A larger portion of new bond deals are being brought through competitive issuance as a lack of refundings keeps supply at a minimum.
Competitive deals have comprised 35.5% of new issuance by number of deals since the beginning of the year, according to data from Bloomberg, the largest proportion of the combined negotiated and competitive market since 2003. There were 471 competitive deals, about 29.9% of the market, at this point last year.
The skew towards competitive deals this year may be a result of fewer municipal bond refundings, which sources said are more easily done through a negotiated deal. Bonds sold through a competitive issue are purchased through a winning bid by a dealer, while in a negotiated issue, the issuer selects an underwriter to structure the deal prior to the bond issue.
"The uptick in the ratio of competitive to negotiated deals is primarily due to the reduction in refunding volume," one financial advisor in the southwest said. "Most of those deals are done negotiated, so when those deals dry up, you see that reduction in the negotiated market."
Negotiated deals have accounted for $21.3 billion of new bonds by par amount so far this year, while competitive deals have taken up $9.24 billion in issuance, according to Thomson Reuters data from Tuesday. Competitive deals have accounted for 30.3% of the market in par value this year, compared with 27.6% at this point a year ago.
"Refundings can be very market sensitive, the negotiated market platform enables you to be more flexible and move it around if rates go against you," the financial advisor said. "Structuring to save and doing those kind of things is much easier when you're negotiating a deal rather than putting it together competitively."
A negotiated setting can be preferable for refunding deals, as issuers may want to move around a pricing date depending on interest rates. Larger deals can also be premarketed ahead of time in a negotiated issuance.
"If you look at the amount of refundings versus last year, there has been less," one trader in Florida said. "We don't know why the issuers aren't willing to step up and do some of these refundings, because rates are only going to rise."
While several market participants said negotiated deals are the preferred method for refunding bonds, data from 2013 shows competitive deals shows only a small dip in participation in the refunding market compared with the bond market as a whole.
In 2013, competitive bonds represented 37% of the negotiated and competitive market for all bonds. In the refunding market, competitive bonds were involved in 32% of deals.
More private placements and direct loans may be contributing to a lower negotiated volume, sources said.
"There's definitely a chance that more private placement deals could be taking away negotiated volume, but I can't say for sure," the advisor said. "Because of the fact that banks are sitting on a lot of cash and assets at this point, municipals offer very safe way for them to lend credit. They're being very aggressive and can get good execution on these things versus the capital markets."
Competitive deals account for four of the week's seven scheduled deals bringing at least $90 million of bonds. On Wednesday, the biggest new deal was $90 million of Cache County, Utah, general obligation bonds.
Traders pointed to Thursday's scheduled $227 million of Delaware GOs, a competitive deal, as the week's biggest draw.
"Deals are still coming on the aggressive side but there really isn't much meat to sink your hands into so we'll be focusing the Delaware GOs," the trader in Florida said. "That may spur some buying."
With the lack of any big deals leading in the primary market, that deal will give the market a good indication of what underwriters and accounts are willing to take onto their books, the trader said.
Yields on the Cache County bonds, for which JP Morgan won the bid, ranged from 0.22% with a 2% coupon maturing in 2015 to 3.79% with a 4% coupon maturing in 2034. The bonds are callable at par in 2024.
With municipal bond trading slow Wednesday, the bond market headed into a third day of below-average activity.
Trading volume in the muni market picked up to 0.5% above the Wednesday average, after starting the day 21% below normal trading volumes, according to data from Bloomberg. MSRB trading volume on Monday and Tuesday was the lowest since the beginning of the year, according to Janney Capital Market's Alan Schankel.
"Low supply can be a double edged sword," Schankel said. "If you have low supply you drive down yields. Without new issues there are no robust price discoveries, so you are not getting the prices you would expect."
The biggest deal of the week, $270 million of California's Inland Valley Development Agency bonds, is set to be priced by Barclays Capital Inc. on Thursday.
The California Development Agency bonds will likely be closely watched by investors later in the week, Schankel said. The sale marks the first time the agency has come to market since being the previous incarnation was disbanded in February 2012.
"It's the first large new issue of this kind, so it should be interesting," Schankel said.
Muni bond yields were also aided by Treasuries Wednesday as government paper mostly firmed. Yields on the 30-year benchmark Treasury yield fell four basis points to 3.63%, while the 10-year also slid four basis points to 2.67%. The two-year yield was unchanged at 0.33%.
Yields according to Municipal Market Data were three basis points lower Wednesday afternoon on bonds maturing from 2023 to 2044. Bonds between 2018 and 2022 fell two basis points.
Municipal Market Advisor yields also showed firming across the curve, with bonds maturing after 2037 falling as much as three basis points. All bonds four years and out experienced a drop of as much as two basis points.
