With $5.77 billion of new issuance scheduled for this week, municipal bond traders said the market was firmer as demand outweighed supply.
“This week’s supply seems very manageable,” a New York trader said.
“It feels a little firmer probably because Treasuries are firmer too,” a second New York trader said.
This week’s expected $5.77 billion in new issues is up from last week’s revised $5.61 billion. On the negotiated calendar, an estimated $4.67 billion should be priced, up from last week’s revised $3.61 billion. On the competitive side, the market can expect $1.10 billion to be auctioned, down from last week’s revised $2 billion.
Citi is expected to price the week’s biggest deal – $1.2 billion of Iowa Finance Authority Midwestern disaster area revenue bonds for the Iowa Fertilizer Company Project – on Tuesday. The bonds are rated BB-minus by Standard & Poor’s and Fitch Ratings.
The second New York trader said the deal could get broad-based support, even after a Texas fertilizer plant explosion on April 17. “It could be a tough sell right now based on the headlines from Texas just two weeks ago, but at double-B-minus and the hunger for yield right now, it wouldn’t surprise me if it ends up doing better than expected,” he said.
This trader added that buyers interested in lower-rated bonds may want the diversity this deal provides. “It’s a different name so you figure firms who do junk bonds would go for it in droves since they don’t own it.”
“As crazy as it sounds, I think at this point in time I’d rather have the headline risk associated with double-B-minus fertilizer plant bonds than Puerto Rico general obligations,” he said.
Outside the big Iowa deal, traders said the market was focused on secondary trades Monday. I am seeing high grades in the five- to 10-year range that seem OK so someone is buying a few things,” the first trader said. “It’s firm at the moment.”
Other analysts noted strength in the five- to 10-year part of the curve.
“The belly of the curve is performing as well as longer term bonds as the weighted average yield of bonds in the five-year Standard & Poor’s AMT-Free Muni Series 2018 index have come down by 11 basis points in April, to return 1.21% year-to-date,” said J.R. Rieger, vice president of fixed income at Standard & Poor’s Dow Jones Indexes.
He added that 10-year bonds in the S&P AMT-Free Muni Series 2023 index have improved 25 basis points to finish at a weighted average yield of 2.25%.
Outside the belly of the curve, the market has also posted gains. “Even with a slip of three basis points to the cheaper since month end, the high yield municipal bond market tracked by the S&P Municipal Bond High Yield Index remains on track to making April the 17th consecutive month in a row where it has seen a positive monthly return,” Rieger said.
The high yield market has returned 2.88% for the year to date and 0.75% so far in April.
Secondary trades compiled by data provider Markit Monday showed a mix of firming and weakening.
Yields on Dallas, Texas, Independent School District 5s of 2016 slipped three basis points to 0.50% and Columbus, Ohio, 5s of 2026 fell one basis point to 2.17%.
Yields on Michigan Tobacco Settlement Financing Authority 5.125s of 2022 and Tarrant County, Texas, Cultural Education Facilities Financing Corp.4s of 2043 declined two basis points each to 6.06% and 4.09%, respectively.
Other trades were weaker. Yields on New Jersey State Turnpike Authority 5s of 2035 increased two basis points to 3.30% and Dormitory Authority of the State of New York 4s of 2027 rose one basis point to 2.94%.
Municipal bond scales ended flat Monday after posting gains Friday on a risk-off rally.
Yields on the Municipal Market Data 5% triple-A GO scale ended steady across the curve. The 10-year and 30-year yields closed unchanged for the second trading session at 1.69% and 2.87%, respectively. The two-year closed steady at 0.29% for the 17th session.
Yields on the Municipal Market Advisors 5% scale also ended flat across the curve. The 10-year and 30-year yields finished unchanged at 1.75% and 3.00%, respectively. The two-year was flat at 0.32% for the 17th session.
The Treasury yield curve steepened Monday after the long end reversed morning gains. The two-year yield fell one basis point to 0.22% while the 30-year yield increased one basis point to 2.88%. The benchmark 10-year was steady at 1.67%.
With a smaller calendar this week than last week, some market participants say the lack of conviction that existed in the market last week will continue into this week.
“Secondary trading levels were thin last week and inter-dealer trading activity has kept to softer levels than earlier in the year,” wrote Matt Fabian, managing director at MMA. “The lack of follow through - and worry about still uneven mutual fund flows - may be inhibiting traditional investors from taking more aggressive stands on credits outside of a range of the most liquid names.”
He added that crossover buyers are still present in the market as muni-to-Treasury ratios hover at or above 100%. Treasury yields have fallen much faster than municipal yields.
Indeed, the five-year ratio closed at 110.4% on Monday and the 10-year ratio finished at 101.2%. The 30-year ratio closed right at 100%.
