Gap between muni supply, redemptions still growing

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The gap between new issue supply and redemptions continues to grow, Patrick Luby, senior municipal strategist at CreditSights said on Monday.

This week’s bond calendar is expected to total about $6.5 billion while the Bond Buyer’s 30-day visible supply was calculated at $9.98 billion on Monday. Because of heavy redemption volume, the 30-day net supply is now at negative $17.2 billion, Luby said.

“Primary dealer holdings of municipal bonds declined to $12.5 billion in the week ended April 24, which is below the year-to-date weekly average of $14.3 billion,” Luby said. “The biggest change in the most recent report was in holdings due 10-years and longer, which fell from $9.8 billion to $8.8 billion.”

He added that municipal bond mutual fund flows were positive for the 17th week in a row.

“But last week was only the second week of the year when net inflows totaled less than $1 billion," he said, adding that “$19.4 billion in bonds were redeemed on May 1 and it appears at least some of that money went directly into money market funds, which pulled in $1.8 billion in net new assets in the week ended May 1. That is well above the four-week average of negative $1.3 billion.”

The short-term market is looking more attractive, Schwab said in its weekly market comment.

“The SIFMA Municipal Swap Index, an index for very short-term yields that many municipal money market funds track, is the highest it’s been in a decade,” Schawb said. “Consider using municipal money market funds for the cash allocation of your portfolio.”

Primary Market
This week’s calendar consists of $4.1 billion of negotiated deals and $2.4 billion of competitive sales.

On Tuesday, Massachusetts (Aa1/AA/AA+), will be competitively selling $700 million of general obligation bonds in four offerings.

The sales consist of $400 million of Series 2019C GOs, $100 million of Series 2019D GOs, $100 million of Series 2019E GOs and $100 million of Series 2019F GOs. PFM Financial Advisors is the financial advisor; Locke Lord is the bond counsel.

The Los Angeles Unified School District (Aa2/NR/AAA) is selling $634 million of Series 2019A GOs on Tuesday. Proceeds will be used to current refund certain outstanding debt.

Fieldman, Rolapp & Associates is the financial advisor; Hawkins Delafield is the bond counsel.

Baltimore, Md., (Aa2/AA/NR) is selling $85 million of GO’s in two sales in Tuesday that consist of $64.855 million of Series 2019A tax-exempt consolidated public improvement bonds and $20.145 million of Series 2019B taxable consolidated public improvement bonds.

Proceeds will be used to fund certain capital projects in the city. The financial advisor is PFM Financial Advisor; the bond counsel is McGuireWoods.

Also on tap, Morgan Stanley is expected to price the Massachusetts Development Finance Agency’s (NR/BBB/NR) $174 million of tax-exempt and taxable revenue bonds for Atrius Health.

Secondary market
Munis strengthened along with Treasuries as stocks turned volatile after President Donald Trump’s threat to hike tariffs on Chinese imported goods caused market worries to increase on the chances of a resolution to the trade war.

The U.S. threatened to raise tariffs on $200 billion of Chinese goods to 25% from 10% currently by Friday, citing slow progress in U.S.-China negotiations,” Morgan Stanley research said in a report on Monday. “It could be a pressure tactic to speed an agreement on pending issues such as existing tariff removal timing, details related to the enforcement mechanism and industrial subsidies.”

While Morgan Stanley said it expects a re-escalation would be temporary, market weakness would help bring both sides back together.

“…any escalation inherently augments uncertainty and further undercuts risk markets, where a Goldilocks outcome was already priced in,” the report said. “Should trade tensions re-escalate, we see an annualized 0.3% impact to China GDP growth and expect further easing efforts.”

Munis were stronger on the MBIS benchmark scale Monday, which showed yields falling one basis point in the 10-year maturity and dropping two basis points in the 30-year maturity. High-grade munis were also stronger, with yields falling by two basis points 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 both the 10-year GO and the 30-year muni fell by three basis points.

The 10-year muni-to-Treasury ratio was calculated at 72.4% while the 30-year muni-to-Treasury ratio stood at 85.6%, according to MMD.

“The muni market continues to rally along with the broader fixed-income markets. The ICE Muni Yield Curve is 1.3 basis points lower in the five-year extending to 2.3 basis points lower in the 30-year maturities,” ICE Data Services said in a Monday market comment. “The two-year/10-year municipal spread is now down to 29 basis points. High-yield and tobacco bonds were 1bp lower. Taxables were down by 4.1 basis points in the five-year.”

On Friday, traders said the calendar remained soft versus the demand. “There is still not enough debt to meet ongoing cash inflows to bond funds,” a New York trader said.

“The only caution is that the 30-year and the 10-year muni to Treasury ratios are very expensive and could slow down the investing in munis if we get an unexpected spike in the new-issue calendar, but at present all signs indicate strong support for munis,” he said.

Last week's actively traded issues
Revenue bonds made up 52.85% of total new issuance in the week ended May 3, down from 53.20% in the prior week, according to IHS Markit. General obligation bonds were 42.47%, up from 42.37%, while taxable bonds accounted for 4.68%, up from 4.43%.

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Some of the most actively traded munis by type in the week were from Puerto Rico issuers.

In the GO bond sector, the Puerto Rico Commonwealth 8s of 2035 traded 38 times. In the revenue bond sector, the Puerto Rico Sales Tax Financing Corp. 5s of 2058 traded 64 times. In the taxable bond sector, the COFINA 4.55s of 2040 traded 20 times.

Previous session's activity
The MSRB reported 32,643 trades on Friday on volume of $10.34 billion. The 30-day average trade summary showed on a par amount basis of $12.36 million that customers bought $6.11 million, customers sold $4.07 million and inter-dealer trades totaled $2.18 million.

California, Texas and New York were most traded, with the Golden State taking 16.274% of the market, the Empire State taking 12.027% and the Lone Star State taking 11.721%.

The most actively traded security was the Riverside County Transportation Commission, Calif., Series 2017B 5s of 2038 which traded six times on volume of $30 million.

Treasury auctions discount rate bills
Tender rates for the Treasury Department's latest 91-day and 182-day discount bills were lower, as the $39 billion of three-months incurred a 2.380% high rate, down from 2.385% the prior week, and the $36 billion of six-months incurred a 2.380% high rate, off from 2.395% the week before. Coupon equivalents were 2.434% and 2.449%, respectively. The price for the 91s was 99.398389 and that for the 182s was 98.796778.

The median bid on the 91s was 2.350%. The low bid was 2.320%. Tenders at the high rate were allotted 7.33%. The bid-to-cover ratio was 3.17.

The median bid for the 182s was 2.365%. The low bid was 2.330%. Tenders at the high rate were allotted 6.89%. The bid-to-cover ratio was 3.21.

Gary E. 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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