FOMC, taxable and tobacco bonds highlight $7.7B week
With interest rates likely to fall lower after Federal Reserve policy makers meet, already favorable market conditions for municipal issuers will get even better in the coming week.
The muni market is expected to see $7.69 billion of new deals for the week of Oct. 28, less than the revised total of $10.72 billion in the past week. The calendar consists of $5.71 billion of negotiated deals and $1.98 billion of competitive sales.
The Federal Open Market Committee is set to meet Oct. 30-31 and while a cut to interest rates is expected, the vote won't be unanimous. The dissent may hold the key to future moves, as economic indicators suggest rate cuts are not needed, while trade issues, a flat yield curve and low inflation suggest otherwise.
A 25 basis point cut would bring the rate to a range of 1.5% to 1.75% and would mark the third consecutive meeting in which the panel cut rates.
“With the Fed potentially cutting rates more next week, we will be in this low rate environment foreseeable future,” Jim Colby, senior municipal strategist and portfolio manager at VanEck, said on Friday. “It’s no doubt a great time for issuers to reduce their cost of capital and I would think for any entity would see this as an opportune time to do so.”
He added that potential issuers hovering on the precipice of investment grade and high-yield that are seeing strains in terms of capital structure, such as Illinois and Chicago, need to see that this is a great opportunity to raise capital.
“Those types of municipalities are still finding interested buyers in this market and that demand is going to provide liquidity for those entities,” he said. “I would expect to see more of those issuers come to market and take advantage of the opportunity, but that is easy to say but harder to do, with all the political hoops to jump through.”
Since end of August, Colby said, there’s been an adjustment in the muni yield curve, as demand continues to be strong and it is “hard to get a clear handle" on where bonds should be valued and traded.
There are 23 scheduled deals of $100 million or larger, eight of them competitive deals. 12 of those $100 million or larger scheduled deals are either partially or completely taxable – continuing the new normal without advanced refundings.
“Because of the tax legislation that took away advanced refundings, this market always finds a way to evolve. Now taxable vehicles are being used to refund tax-exempt debt,” said Colby. “While this will continue for the foreseeable future with no looming tax law changes, it is somewhat concerning, since some bonds are being taken out of the exempt world with taxable and there is some erosion of the replacement process. It is more demanding from an reallocating process, since some favored positions in some portfolios are being removed.”
Bank of America is set to price the largest deal of the week — Broward County, Florida’s (A1/A+/A+) $983.97 million of airport system revenue and revenue refunding bonds on Thursday. The deal will consists of three series, two featuring alternative minimum tax bonds and the third comprised of taxable bonds.
Citi is slated to price the State of Wisconsin’s (Aa2/NR/AA) $621.98 million of general fund annual appropriation refunding taxable bonds on Monday. The deal is expected mature serially from 2021 through 2032.
Bank of America is also expected to price Lehigh County General Purpose Authority’s (A2/A+/NR) $416.84 million of hospital revenue bonds for the Lehigh Valley Hospital Network on Wednesday.
Jefferies is scheduled to price the Tobacco Securitization Authority of Southern California’s $415.109 million of tobacco settlement asset-backed refunding bonds on Tuesday. The deal is expected to consist of three series and carries ratings from S&P Global Ratings as follows: In the 2019A series, the 2020 through 2029 maturities carry an A rating, the 2030 through 2039 maturities are rated A-minus, and the 2048 maturity is rated BBB plus; In the series 2019B-1, the 2029 maturity is rated BBB plus and the 2048 maturity is rated BBB minus, Series 2019B-2 is not rated.
“The tobacco deal will have the attention of a lot of people,” Colby said. “It’s not the largest sized deal but in the high yield spectrum much of what else we have seen are smaller, so it’s nice to see an issue of some size that will offer a bit of variety.”
Colby also noted that over the past few years, tobacco bond outstanding issuance has been eroded and now the high-yield sector has far fewer tobacco bonds.
