The primary municipal market braced for issuance to more than double in the coming week after munis weakened Friday on Federal Reserve Chair Janet Yellen's strongest signal yet of an interest rate increase this month.
Ipreo estimates volume will increase to $10.23 billion, from a revised total of $3.96 billion in the past week, according to updated figures from Thomson Reuters. The calendar for the week ahead is composed of $7.69 billion of negotiated deals and $2.54 billion of competitive sales.
In fact, the top three sales alone are larger than the total sales in each of the past two weeks. Those sales include $2.4 billion from California, $1.19 from Maryland and $800 million from the New York City Transitional Finance Authority.
Jim Colby, senior municipal strategist at Van Eck Global, said that March is typically a tough month for performance and the increase in issuance is desperately needed.
"There is nothing like a substantial, new issuance calendar to get us back to more normal spreads, ratios and curves," he said. "I know that leading up to next week, a lot of dealers were hoping not to expose themselves too much as far as trading limits, as they knew the calendar would increase. They have eased their bids the past few days, as they did not want to take on too much inventory to gear up for the coming week."
Citi is scheduled to price the largest deal of the year so far, when the Golden State sells $2.4 billion of various purpose general obligation and refunding bonds on Tuesday following a one day retail order period on Monday. The deal is expected to mature serially from 2017 through 2046 and is rated Aa3 by Moody's and AA-minus by S&P Global Ratings and Fitch Ratings.
Market sources indicated that if demand is significant, the size of the deal may increase. Colby said that the market would be able to handle $3 billion of Cal GO's '"easily" and that it would just be a matter of price and level.
Tom Schuette, partner and co-head of portfolio management at Gurtin Fixed Income Management, said demand is strong for California paper, especially when it comes in size.
"Though the State's ratings haven't changed in some time, we believe that the State's credit quality continues to strengthen as California has maintained solid fiscal discipline and experienced a sustained run of favorable revenue trends," he said. "In terms of the coming sale, the state is one obligor that many buyers may be full on, however, since so much of the offering – about $1.9 billion – is refunding, demand will likely be strong given that many will be looking to replace bonds that are being refunded."
Maryland is expected to sell three competitive sales totaling roughly $.1.19 billion of GO state and local facilities tax exempt and taxable bonds. The exempt sales will be for $524.47 million and $575 million and the taxables make up the remaining $100 million. The top rated, triple-A rated by all three rating agencies paper will be auctioned on Wednesday.
JPMorgan is slated to price New York City Transitional Finance Authority's $800 million of future tax secured subordinate bonds on Tuesday after a two-day retail order period. The deal is rated Aa1 by Moody's and triple-A by S&P and Fitch.
"I expect this to give the market a price adjustment and a resetting of triple-A curve and you could look back and say that was a great opportunity to buy bonds," said Colby. "The market won't be shaken at all by the supply alone, it can handle that; it's the other things like the labor report next Friday and what Yellen said today and the chances of a potential rate hike coming up."
Secondary Market
Top shelf municipal bonds finished weaker on Friday. The 10-year benchmark muni general obligation yield rose two basis points to 2.41% from 2.39% on Thursday, while the yield on the 30-year GO increased two basis points to 3.18% from 3.16%, according to the final read of Municipal Market Data's triple-A scale.
U.S. Treasuries were mixed on Friday. The yield on the two-year Treasury fell to 1.31% from 1.32% on Thursday, while the 10-year Treasury yield was unchanged from 2.49%, and the yield on the 30-year Treasury bond decreased to 3.08% from 3.09%.
The 10-year muni to Treasury ratio was calculated at 96.9% on Friday compared to 96.0% on Thursday, while the 30-year muni to Treasury ratio stood at 103.2%, versus 102.5%, according to MMD.
Rate Hike Seems Imminent
It's beginning to look a lot like a March rate hike, unless there's a big shock in the next two weeks.
Federal Reserve Board Chair Janet Yellen said Friday if inflation and employment statistics stay on track, the Federal Open Market Committee could raise rates in March.
"Indeed, at our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate," Yellen said in a Chicago speech, according to prepared text released by the Fed.
This follows other Fed officials, who earlier in the week said the March meeting is "live," there would be "serious discussion" about a rate hike this month, or simply that a rate hike could be appropriate "soon."
She repeated, there's "no evidence that the Federal Reserve has fallen behind the curve, and I therefore continue to have confidence in our judgment that a gradual removal of accommodation is likely to be appropriate. However, as I have noted, unless unanticipated developments adversely affect the economic outlook, the process of scaling back accommodation likely will not be as slow as it was during the past couple of years."
Week's Most Actively Traded Issues
Some of the most actively traded issues by type in the week ended March 3 were from Maryland, New York, and Alabama,
In the GO bond sector, the Baltimore County, Md., 3s of 2018 were traded 29 times. In the revenue bond sector, the New York Municipal Water Finance Authority 4s of 2039 were traded 52 times. And in the taxable bond sector, the Alabama Port Authority 4.722s of 2040 were traded 38 times.
Week's Most Actively Quoted Issues
Mississippi, Pennsylvania and Illinois names were among those most actively quoted in the week ended March 3, according to Markit.
On the bid side, the Miss. Business Finance Corp. revenue 5.15s of 2028 were quoted by 61 unique dealers. On the ask side, the Lehigh, Pa., General Purpose Authority revenue 4s of 2035 were quoted by 209 unique dealers. And among two-sided quotes, the Illinois taxable 5.1s of 2033 were quoted by 22 unique dealers.
Lipper: Muni Bond Funds Report Outflows
Investors in municipal bond funds made an about-face and withdrew funds, according to Lipper data released late Thursday. The weekly reporters saw $346.225 million of outflows in the week ended Feb. 22, after inflows of $149.336 million in the previous week.
The four-week moving average remained in the green at positive $146.846 million, after being positive at $236.914 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 also had outflows, losing $228.545 million in the latest week after gaining $156.457 million in the previous week. Intermediate-term funds had outflows of $41.652 million after inflows of $82.507 million in the prior week.
National funds had outflows of $239.790 million after inflows of $207.266 million in the previous week. High-yield muni funds reported inflows of $48.366 million in the latest reporting week, after inflows of $227.761 million the previous week.
Exchange traded funds saw outflows of $105.083 million, after inflows of $36.447 million in the previous week.
