Buyers of municipal bonds may find a measure of satisfaction in almost $6 billion of supply on tap for the coming week, especially given that it shortened to four days due to the Presidents Day holiday.
Buyside participants on Friday said the market was eagerly awaiting the arrival the new debt after a recent yield backup and would pay special attention to the short end of the yield curve on some of the larger, market friendly names.
Ipreo estimates weekly volume at $5.8 billion, comprised of $4.5 billion of negotiated deals and $1.3 billion of competitive sales. Dominating the slate are two deals from opposite ends of the county -- a $1.35 billion offering coming from the Los Angeles School District and almost $1 billion of bond sales from New York City.
“The market will actually be happy to see supply,” said a New York underwriter at a large Wall Street firm. “It will be helpful to the market; people like to see how deals are received and they like to see full scales on new issues.”
Bank of America Merrill Lynch is set to price the LAUSD’s general obligation bonds consisting of Election of 2005 series 2018M-1 tax-exempts and Series 2018M-2 taxables and Election of 2008 Series 2018B-1 tax-exempts and Series 2018B-2 taxables.
The tax-exempts are rated Aa2 by Moody’s Investors Service and AAA by Fitch Ratings while the taxables are rated Aa2 by Moody’s and F1-plus by Fitch. And Jefferies is set to price NYC’s $700 million of tax-exempt fixed-rate general obligation bonds on Thursday after a two-day retail order period. Also on Thursday, the city will competitively sell $250 million of taxable fixed-rate bonds in two separate offerings consisting of $188.11 million and $61.89 million GOs. New York City is rated Aa2 by Moody’s and AA by Fitch.
The underwriter described market attention as being strong on the short end of the yield curve. He expects the first 10 years to be “well sought after” -- especially on marquee credits, such as New York City’s GOs and the LAUSD deals.
“That not to say people won’t pay attention to the long end, but the short end is a place to put some money to work and not have a lot of rate volatility,” the underwriter said.
He said the pair of East Coast-West Coast deals will stand out for their positive attributes of being solid, liquid credits that hail from specialty states with heavy demand, and whose deals offer good block size.
He said he expected yields on the deals to be “comparable to where they have come in the past.”
The municipal market has and will continue to take the recent volatility in stride, according to the underwriter.
“I think the market has dealt with a fair amount of bid lists from customers, but in general the market is responding well to the volatility we have seen from a rate standpoint and the economic and inflation news,” he said.
Lipper: Muni bond funds saw outflows
Investors in municipal bond funds reversed course in the latest week and pulled cash out of the funds, according to Lipper data released on Thursday.
The weekly reporters saw $443.409 million of outflows in the week of Feb. 14, after inflows of $674.908 million in the previous week.
Exchange traded funds reported outflows of $60.759 million, after inflows of $53.734 million in the previous week. Ex-ETFs, muni funds saw $382.649 million of outflows, after inflows of $621.174 million in the previous week.
The four-week moving average was positive at $312.146 million, after being in the green at $717.654 million in the previous week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.
Long-term muni bond funds had outflows of $102.806 million in the latest week after inflows of $36.688 million in the previous week. Intermediate-term funds had inflows of $201.425 million after inflows of $391.078 million in the prior week.
National funds had outflows of $410.442 million after inflows of $686.135 million in the previous week. High-yield muni funds reported inflows of $20.088 million in the latest week, after outflows of $572.375 million the previous week.
Friday trading was typical in that there was some solid morning activity, but that trailed off by midday -- and the pre-holiday mood was noticeable among anxious investors.
“The amount of customers we have been able to keep focused throughout the week are now waning and looking forward to the weekend,” a Florida trader said. Investors have been stressed in recent weeks, due to the market volatility, but have shown some renewed interest since the backup, he said, calling the market “fundamentally sound” on Friday afternoon.
“The marketplace seemed to have some challenges over the last few weeks, but we are starting to see more activity out of the customer base, which is encouraging,” the trader said.
Much of the activity has showed a strong preference by core retail investors for defensive structures -- such as serial bonds in the first 15 years of the curve, with some willing to go out to 25 years, and 5% coupons, the trader said.
Another trend is an increase in tax loss swaps, he said.
“Some customers are choosing to look for shorter call structures now that a lot of the portfolios are willing to sell that structure because they have had losses,” he said.
“The book yields that customers have made it difficult to take gains but now with the backup in rates a lot of customers have losses in their portfolio and are able to take advantage of tax loss swaps,” he explained. “Bonds with seven to eight year calls are starting to filter into the market and we didn’t have that traffic before.”
Previous session's activity
The Municipal Securities Rulemaking Board reported 47,515 trades on Thursday on volume of $13.99 billion.
California, Texas and New York were the states with the most trades, with the Golden State taking 13.639% of the market, the Lone Star State taking 10.669%, and the Empire State taking 9.551%.
Week's actively traded issues
Some of the most actively traded bonds by type in the week ended Feb. 16 were from Puerto Rico and Pennsylvania issuers, according to Markit.
In the GO bond sector, the Puerto Rico Commonwealth benchmark 8s of 2035 traded 100 times. In the revenue bond sector, the Pennsylvania Commonwealth Financing Authority tobacco 4s of 2039 traded 144 times. And in the taxable bond sector, the Puerto Rico Sales Tax Financing Corp. 6.05s of 2036 traded 19 times.
Week's actively quoted issues
Puerto Rico and California names were among the most actively quoted bonds in the week ended Feb. 16, according to Markit.
On the bid side, Puerto Rico Commonwealth GO 8s of 2035 were quoted by 38 unique dealers. On the ask side, the California taxable 7.95s of 2036 were quoted by 86 dealers. And among two-sided quotes, the Puerto Rico Commonwealth GO 8s of 2035 were quoted by 22 unique dealers.
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 Vanessa Kim at 212-803-8474 for more information.