Municipal bonds ended weaker on Friday with traders looking ahead to the biggest new issue slate in almost a year as more than $10 billion of supply is set to sweep over the market.
Municipal volume for the upcoming week is estimated by Ipreo at $10.10 billion, up from a revised total of $8.89 billion sold this week, according to Thomson Reuters. The last time the market saw a bigger slate of sales was in the week of March 9, 2015, when $12.44 billion of bonds were sold. The upcoming calendar consists of $8.79 billion of negotiated deals and $1.31 billion of competitive sales.
"On the demand side, flows into municipal funds have been mostly strong in recent weeks, even months -- that money is ready to be put to work," said Tom Kozlik, Managing Director at PNC, adding in the new week "there is going to be an opportunity to do just that."
On the supply side, a good amount of the week's calendar is made up of several larger issues, he said.
Randy Smolik, Senior Market Analyst at Municipal Market Data, pointed to corporates, which may be providing some leadership to munis due to the continuing low cost of borrowing.
"Corporate treasurers are selling debt with reckless abandon," he said, adding that "They are jumping all over these low rates. The selling is so sizable that it could be offering some leadership to municipal treasurers."
He also noted that the rise in supply is also due to technical factors, as the market often sees a sizable build in supply at this time of year.
"It sometimes may take a few months after the start of a new year before the primary gets running on all cylinders," he said.
Alan Schankel, Managing Director at Janney Capital Market, agreed.
"I see an underlying reason for increased volume [in the next ahead] to be catch-up after a relatively slow start to the year. It looks like a big chunk of volume is refunding," he said.
"After hitting a cyclical low point earlier this month, rates are moving gradually higher so there may be an element of rising rate concern. Also, although demand continues strong (fund flows), ratios have been ticking up," Schankel said. "There may be concern that credit issues such as Chicago [Public Schools], Puerto Rico and Atlantic City, including mention of the bankruptcy word, will generate negative muni market headlines and impact future borrowing costs."
Massachusetts will be coming to market with a $1.1 billion general obligation bond sale.
Bank of America Merrill Lynch is set to price the $600 million of new money consolidated loan of 2016 Series A bonds and the $501.34 million of 2016 Series A refunding bonds on Thursday after a one-day retail order period.
Proceeds of the sale will be used to finance state capital projects and will advance refund some portions of outstanding GOs. Massachusetts currently estimates savings of $73 million on a present value basis and almost $100 million on a gross basis.
The issue is rated Aa2 by Moody's Investors Service, and AA-plus by Standard & Poor's and Fitch Ratings.
Issuers in California will be coming with a raft of sales, headlined by the biggest deal of the week – a $1.2 billion GO and GO refunding bond offering coming from the Los Angeles Unified School District to be priced by Citigroup on Tuesday.
Proceeds of the sale will be used to finance school facilities projects and refund some portions of outstanding bonds. The deal is rated Aa2 by Moody's, triple-A by Fitch and AA-plus by Kroll Bond Rating Agency.
Also from California, Wells Fargo Securities is expected to price the San Diego Public Facilities Financing Authority's $401.49 million of Series 2016A senior sewer revenue refunding bonds on Wednesday. The deal is rated AA by Standard & Poor's and Fitch Ratings.
Barclays Capital is set to price the California Statewide Communities Development Authority's $282.74 million of Series 2016 student housing refunding revue bonds for the UC Irvine Campus Apartments. The deal is rated Baa1 by Moody's Investors Service.
JPMorgan Securities is expected to price the Los Angeles County Public Works Financing Authority's $246.26 million of Series 2016D lease revenue bonds. The bonds are rated A1 by Moody's, AA by S&P and AA-minus by Fitch.
New York issuers are also well represented on the calendar.
Wells Fargo Securities is set to sell the New York Metropolitan Transportation Authority's $500 million of Series 2016A dedicated tax fund refunding bonds on Wednesday. The deal is rated AA by S&P and Fitch.
