Eye on taxable deals as more municipal bond supply surges into the market
Municipal bond buyers saw a spate of big new deals hit the market on Wednesday as traders looked at one taxable sale that offered an attractive pricing.
JPMorgan Securities priced Austin, Texas’ (Aa3/AA/AA) $464.54 million of taxable Series 2019A electric utility system revenue bonds. The deal cameat par to yield from 2.425% in 2019 (20 basis points above the comparable U.S. Treasury security) to 3.087% in 2031 (+70 bps UST); the 10-year was priced to yield 2.987% (+60 bps UST).
The two taxable deals that entered the market on Wednesday both saw over-subscriptions.
“The Austin did really well and was five to eight times over,” said one trader. “Before the repricing, the deal was north of 15 times over. You roughly had half drop out, as some people are shying away at tighter spreads.”
The Allina Health System deal had $1 billion in pre-orders and $900 million post or two to three times oversubscribed and was not bumped as much as the Austin deal, the trader said.
"The size difference of the deals played a factor from a liquidity standpoint," he said. "Also the Austin deal only went out 12 years, so a little bit of a different buyer base."
The muni market is issuer friendly right now, but there is a fair share of taxable deals coming through, as taxable spreads are fairly consistent.
With low yields and rates and super strong demand, why aren't we seeing more tax-exempt muni bond issuance?
"Typically the muni market does not react quickly, unlike the corporate bond market," said Jed McCarthy, co-portfolio manager at 16th Amendment Advisors, LLC. "The corporate market is used to acting quickly and trying to capitalize on market conditions; munis are for a specific project and have a timeline of their own.”
He noted that taking advantage of market conditions and trying to time the market, were two things that were associated with advanced refundings — a frequent, handy tool that was taken away from muni issuers with the rewrite of the tax code.
"With ARs, there was a threshold of savings that the issuer had to hit in order to go with the transaction. With tax reform, there was a hard deadline of when certain types of deals would expire," McCarthy said. "Right now, it is more of a soft deadline. Sure, rates are low but they could stay that way for a long time, so there is nothing to time or rush against the clock to beat."
Turning to tax-exempts, Goldman Sachs priced PEFA Inc.’s (A3/NR/A) $614.41 million of Series 2019 gas project revenue bonds. The Iowa deal was priced as 5s yielding 2.43% in 2026 and 5s in 2049 to yield 2.50% with a mandatory tender in 2026.
Wells Fargo Securities priced a reoffering of the South Carolina Transportation Infrastructure Bank’s (A1/NR/A) $350.375 million of Series 2003B revenue refunding bonds as a remarketing. The issue was priced at par to yield 67% of one-month LIBOR plus 45 basis points.
Raymond James & Associates priced the UAB Medicine Finance Authority’s (Aa3/AA-/NR) $103.585 million of Series 2019B revenue bonds.
RBC Capital Markets priced the North Dakota Housing Finance Agency’s (Aa1/NR/NR) $135 million of Series 2019C housing finance program bonds not subject to the alternative minimum tax for the Home Mortgage Finance Program
BofA Securities priced Oregon’s (Aa1/AA+/AA+) $153.035 million of Series 2019E-H general obligation bonds for higher education.
Goldman Sachs received the official award on the Arkansas Development Finance Authority’s (B3/B/NR) $487 million of industrial development revenue AMT bonds for the Big River Steel project. The issue was priced at par to yield 4.50% in 2049.
Jefferies received the written award on the Inland Empire Tobacco Securitization Authority’s (NR/A-/NR) $100 million of taxable tobacco settlement asset-backed refunding bonds Series 2019 turbo current interest bonds in California.
Wednesday’s bond sales
Munis were little changed on the MBIS benchmark scale Wednesday, which showed yields unchanged in the 10-year maturity and rising less than a basis point in the 30-year maturity. High-grade munis were stronger, with yields up by less than one basis point in the 10-year maturity and by one basis point in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year muni GO was steady while yield on the 30-year muni yield rose one basis point.
The 10-year muni-to-Treasury ratio was calculated at 72.7% while the 30-year muni-to-Treasury ratio stood at 86.9%, according to MMD.
Treasuries were stronger as stock prices traded lower.
“Today marks the halfway point of this week’s $6.1 billion new issue calendar,” ICE Data Services said in a Wednesday market comment. “As attention is diverted to the primary market, the ICE Muni Yield Curve is hovering at similar levels as yesterday on lower than usual volume. The two-year/10-year muni spread has gapped out recently to 28 basis points from 23 basis points last week.”
ICE said that high-yield was unchanged in evenly mixed, but light trading, while taxable yields were down by 3.7 basis points in the five-year.
Previous session's activity
The MSRB reported 41,614 trades on Tuesday on volume of $13.495 billion. The 30-day average trade summary showed on a par amount basis of $12.66 million that customers bought $6.09 million, customers sold $4.37 million and interdealer trades totaled $2.20 million.
California, Texas and New York were most traded, with the Golden State taking 18.445% of the market, the Lone Star State taking 11.464% and the Empire State taking 7.572% of the market.
The most actively traded security was the Puerto Rico Sales Tax Financing Corp. restructured COFINA A-1 revenue 5s of 2058, which traded 51 times on volume of $43.31 million.
ICI: Muni funds see $1.8B inflow
Long-term municipal bond funds and exchange-traded funds took in a combined inflow of $1.819 billion in the week ended May 15, the Investment Company Institute reported on Wednesday.
It was the 19th straight week of inflows and followed an inflow of $2.331 billion into the tax-exempt mutual funds in the previous week.
Long-term muni funds alone saw an inflow of $1.764 billion after an inflow of $2.006 billion in the previous week; ETF muni funds alone saw an inflow of $54 million after an inflow of $325 million in the prior week.
Taxable bond funds saw combined outflows of $138 million in the latest reporting week after inflows of $5.261 billion in the previous week.
ICI said the total combined estimated outflows from all long-term mutual funds and ETFs were $11.421 billion after outflows of $2.296 billion in the prior week; equity funds were the biggest losers as they experienced $11.399 billion of outflows.
BlackRock positive on munis
Peter Hayes, head of BlackRock’s Municipal Bonds Group, maintains a constructive view on the asset class. With the dynamic of robust demand paired with moderate supply expected to continue driving strong returns, particularly as the historically favorable summer months approach.
"As we enter the historically favorable summer months, we believe robust demand could persist for some time as retail investors increasingly value the tax haven provided by the asset class, making the market less reliant on support from crossover buyers," he said.
The group, which oversees $135 billion of municipal assets said that with respect to credit quality, it increased exposure to credits rated AA while decreasing exposure to AAA.
As of the end of April, about 16% of the fund’s net assets were high-yield municipal bonds.
"Given the dearth of supply, strong inflows and tight valuations in the secondary market, we focused on identifying opportunities to tactically trade some high-profile issues in the primary market," Hayes said.
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.