Market awaits large calendar; A bit on retail interest

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Munis were mixed on the MBIS benchmark scale Monday, with yields mostly holding steady as investors look toward a relatively large new-issue calendar led by New York City.

Primary market
New York City (Aa1/AA/AA) plans to sell $850 million of tax-exempt general obligation bonds via negotiated sale on Thursday after a two-day retail order period starting on Tuesday. Some panelists at our California Public Finance Conference last week suggested that retail is growing stronger and stepping up. Could a three-day retail order period be next? More below.

The deal will be negotiated through the city’s underwriting syndicate led by book-running lead manager Jefferies, with BofA Securities, Citigroup, Goldman Sachs, JPMorgan Securities, Loop Capital Markets, Ramirez & Co., RBC Capital Markets and Siebert Cisneros Shank & Co. serving as co-senior managers. Proceeds will be used to fund capital projects.

The city will also competitively sell $130 million of taxable GOs on Wednesday.

The Massachusetts Department of Transportation is set to come to market with $696.7 million of Metropolitan Highway System bonds.

Citigroup is expected to price the $491.5 million of Series 2019A senior (A2/A+/A+) revenue refunding bonds and $205.21 million of Series 2019C subordinate Commonwealth Contract Assistance Secured (Aa2/AA/AA+) revenue refunding bonds on Wednesday.
“New York City tops the calendar with $850 million of GO bonds and Massachusetts plans to offer $700 million of Metro Highway System revenue senior and subordinated bonds supported by Commonwealth contract payments,” Janney said in a Monday market comment. “Given last week’s report of $1.6 billion of inflows to muni funds in the week ended Sept. 25, there should be plenty of investor interest in this week’s slate.”

In the competitive arena on Tuesday, Seattle, Washington, (Aa2/AA/NR) is selling $356.575 million of Municipal Light and Power bonds in two offerings. The deals consist of $214.605 million of Series 2019A improvement revenue bonds and $141.97 million of Series 2019B refunding revenue bonds.

Piper Jaffray is the financial advisors; Stradling Yocca is the bond counsel. Proceeds will be used to finance certain capital improvements and conservation programs for the city s municipal light and power plant and to refund debt.

All about retail

Retail is “two-legged,” market participants said last week at The Bond Buyer’s California Public Finance Conference. Retail is an evolving animal in the municipal market, having stepped up at a time when rates are historically low yet demand remains high.

There is professional retail and then there are separately managed accounts and registered investment advisors that are taking on a much larger role in the municipal market.

Institutional investors buy blocks — so issuers need to diversify and cultivate a retail base — tell their stories of why retail needs to step in, panelists said.

“If you’re an issuer, it really would benefit you to cultivate those retail relationships,” said Tom Paolicelli, Director of Issuer Success at BondLink. Individual investors “need more time. They need to know when a deal is coming. You have to cater to them. Technology is really helping to step up that effort. Technology can be your friend.”

Professional retail is a priority still, though, said Tom Lockard, co-founder of 280 Capital. ”Our goal is to get the individual to buy and hold.”

Additionally, the panelists all agreed that “impact” and “green” has been driving pricing, especially inside of 12 years. The transfer of wealth from the Baby Boomers to Millennials is real and these new investors will demand that their investments go toward projects that can show their impacts, in both the actual projects and their portfolios.

“It’s really a new way of evaluating credit; there is a lot more interest in looking at those factors, looking at credit through an ESG-lens. Climate change is a factor and we’ve heard from some investors that they’re going to pull away from the coasts [as far as investing],” unless more attention is paid to the issue, Paoliclli said.

With interest rates being so low, it has been interesting how much retail has stepped up over the past two years, said Debra Saunders, director at Citi. The impact on tax law changes has made for the uptick in retail. “What should issuers be thinking about preferences on prices and coupons? If you have a big deal you could issue some par bonds. Couponing is one way to boost demand.”

Secondary market
Munis were mixed on the MBIS benchmark scale Monday, with yields falling less than one basis point in the 10-year maturity and rising by less than a basis point in the 30-year maturity. High-grades were unchanged, according to MBIS.

On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on both the 10- and 30-year GOs were unchanged at 1.42% and 2.01%, respectively.

“The ICE muni yield curve is marginally higher in very light month end/quarter end trading. High-yield/tobaccos are unchanged,” ICE Data Services said in a Monday market comment “On the back of Friday’s Puerto Rico restructuring proposal, the Commonwealth’s 8% GO is off another 3/8 point today to 60 1/8 bid.”

The 10-year muni-to-Treasury ratio was calculated at 83.5x% while the 30-year muni-to-Treasury ratio stood at 94.0%, according to MMD.