Barclays Capital is expected to sell New York's Utility Debt Securitization Authority's $381.73 million of Series 2016A tax-exempt restructuring bonds on Tuesday. The deal is rated triple-A by Moody's, S&P and Fitch. The offering is part of a $2.5 billion three-phase plan to refinance the triple-B rated bonds from the Long Island Power Authority with lower cost triple-A rated bonds from the UDSA.
Citi will price the New York City Municipal Water Authority's $335 million of water and sewer system second general resolution revenue bonds on Tuesday. The deal is rated Aa1 by Moody's, triple-A by S&P and AA-plus by Fitch.
Also on tap, Citi is set to price the Kentucky State Property and Buildings Commission's $668 million of Project No. 112 revenue bonds on Tuesday. The deal is rated Aa3 by Moody's, A by S&P and A-plus by Fitch.
Barclays Capital is expected to sell Ohio State University's $600 million of taxable Series 2016A general receipts bonds. The deal is rated Aa1 by Moody's and AA by S&P and Fitch.
JPMorgan is set to price the Orange County School Board, Fla.'s $218.87 million of Series 2016B and C bonds. The issue is rated Aa2 by Moody's and AA by Fitch.
Secondary Market
The yield on the 10-year benchmark muni general obligation rose five basis points to 1.76% from 1.71% on Thursday, while the 30-year muni yield was three basis points higher at 2.80% from 2.77%, according to the final read of Municipal Market Data's triple-A scale.
For the 10-year muni, yields were up 10 basis points on the week. On Friday, Feb. 19, the yield on the 10-year muni stood at 1.66% while the yield on the 30-year muni was at 2.78%.
Treasuries were lower on Friday. The yield on the two-year Treasury rose to 0.80% from 0.72% on Thursday, while the 10-year Treasury yield gained to 1.77% from 1.70% and the 30-year Treasury bond yield increased to 2.64% from 2.57%.
The 10-year muni to Treasury ratio was calculated on Friday at 99.8% compared to 100.9% on Thursday, while the 30-year muni to Treasury ratio stood at 106.2% versus 107.7%, according to MMD.
The Week's Most Actively Quoted Issues
Puerto Rico, Maryland and California were among some of the most actively quoted names in the week ended Feb. 26, according to data released by Markit.
On the bid side, the Puerto Rico commonwealth GO 8s of 2035 were quoted by 12 unique dealers. On the ask side, the Maryland Health and Higher Educational Facilities Authority revenue 4s of 2046 were quoted by 22 unique dealers. And among two-sided quotes, California's Golden State Tobacco Securitization revenue 5 3/4s of 2047 were quoted by 19 dealers.
The Week's Most Actively Traded Issues
Some of the most actively traded issues by type in the week ended Feb. 26 were in New York, Alabama and Florida, according to Markit.
In the GO bond sector, the New York City 3s of 2034 traded 58 times. In the revenue bond sector, the Lower Alabama Gas District 5s of 2046 traded 84 times. And in the taxable bond sector, the Florida Administrative Finance Corp. 2.163s of 2019 traded 82 times, Markit said.
Muni Bond Funds See Inflows for 21st Straight Week
Municipal bond funds reported inflows for the 21st straight week, according to Lipper data released on Thursday. Weekly reporting funds saw $696.392 million of inflows in the week ended Feb. 24, after inflows of $688.964 million in the previous week, Lipper said.
So far this year, muni mutual funds have seen about $6.0 billion of inflows.
The four-week moving average remained positive at $744.844 million after being in the green at $719.442 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 experienced inflows, gaining $654.431 million in the latest week after inflows of $460.258 million in the previous week. Intermediate-term funds had inflows of $89.040 million after inflows of $191.155 million in the prior week.
National funds saw inflows of $589.237 million after inflows of $575.066 million in the prior week. High-yield muni funds reported inflows of $245.834 million in the latest reporting week, after inflows of $99.768 million the previous week.
Exchange traded funds saw inflows of $173.593 million, after inflows of $90.824 million in the previous week.
