Traders said this week's increased issuance will create buying opportunities for market participants.
Issuance this week is expected to be $2 billion larger at $5.4 billion than last week's $3.2 billion, according to Ipreo and The Bond Buyer. This would be the heaviest week of issuance since the week ending March 14, when $3.5 billion Puerto Rico general obligation bonds and $1.69 California GOs boosted issuance to $11.4 billion.
"I think [this week's issuance] is great for the market," a trader in Chicago said. "Whenever there is above five billion there is more price discovery."
Issuance has been weak this year totaling $62.5 billion in the first quarter compared to $84.4 billion in the same time frame last year. Excluding the week of March 14, weekly issuance has generally hovered between $3 billion and $4 billion.
A strategist in Missouri said that municipalities are staying conservative because they do not want to see a repeat of 2008 and 2009.
"Maybe the higher issuance this week will shake things up a bit," the trader in Chicago said.
The lack of issuance has created strong demand for the few municipal bonds in the market, driving up prices.
"It's a broken record, but I think with the amount of issuance coming on, things tend to be priced up," the trader in Chicago said.
Strategists believe potential new issuance this week will create some buying opportunities for investors.
"We now approach the tail-end of our near-term cautious outlook to the market, which may afford investors an opportunity to add exposure during periods of potentially increased issuance prior to the arrival of the summer months (next week's calendar is modestly higher at $5-$6 billion)," Morgan Stanley said in a report released on Friday.
In the report Morgan Stanley recommends investors look at defensive 5% or higher coupon bonds with short maturities in the four- to nine-year maturity range that are rated mid-tier A or higher for local and state GOs, and BBB or higher for essential service revenue bonds.
"Aggregate yield adjustments for the 5-, 10- and 30-year AAA benchmarks since our cautious outlook on February 28th currently stand at +32, +13, and -3 basis points, respectively," Morgan Stanley said.
Bank of America Merrill Lynch will issue $650 million of future tax secured subordinate bonds, the largest deal of the week, for the New York City Transitional Finance Authority. The retail order period was scheduled to begin Friday and continue Monday. The bonds are rated Aa1 by Moody's Investors Services and AAA by both Standard and Poor's and Fitch Ratings.
"We are thinking there's going to be a nice appetite for the New York City deal," the trader in Chicago said. "Both retail and institutional."
Wells Fargo Securities will issue $220 million of general obligation bonds for the University of Connecticut. The bonds mature serially from 2015 to 2034 and received an Aa3 rating from Moody's, a AA rating from S&P and a AA-minus from Fitch. The retail order period was scheduled to begin on Friday and continue Monday.
There are no deals over $100 million slated for Monday in the competitive market.
The state of Illinois will issue $250 million of general obligation bonds on Thursday, the largest deal in the competitive market this week. The bonds are rated A3 by Moody's and A-minus by Fitch.
The deal "is worth taking a look at because spreads have heightened in Illinois since the release of the pension report," the strategist in Missouri said.
Muni yields strengthened Monday morning, with bonds on the intermediate curve gaining as much as two basis points and those beyond 2037 inching up one basis point. Yields on bonds on the short end of the curve are still under review, according to the Municipal Market Data triple-A scale.
"There was a little bit of a relief in the intermediate because some of those curves have moved up a little bit, while 10-30 rates have fallen," the strategist in Missouri said.
Treasuries yields fell Monday morning, with the 10-year benchmark and the two-year notes slipping two basis points each to 2.71% and 0.41%, respectively. The 30-year yields slid one basis point to 3.58%.