Treasuries were stronger as stock prices traded lower. The Treasury three-month was yielding 1.828%, the two-year was yielding 1.616x%, the five-year was yielding 1.551%, the 10-year was yielding 1.676% and the 30-year was yielding 2.124%.

"With little direction being offered by the Treasury complex and a larger than average new issue calendar to contend for with this week, muni participants are keeping their powder dry," MMD analyst Peter Franks said in a market comment. "Exacerbating the lack of activity is the fact that today marks month end/quarter end and many have their books frozen till tomorrow. What little activity there has been was mostly steady."
Previous session's activity
The MSRB reported 25,090 trades Friday on volume of $9.84 billion. The 30-day average trade summary showed on a par amount basis of $10.88 million that customers bought $5.81 million, customers sold $3.20 million and interdealer trades totaled $1.88 million.

California New York and Texas were most traded, with the Golden State taking 14.289% of the market, the Empire State taking 12.016% and the Lone Star State taking 9.618%.

The most actively traded security was the New York Triborough Bridge and Tunnel Authority’s Series 2019B taxable revenue 3.427s of 2044, which traded four times on volume of $20 million.

N.Y. Fed model sees Q4 GDP at 2.4%
The Federal Reserve Bank of New York on Monday released an update of the economic forecasts as generated through its dynamic stochastic general equilibrium (DSGE) model. The predictions are not an official New York Fed forecast, but only part of its staff’s overall forecasting process.

According to the model, the current GDP growth forecast year-over-year for the fourth quarter for 2.4%, up from the forecast in June of 1.8%, since second quarter real GDP growth was higher than expected.
“The model attributes this faster-than-projected growth to a productivity boost, the result of both temporary and more persistent factors. The latter lift the model’s projections through the remainder of the forecast horizon,” the N.Y. Fed said.

“The estimates of the real natural rate of interest are slightly lower than those in June over the entire forecast horizon,” the N.Y. Fed said. “This is due to a confluence of factors: while the persistent component of productivity tends to push the natural rate up, the temporary component has the opposite effect. In the short run, the latter prevails.”

Core PCE inflation was forecast at 1.6% for the year, 0.2 percentage point higher than the N.Y. Fed projected in June.

“Inflation forecasts for the remainder of the forecast horizon are lower than the June projections, as higher productivity reduces marginal costs,” the N.Y. Fed said. “The uncertainty surrounding both the output growth and inflation projections is sizable.”

Last week's activate traded issues
Revenue bonds made up 52.99% of total new issuance in the week ended Sept. 20, down from 52.32% in the prior week, according to IHS Markit. General obligation bonds were 43.06%, down from 43.55%, while taxable bonds accounted for 3.95%, down from 4.13%.
Some of the most actively traded munis by type in the week were from Pennsylvania, New Jersey and California issuers.

In the GO bond sector, the Reading School District, Pennsylvania 3.125s of 2042 traded 26 times. In the revenue bond sector, the New Jersey Transportation Trust Fund Authority 5s of 2044 traded 84 times. In the taxable bond sector, the San Francisco Bay Area Toll Authority 2.574s of 2031 traded 50 times.

Bond fact from NYC Comptroller’s Office
The New York City Comptroller’s Office on Monday released its monthly report, which included a section on “Market Keeps Sinking Fund Afloat.”

“In 1813, New York City Comptroller Thomas R. Mercein established the city’s first sinking fund to pay debt service, shortly after New York City issued the country’s first recorded municipal bonds in 1812. The sinking fund set aside revenues from specific sources to pay debt service, rather than relying on general city revenues (with a promise to bondholders to levy additional taxes, if necessary). As obvious as this accounting may seem today, it was uncommon at the time to pledge specific revenues for debt repayment,” the report said.
“The sinking fund relied on revenue from the commutation of water lot rents and quit-rents, license fees for pawnbrokers and coaches, market rents and fees, and a quarter of the proceeds from city real estate sales. Comptroller Mercein established the sinking fund to maintain the city’s credit, ‘because emergencies may happen, which will require new loans.’ [The finances of New York City, by Edward Dana Durand, pages 33-36, 1898]. This eclectic combination of revenues would have been insufficient to pay debt service by 1826, were it not for the construction of Fulton Market a few years before that date, which dramatically increased market rents and stabilized the sinking fund.”

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.

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Primary bond market Secondary bond market City of New York, NY State of New York City of Seattle, WA Massachusetts Department of Transportation Commonwealth of Massachusetts State of California State of Texas Reading School District, PA New Jersey Transportation Trust Fund Authority Bay Area Toll Authority