Munis face a rise in issuance this week with several mega deals on tap, as the market faces the possible continuation of last week's rally and abating bids wanteds.
The tone heading into this week is cautious, said Tim Iltz, fixed income credit and market analyst at HJ Sims.
This is because of the volatility over the past several weeks and accounts "rearranging the deck chairs" a little bit in how they view the yield curve, he said.
"We've had a fairly significant change in terms of the slope of the municipal curve, and also the steepness in the intermediate part of the curve has made certain tenors much more appealing," Iltz said.
The 15-year maturity is about 88% of the 30-year curve, so an investor going out 15 years can capture close to 90% of the 30-year curve. "There's a lot of appeal to that," he said.
"Value is finally being pursued after a difficult September," said Tripp Kaiser, executive director of the Center on Municipal Capital Markets at the University of Texas at Austin.
Separately managed accounts and crossovers have reportedly started to "embrace higher yields/ratios, with large blocks providing some stronger price discovery around quarter-end," he noted, a welcome relief after a difficult stretch for munis.
Even with the recent rally, munis remain "relatively cheap," with tax-exempt yields and tax equivalent yields both high, said Daryl Clements, municipal portfolio manager at AllianceBernstein.
Issuance will be elevated this week as shelved deals are set to come to market, but supply will likely "abate" as November approaches, he said.
With higher yields, refundings may slow, reducing overall issuance and, "given the amount of tax losses that have already been taken, bid wanted volume may also abate," Clements said.
Supply rises above $15 billion this week. California leads the negotiated market with $1.75 billion of general obligation bonds across two tranches, one of five deals above $1 billion.
The competitive market is led by the Maryland Department of Transportation, with $859.47 million of consolidated transportation bonds to be sold across three series.
Some of the largest deals are several from specialty states — including California, New York City and Connecticut.
"The caveat is that total supply relative to scheduled redemptions remains significantly positive in each state," said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.
"While the in-state investor advantage remains a benefit, issuers may need to offer wider concessions to attract buyers, particularly because all three transactions are in widely held sectors," she said.
This week also sees the release of the meeting notes from the Federal Reserve's September meeting, where it hiked interest rates by 25 basis points, Iltz noted.
If the notes included inflationary comments, the market could start to "dance" around the possibility of another rate hike at the Fed's October meeting, he said.
Last week there was around a 70% chance of an October rate hike, but the probability has fallen to around 20%, a significant change in how investors are thinking about what the Fed does next.
If the Fed hikes rates again this month, rates may respond in a more dramatic fashion, as financial markets have largely written off a rate hike, according to Iltz.
