As there are just eight full work days remaining in the year, muni market leaders believe that 2020 will look a lot like 2019 — with high volume, increasing taxable issuance and strong demand.
According to Sally Bednar, head of muni capital market strategy at Wells Fargo Securities, the drivers of the muni market in 2019 should push into 2020, making it another strong and successful year for the asset class.
"This year started out a little slow, as we saw rates rally and credit spreads have stayed steady and even tightened a little bit," Bednar said. "But the taxable market brought momentum of issuance into the marketplace and it's here to stay."
She noted that while it took a little bit of education for the issuers when it came to replacing tax-exempt debt with taxable debt, issuers got over it during the summer — once they realized they can replicate the structure of tax-exempts and also liked where the rates were.
"Taxables are sold at par, so issuers can see cash-flow savings immediately. With tax-exempt current refundings, even though you might lock in an exempt forward, you don’t see the cash-flow savings right away," she said.
That is one of the benefits from issuing taxable debt as opposed to tax-exempt. With other benefits being a wider investor base, including foreign investors, an extension of duration and better credit quality.
Those benefits got issuers over the hump, who were previously missing the traditional advance refunding of tax-exempt debt, which was outlawed by 2017 tax reform. She said that being said, 2020 is going to look a lot like 2019, another strong issuance year. It's hard not to see 2020 with positive investor inflows, continued inflows into early 2020, she added.
"Taxable munis issuance is up over 100% this year, totaling $67B from $31B in 2018. Those numbers are also an understatement, as it does not include corporate CUSIPS, which we have seen a fair amount of as well," Bednar said. "I expect this trend to continue into 2020, making it another strong issuance year. Tax law isn’t going to change next year, at least through the November election."
“Corporate issuance has been flat,” she said. “Investors are here, rates are low, those combined with a lot of munis with 2020 and 2021 call dates."
She also said that taxable issuance will increase next year – perhaps not to the 2019 pace, however.
“One reason being that most corporates are pretty short dated, with the average life being well less than 10 years. Corporate buyers or investors they get higher credit rating and longer duration. With so much global negative yielding debt, foreign buyers from Asia or Europe come into primary and secondary."
She also noted that munis have had a second year in a row of above 5% returns.
Primary market
Munis will see a little over $6 billion of issuance in the second to last full week of the year, as
The Dormitory Authority of the State of New York dominates the new-issue slate with its sale of $3.2 billion of general purpose personal income tax revenue bonds. The deal consists of $1.997 billion of tax-exempt Series 2019D (Aa1/NR/AA+/NR) and Series 2019E (Aa1/NR/AA) PITs and $1.269 billion of taxable Series 2019F (Aa1/NR/AA+/NR) PITS. Morgan Stanley is set to price the bonds on Tuesday.
Barclays Capital is expected to price two issues for the Massachusetts Institute of Technology (Aaa/AAA/NR/NR) on Tuesday. The deals consist of $300 million of Series F taxable corporate CUSIP bonds and $137 million of Massachusetts Development Finance Series 2020P revenue bonds.
Secondary market
Munis were mixed on the MBIS benchmark scale, with yields rising by two basis points in the 10-year maturity and falling by less than a basis point in the 30-year. High-grades were also mixed, with yields on MBIS AAA scale increasing by no more than one basis points in the 10-year and decreasing by one basis point in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the both 10- and 30-year were steady at 1.42% and 2.04%, respectively.
The 10-year muni-to-Treasury ratio was calculated at 74.7% while the 30-year muni-to-Treasury ratio stood at 88.3%, according to MMD.
Stocks and Treasuries were both moving higher.
The Dow Jones Industrial Average was up about 0.45% as the S&P 500 Index rose 0.78% while the Nasdaq gained 0.99%.
The Treasury three-month was yielding 1.546%, the two-year was yielding 1.639%, the five-year was yielding 1.718%, the 10-year was yielding 1.894% and the 30-year was yielding 2.312%.
Previous week's actively traded issues
According to
Some of the most actively traded munis by type last week were from Colorado, District of Columbia and Texas issuers.
In the GO bond sector, the Vauxmont Metropolitan District, Colo., 3.25s of 2050 traded 27 times. In the revenue bond sector, the Metropolitan Washington Airports Authority 3s of 2050 traded 66 times. In the taxable bond sector, the Texas Private Activity Bond Surface Transportation Corp. 3.922s of 2049 traded 133 times.
Previous session's activity
The MSRB reported 30,800 trades Friday on volume of $13.30 billion. The 30-day average trade summary showed on a par amount basis of $11.77 billion that customers bought $6.47 billion, customers sold $3.24 billion and interdealer trades totaled $2.06 billion.
New York, California and Texas were most traded, with the Empire State taking 14.168% of the market, the Golden State taking 12.695% and the Lone Star State taking 8.946%.
The most actively traded security was the New Jersey Transportation Trust Fund Authority’s Series 2011B 5s of 2042, which traded 184 times on volume of $22.41 million.
Treasury auctions discount rate bills
Tender rates for the Treasury Department's latest 91-day and 182-day discount bills were higher, as the $42 billion of three-months incurred a 1.540% high rate, up from 1.520% the prior week, and the $36 billion of six-months incurred a 1.550% high rate, up from 1.520% the week before.
Coupon equivalents were 1.572% and 1.588%, respectively. The price for the 91s was 99.610722 and that for the 182s was 99.216389.
The median bid on the 91s was 1.515%. The low bid was 1.485%.
Tenders at the high rate were allotted 59.92%. The bid-to-cover ratio was 2.70.
The median bid for the 182s was 1.520%. The low bid was 1.480%.
Tenders at the high rate were allotted 96.62%. The bid-to-cover ratio was 2.63.
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.
