The municipal market may stabilize in the coming week, helped by a calendar of new issues that is moderate in size, diverse in composition and rich in familiar and attractive names, market watchers say.
After a week in which the market mostly reeled from Detroit’s bankrupcty filing and a downgrade of Chicago, The Bond Buyer and Ipreo estimate volume will dip to about $4.84 billion from total sales of $5.26 billion in the past week, as reported by Thomson Reuters. Leading the way, Citi expects to price more than $1.1 billion of Ohio Turnpike Commission bonds.
The anticipated volume falls on the heels of a mixed week for munis, particularly in the primary, where investors showed strong interest for some issues and participated in others only after price adjustments.
Looking closer at the coming calendar, $3.53 billion of muni bonds are scheduled for negotiated sale, versus a revised $4.0 billion that were sold last week. Bonds scheduled for competitive sale this week should total $1.31 billion, compared with $1.26 billion last week.
This week’s deals feature some recognizable names which, in almost any market environment, would do well, said James Colby, portfolio manager and senior municipal strategist at Van Eck Global.
“The calendar is manageable,” he said. “And assuming that underwriters and issuers are willing to sell at prices that will clear the market, it will go through another week where deals will get done reasonably well.”
Citi expects to headline offerings in the negotiated market with $1.1 billion of Ohio Turnpike Commission turnpike bonds. The bonds, expected to price Tuesday following a retail order period Monday, are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.
They should arrive structured as serials, maturing in different segments between 2019 and 2038, and a term bond in 2050.
Goldman, Sachs & Co., is likely to price $292 million of Lehigh County Authority water and sewer revenue bonds for the City of Allentown, Pa. The taxable, tax-exempt and capital appreciation bonds are rated A by Standard & Poor’s. They are expected to arrive Monday.
Barclays is expected to price $206.9 million of Private Colleges and Universities Authority for Emory University. The bonds are rated Aa2 by Moody’s, AA by Standard & Poor’s and AA-plus by Fitch.
The deal should arrive Tuesday, structured as serials maturing in 2014 through 2022 and a term bond in 2043.
Massachusetts expects to auction $600 million of general obligation bonds Wednesday to lead the competitive market. They will arrive structured as serials, maturing in 2023 through 2026 and 2032 through 2043.
The Ohio deal will stand as somewhat of a bellwether, while Massachusetts GOs will provide an attractive high-grade offering, said Alan Schankel, managing director at Janney Capital Markets. This week’s distribution should entice a multitude of buyers, he added.
“There’s a big state issue; there’s a big revenue issue, some airports, so, there’s a nice diversification of issues,” Schankel said. “There a something-for-everyone quality that’ll be good if [Friday’s] bid holds up into next week.”
The long end of the yield curve rose over the week, recovering some ground with Friday’s rally, Municipal Market Data numbers showed. Over the span, yields for 30-year tax-exempts rose 16 basis points, before settling at up six basis points to close at 4.21%. The 10-year triple-A yield increased 10 basis points before falling seven basis points Friday to land at 2.70%. Two-year yields remained level at 0.43%.
Treasuries sold off across the curve last week, mostly underperforming munis. That left muni ratios to Treasuries in cheap territory. The 10-year sits around 105%. The 30-year ratio hovers around 117%, while the two-year dropped 13 percentage points on the week to 130%.
Muni bond mutual funds recorded a ninth straight week of outflows as investor demand continued to flounder amid negative headlines on Detroit and Chicago. Those funds that report flows weekly suffered outflows of $1.23 billion for the week ended July 24, Lipper FMI reported, up from the $1.56 billion that left the market the previous week.
Even though outflows continued, there should be demand for new issuance, Van Eck Global’s Colby said. “For certain name issuers, there is decent demand,” he said. “And that’s in part due to the attractiveness of new issues, reflecting the investors’ need and demand for bonds in certain parts of the yield curve, as well as filling in the buckets for appropriate distributions.”
Deals in the primary market met with a mixed reception in the past week. The largest deal of the week, Bay Area Toll Authority, received $2.3 billion orders for its San Francisco Bay Area subordinate lien toll bridge revenue bonds and increased the size of the deal to $900 million from the originally scheduled $750 million. Lead underwriter Bank of America Merrill Lynch was able to lower yields as much as 5 basis points on certain maturities.
Triple-A rated Maryland issued $435 million of GO state and local facilities loan Wednesday. Bonds with 5% coupons were priced right on Tuesday’s Municipal Market Data triple-A scale, except for bonds maturing between 2021 and 2024, which had yields three to five basis points above the scale.
Other issuers didn’t see as much demand. JPMorgan priced more than $500 million of New York City GOs and raised yields as much as 10 basis points on certain maturities after already increasing them as much as 12 to 16 basis points from retail pricing.
And some issuers postponed their deals. Oregon’s Providence Health and Services was expected to come with over $200 million of bonds. The issuer cut its refunding portion and is expected to price $78 million next week. The Private Colleges and Universities Authority posted its $206.9 million deal for Emory University to next week.
Longer-term securities were hit the hardest in the secondary market last week, said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management. “There was a continuation of abandonment of longer-term securities and the five- to 30-year slope is at a 12-month high,” he said. “We’ve seen that spread rise from under 200 basis points to over 270 basis points.”
That selling is making longer bonds look attractive, Heckman said, with 4% coupons maturing in 2027 selling at a discount last week. “We think the market is getting close to a point where if we get steeper we may go further out on the yield curve.” For now, Heckman said he’s still focused on the five- to eight-year spot.
After Detroit filed for bankruptcy and Moody’s downgraded Chicago three notches to A3, Heckman said buyers need to do their credit homework.
“We are starting to see a division in credit quality,” he said. “There were a lot of bid lists for Illinois and Chicago and heavy selling for selective credits that are viewed as being weaker. People are gravitating towards situations where they are moving away from areas that might encounter a potential bankruptcy filing.”