The competitive slate has a New York state of mind, as seven of the eight $100 million or larger deals are from issuers that hail from the Empire State.
Leading the way is the New York State, (Aa1/AA+/AA+) as it’s expected to sell three separate deals of taxable general obligation bonds totaling $915.75 million on Monday.
No matter how good the market is or has been, nothing is perfect. Colby has one concern when looking at credit and new issue supply.
“I’m concerned about deals that do come that are perhaps rushed into a marketplace without appropriate structure and security structure,” he said. “The temptation to come to market at low rates with all the demand, doesn’t always allow for the building of proper protection and convince embodied in a new issue that an investor or money manager would like.”
Lipper sees an even bigger inflow
For 42 weeks in a row investors have poured cash into municipal bond funds, according to the latest data released by Refinitiv Lipper on Thursday.
Tax-exempt mutual funds that report weekly received $1.427 billion of inflows in the week ended Oct. 23 after inflows of $1.203 billion in the previous week. This marks the fourth time in the past five weeks inflows have exceeded $1 billion.
Exchange-traded muni funds reported inflows of $222.255 million after inflows of $109.211 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.205 billion after inflows of $1.094 billion in the previous week.
The four-week moving average remained positive and remained higher than $1 billion at $1.225 billion, after being in the green at $1.277 billion in the previous week.
Long-term muni bond funds had inflows of $1.219 billion in the latest week after inflows of $985.537 million in the previous week. Intermediate-term funds had inflows of $111.414 million after inflows of $57.958 million in the prior week.
National funds had inflows of $1.255 billion after inflows of $1.074 billion in the previous week. High-yield muni funds reported inflows of $355.095 million in the latest week, after inflows of $320.969 million the previous week.
Munis were mixed on the MBIS benchmark scale, with yields falling by less than one basis point in the 10-year maturity and rising by less than a basis point in the 30-year maturity. The MBIS AAA scale was also stronger, with yields decreasing by one basis point in the 10-year maturity and by no more than two basis points in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on both the 10- and 30-year remained steady at 1.51% and 2.10%, respectively.
The 10-year muni-to-Treasury ratio was calculated at 83.7% while the 30-year muni-to-Treasury ratio stood at 91.3%, according to MMD.
Treasuries yields were trading higher and stocks were in the green. The Treasury three-month was up and yielding 1.677%, the two-year was up and yielding 1.627%, the five-year was up and yielding 1.631%, the 10-year was up and yielding 1.808% and the 30-year was up and yielding 2.295%.
Week's actively traded issues
Some of the most actively traded munis by type in the week ended Oct. 25 were from Texas, New York and New Jersey issuers, according to IHS Markit.
In the GO bond sector, the Cypress-Fairbanks Independent School District, Texas, 4s of 2044 traded 33 times. In the revenue bond sector, the New York State Thruway Authority, 3s of 2053 traded 94 times. In the taxable bond sector, the Rutgers University 3.27s of 2043 traded 79 times.
Week's actively quoted issues
New York and Georgia bonds were among the most actively quoted in the week ended Oct. 25, according to IHS Markit.
On the bid side, the New York State Thruway Authority revenue 3s of 2053 were quoted by 26 unique dealers. On the ask side, the New York State Thruway Authority revenue 3s of 2053 were quoted by 143 dealers. Among two-sided quotes, the Municipal Electric Authority of Georgia 7.055s of 2057 were quoted by 9 dealers.
Previous session's activity
The MSRB reported 31,684 trades Thursday on volume of $12.993 billion. The 30-day average trade summary showed on a par amount basis of $10.73 million that customers bought $5.87 million, customers sold $2.96 million and interdealer trades totaled $1.89 million.
California, New York and Texas were most traded, with the Golden State taking 12.875% of the market, the Empire State taking 11.536% and the Lone Star State taking 11.486%.
The most actively traded security was the Miami-Dade County, revenue, 4s of 2049, which traded 22 times on volume of $53.50 million.
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.