Dip in September CUSIP requests signals municipal issuance slowdown

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Municipal CUSIP requests slowed in September, following a record surge in August, CUSIP Global Services reported on Wednesday. This is suggestive of a possible near-term slowdown in new issuance.

The aggregate total of all municipal securities requested, which include municipal bonds, long- and short-term notes and commercial paper, fell 9.6% to 1,104 in September from 1,221 in August.

Requests for municipal bond identifiers fell to 886 in September from 972 in August.

“The monthly decline we’re seeing in CUSIP request volume this September looks dramatic when compared with the significant surge in volume we saw in August, but the month did follow historically normal volume trends,” said Gerard Faulkner, CUSIP’s director of operations. “It is notable, however, that the September slowdown coincided with historic high yields on U.S. Treasuries, possibly indicating that the rising rate environment will crimp the growth of new security issuance in the months to come.”

On a year-over-year basis, total municipal identifier request volume is down 13.2% to 9,705 from 11,185 in the same period last year. Requests for municipal bond CUSIPS have fallen 14.8% year-over-year, to 7,803 from 9,158.

Among the top state issuers in September, CUSIPs for scheduled public finance offerings from Texas, New York, and California were the most active.

Secondary market
Municipal bonds were weaker on Wednesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields rose as much as two basis points in the six- to 30-year maturities while falling as much as a basis point in the one- to five-year maturities.

High-grade munis were also weaker, with yields calculated on MBIS' AAA scale rising as much as two basis points in the three-to 30-year maturities, falling less than a basis point in the one-year maturity and remaining unchanged in the two-year maturity.

Municipals were weaker on Municipal Market Data’s AAA benchmark scale, which showed the yield on the 10-year muni general obligation rising one to three basis points while the yield on 30-year muni maturity gained as much as one basis point.

Treasury bonds were stronger and stock prices traded lower.

On Wednesday, the 10-year muni-to-Treasury ratio was calculated at 85.6% while the 30-year muni-to-Treasury ratio stood at 101.8%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.

A very soft tone followed the weakness in Treasuries, with particularly weak bids on bonds longer than 10 years, according to a New York municipal trader.

“Bid lists are large, representing cash outflows from funds,” he said Wednesday afternoon. “The Street is heavy and still trying to recover from a rough September and what is so far a very weak October,” he added.

Previous session's activity
The Municipal Securities Rulemaking Board reported 54,727 trades on Tuesday on volume of $12.06 billion.

New York, California and Texas were the municipalities with the most trades, with the Empire State taking 15.101% of the market, the Golden State taking 14.605%, and the Lone Star State taking 10.644%.

Primary market
In the competitive arena on Wednesday, the Fremont Unified School District, Calif., sold $127 million of Series C Election of 2014 general obligation bonds.

Citigroup won the bonds with a true interest cost of 3.7646%.

Proceeds are being issued to buy, repair and build school equipment, sites and facilities. The financial advisor is Keygent; bond counsel is Stradling Yocca.

The deal is rated Aa1 by Moody’s Investors Service and AA-minus by S&P Global Ratings.

In the negotiated sector on Wednesday, Ramirez & Co. priced the Los Angeles Department of Water and Power’s $300 million of Series 2018B&C power system revenue bonds.

The deal is rated Aa2 by Moody’s and AA by S&P and Fitch Ratings.

JPMorgan Securities priced the State of California Department of Water Resources’ $216 million of Series AZ water system revenue bonds for the Central Valley water system.

The deal is rated Aa1 by Moody’s and AAA by S&P.

Bank of America Merrill Lynch priced the Indiana Finance Authority’s $163.71 million of Series 2018A state revolving fund program green bonds.

The deal is rated triple-A by Moody’s, S&P and Fitch.

Since 2008, the authority has issued over $17 billion of debt with the most issuance occurring in 2011 when it sold $2.58 billion. It sold the least amount of debt in 2014, when it issued $642.7 million.
On Thursday, JPMorgan is set to price the Maricopa County Special Health Care District, Ariz.’s $400 million of Series 2018C general obligation bonds.

Siebert Cisneros Shank & Co. is expected to price the North Texas Tollway Authority’s $347 million of Series 2018 second tier revenue refunding bonds on Thursday.

Wednesday’s bond sales

California
Click here for the Fremont sale

Click here for the Water pricing

Click here for the LA DWP pricing

Indiana
Click here for the FA pricing

Bond Buyer 30-day visible supply at $9.49B
The Bond Buyer's 30-day visible supply calendar increased $173.6 million to $9.49 billion for Wednesday. The total is comprised of $3.71 billion of competitive sales and $5.79 billion of negotiated deals.

Block: Uncertainty won’t hurt muni opportunities
Uncertainty in the municipal market stemming from rising yields won’t curtail opportunities for municipal investors, according to a weekly report from Peter Block, managing director and head of credit strategy at Ramirez & Co.

