Even with an incrementally improving economy, it’s still the simple dynamics of supply and demand that continue to guide the municipal market. And currently, there is still more demand than supply.
This week’s calendar should do little to change the imbalance. Primary market issuance for the muni market is expected to total $3.96 billion this week. That represents a small, insubstantial uptick in volume from last week’s revised figure of $3.49 billion.
The numbers break down into an expected $1.38 billion in competitive offerings, against a revised $673.8 million last week. The negotiated market should expect $2.57 billion of new issuance, compared with a revised $2.82 billion last week.
The market also expects to see $183.8 million in notes issued this week.
“It’s the old cliché: more buyers than sellers, and sellers are either secondary sellers or new issuance, and we don’t seem to have too much of either,” said Fred Yosca, managing director and manager of underwriting and trading at BNY Mellon Capital Management. “There really isn’t much out there.”
Muni bond yields have been in rally mode, with minor exceptions, since late October for the 10-year triple-A, and since early December for the 30-year triple-A.
Muni ratios to Treasuries have been become richer in the intermediate and long ends of the curve, moving south since December.
They would tend to discourage crossover buyers, who find cheap muni-Treasury ratios attractive.
“We’re not nearly as attractive as we were,” Yosca said, “and the market doesn’t seem to care.”
The market has looked reasonably strong. Deals last week did well, according to market pros. In addition, muni bond mutual funds flows have been substantial in a market that hasn’t provided a whole lot of value to investors of late, said Tom Spalding, a senior vice president at the large asset manager Nuveen Investments.
“There was obviously a little bit of trepidation on underwriters’ parts, because we haven’t seen these levels for some say a couple of generations now,” he said.
The competitive market will offer the week’s largest deal. The state of Washington expects to auction $699.1 million of various-purpose general obligation refunding bonds, Series R-2012C.
The state is also expected to auction $260.1 million of motor vehicle fuel-tax GO refunding bonds, Series R-2012D.
Both sets of bonds are rated AA-plus by Fitch Ratings and are scheduled for a Tuesday auction. Both are expected to have serial maturities from 2013 through 2029.
Puerto Rico issues are expected to lead all negotiated deals for the week when they arrive Wednesday. JPMorgan should price $500 million of Puerto Rico Government Development Bank taxable senior notes, Series 2012A. The debt is rated Baa1 by Moody’s Investors Service and BBB by Standard & Poor’s.
“Unfortunately, $500 million of that negotiated is Puerto Rico GDP taxable notes, so they’re not going to provide a lot of help for us in the tax-exempt space,” Spalding said. “But I’m fairly optimistic here on the market, even with this calendar. Really, we don’t see much of a breakthrough on the new-issue front until the end of February or March.”
JPMorgan also follows with the anticipated pricing of $234.5 million of Nebraska Public Power District general revenue bonds.
The bonds, set for a retail order period on Tuesday followed by an institutional period on Wednesday, are rated A1 by Moody’s, A by S&P and A-plus by Fitch.
Barclays Capital is expected to price $200 million of University of Texas System Board of Regents revenue financing refunding bonds, Series 2012A. The bonds are rated triple-A by the major rating agencies and are expected to reach the market on Thursday.