A “chronic and very high level” of secondary market supply requires keeping an eye on any significant reversal of mutual fund flows, as a sell-off by investors or dealers would put additional pressure on an already overburdened secondary market, Block wrote in his Tuesday note.

However, “Despite the recent and marked rate increases, we expect that munis will remain attractive for retail investors as the last remaining — and relatively liquid — income tax shelter, particularly following the Federal curb on SALT deductions,” Block wrote.

“The tax-exempt asset class should also continue to attract international investor interest due to the higher absolute yield levels versus global income assets,” he added.

Block said municipals inside of 10 years continue to benefit from strong retail demand due to flatness of the Municipal Market Data curve — with 132 basis points between the two and 30 year maturities. The intermediate and long-dated maturities 15 years or longer generally have weaker sponsorship due to lower bank and insurance company participation following tax reform, he noted.

The two-year and five-year sectors have outperformed year-to-date by 11.7% and 1.1%, respectively. The 10-year and 30-year sectors have underperformed year-to-date by 1.7% and 7%, which Block said indicates more upside in intermediate and longer-duration.

“Dealers are now holding a fair amount of unsold new issue balances and inventory — 40% above average — that could be sold towards year-end 2018 to clean up balance sheets,” Block said in the report. Investors could also begin selling bonds to offset capital gains in the equity markets and reposition for what appears to be higher-than-expected rates, he said.

“Fortunately for now, investor bid-wanteds remain relatively manageable, given the mitigating effect of positive fund flows and outperformance versus Treasuries,” he added.

Lipton: Year end opportunities
Investors who want to find opportunities in municipals should put available cash to work in the fourth quarter as the close relationship between municipals and Treasuries should continue in the foreseeable future, according to Jeffrey Lipton, managing director and head of municipal research and strategy and fixed income research at Oppenheimer & Co.

“As long as the Treasury market maintains its lock on tax-exempts, the muni asset class will have a difficult time finding better performance driven by inspiring technicals,” Lipton wrote in a Tuesday commentary.

However, investors should act while that window of opportunity is still open, he suggested. “As we get closer to heavier year-end tax loss harvesting and corporate window dressing, the opportunity may fade and we have to reasonably expect to end the year with negative returns,” Lipton wrote.

At the same time, investors should not expect to see a selloff that resembles that of the “Taper Tantrum,” — despite the modest volatility amid “very challenging market dynamics,” he said.

“The grind toward higher rates seems orderly and fund flow movements do not seem overly disruptive,” Lipton wrote, adding that he views demand as strong and feels there is still deployable cash to put to work. “If demand for munis fell out of favor, we suspect that there would be more significant outflows, and, so far, the flow volatility has been manageable despite shifting institutional buyer preferences, particularly from banks and insurance companies,” he said. “As we navigate the final quarter of 2018, we continue to make the case for a comprehensive portfolio analysis.”

He predicted that tax-exempt yields are likely to grind higher and volatility “should stay the course,” though stronger technicals could help with performance.

“We continue to recommend trading up in credit quality and identifying tax-swapping opportunities at this time of year makes sense,” as well as limiting outsized credit risk given that municipal credit quality has “plateaued” and tax swapping done at higher bond yields can be used to offset significant gains made with equities. “We continue to favor intermediate maturities, while staying inside of 20 years can capture over 90% of long-term yields,” Lipton said.

In addition, he said investors can remain defensive by using a barbell strategy as well as premium bonds, because their larger coupons act as a cushion against adverse price performance in declining markets. Overall, Lipton cautions against holding cash on the sidelines in the current market environment. “Very compelling yields are now available and we would further caution against making outsized bets on the mid-term elections,” he said.

Treasury auctions $36B 3-year notes
The Treasury Department auctioned $36 billion of three-year notes with a 2 7/8% coupon at a 2.989% high yield, a price of 99.675199. The bid-to-cover ratio was 2.56.

Tenders at the high yield were allotted 32.32%. All competitive tenders at lower yields were accepted in full. The median yield was 2.955%. The low yield was 2.890%.

Treasury sells re-opened 10-year notes
The Treasury Department auctioned $23 billion of 9-year 10-month notes with a 2 7/8% coupon at a 3.225% high yield, a price of 97.065145. The bid-to-cover ratio was 2.39.

Tenders at the high yield were allotted 45.89%. All competitive tenders at lower yields were accepted in full. The median yield was 3.180%. The low yield was 3.120%.

Gary Siegel contributed to this report.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Ziad Saba at 212-803-6079 for more information.

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Secondary bond market Primary bond market Indiana Finance Authority Los Angeles Department of Water & Power State of California California Department of Water Resources North Texas Tollway Authority Maricopa County Special Health Care District, AZ
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