More of the same: Munis to see another $13B as action rolls on
Fresh on the heels of the biggest volume week in nearly two years, the muni market is keeping the pedal to the metal with only a few weeks remaining in 2019.
IHS Ipreo is estimating supply will come in at $13.21 billion in a calendar composed of $11.63 billion of negotiated deals and $1.58 billion of competitive sales.
“As we approach year-end the muni deals keep coming and there is a ton of cash on hand, looking for a home,” Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management, said. “Time is running out [before the year ends] and now is not a time to be patient, with a lot of cash available.”
He added that the muni market continues to be fundamentally very strong, although today’s job report could result in some short-term weakness.
“Investors are welcoming any type of move off of current levels,” he said. “The primary market, although well difficult to get allocations you want, it is much easier to find paper compared to the secondary.”
There are 31 scheduled deals of $100 million or larger, with six of those coming competitively. Seven of those $100-million-or-larger scheduled deals are either partially or completely taxable.
“No questions about the significant pickup in taxable munis and the fact that it is the new norm,” Heckman said. “Taxable munis is a great market and could continue to grow over time because of the credit quality factor, as the typical investment grade corporate rating is a BBB. It provides good crossover opportunities.”
He added that with the influx of issuance, he has been getting in on the smaller issues in terms of par amounts, where there can be more attractive pricings.
“We use that as an opportunity to pick up additional spread in the smaller issues — something that the bigger transactions don’t necessarily provide this super strong market," he said.
Not worried about muni credit
Heckman has no worries about the general state of credit in municipals, unlike others who fear the influx of cash has driven down borrowing costs for more speculative projects.
“Whenever you are this long in the tooth of the economic cycle and especially given the current strength of the muni market and its driving forces, investors are buying anything and everything they can get a hold of,” he said. “In a low-yield environment, people are going to stretch for yield.”
He added that the "problem child" credits in the market will continued to be watched for obvious reasons but that in the end, they are what makes the investment grade world appealing and even stronger.
“I am not buying that fact that the muni market has a credit problem,” Heckman said. “Any problems are very much isolated and issuer specific."
JP Morgan will run the books on the largest transaction of the week — Texas Private Activity Bond Surface Transportation Corporation’s (Baa2/NR/BBB) $1.20 billion of senior lien revenue refunding bonds, featuring non-alternative minimum tax private activity bonds and taxable bonds for the NTE Mobility Partners LLC North Tarrant Express Managed Lanes Project on Tuesday.
Citi is expected to price the state of Connecticut’s (A1/A/A+) $897.955 million of general obligation and GO refunding bonds on Thursday.
Goldman Sachs is scheduled to price Foothill/Eastern Transportation Corridor Agency’s (Baa2/A-/BBB) $892.86 million of toll road refunding revenue federally taxable bonds on Tuesday.
JP Morgan is also expected to price New York City Transitional Finance Authority’s (Aa1/AAA/AAA) $850 million of future tax secured subordinate bonds on Thursday.
The NYC TFA is also selling $300 million competitively in two separate sales, also on Thursday.
Citi is slated to price the Illinois State Toll Highway Authority’s (A1/ /AA-) $703.375 of senior revenue refunding bonds on Tuesday.
After a busy week, the municipal market was catching its breath on Friday, as a lighter calendar of primary issuance is expected for next week.
“We had one of the biggest weeks of the year in issuance, which followed one of the biggest weeks ever last week of bond fund inflows,” a regional Atlanta trader said on Friday afternoon.
He characterized the market as strong and performing well as the year comes to a close and investors try to take advantage of the last flurry of supply before volume dries up for the holidays ahead of the New Year.
“There’s been a lot of demand and finally in the last two months of the year we are finally starting to see a meaningful amount of supply, and generally speaking, it’s been well received by retail and institutional investors,” he said.
That is the case — even as the 10-year Treasury benchmark is significantly up off of the lows of earlier this year.
“The 1.40% handle yield has made the levels a lot more appealing than they were earlier in the year,” he said of the municipal percentage of Treasuries.
Friday’s employment report indicated that there is economic strength driven by the employment sector — even though that really hasn’t made much of a difference in munis, or Treasuries.
“Treasuries are only off a half point on the long end, and munis are only two to three basis points weaker — which is not meaningful given how much supply we have had to digest in the last few weeks,” the trader said.
As the end of December approaches, investors are eager to take advantage of any supply before seasonal volume disappears before the New Year.
“I think investors are going to be poised to add to their portfolios, especially with this week and next, that will be the last opportunity to add before we get to the first week of the year where there isn’t any supply,” he said.
“Munis have performed well vis-a-vis Treasuries — and there seems to be a lot of continued demand,” the trader added.
One thing he said is different this quarter than 2018 to the growth of taxable issuance in the municipal market.
“That’s been interesting to follow how those transactions have gone and how new participants in the taxable space have taken up that additional supply,” he noted.
“It’s probably having the effect of decreasing the exempt supply and it’s becoming more challenging to find tax-exempt paper since some people are saying 30% of the market is coming taxable whereas before it was less than 10%,” he said.
Munis were slightly stronger on the MBIS benchmark scale, with yields falling by one basis point in both the 10- and the 30-year maturities. High-grades were mixed, with yields on MBIS AAA scale decreasing by less than one basis point in the 10-year maturity and increasing by less than one basis point in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on both the 10- and 30-year was two basis points higher to 1.48% and 2.07%, respectively.
The 10-year muni-to-Treasury ratio was calculated at 80.4% while the 30-year muni-to-Treasury ratio stood at 90.7%, according to MMD.
Treasuries were mostly higher and stocks soared after an upbeat jobs report. The Dow Jones Industrial Average was higher by about 1.20%, the S&P 500 Index gained 0.95% and the Nasdaq declined by 0.99%.
The Treasury three-month was yielding 1.523%, the two-year was yielding 1.633%, the five-year was yielding 1.671%, the 10-year was yielding 1.842% and the 30-year was yielding 2.286%.
Lipper sees 48th consecutive inflow
For 48 weeks in a row investors have poured cash into municipal bond funds, according to the latest data released by Refinitiv Lipper on Thursday.
Tax-exempt mutual funds that report weekly received $614.882 million of inflows in the week ended Dec. 4 after inflows of $2.355 billion in the previous week. This is also the lowest inflow amount since Sept. 18, when there was only $209.318 million and it ends a streak of eight weeks in a row with greater than $1 billion of inflows.
“The holiday had somewhat of an impact in the lower amount of inflows but I think in general, streaks are made to be broken and wouldn’t be surprised the streak ends next week or sometime in the next few weeks,” Heckman said.
Exchange-traded muni funds reported inflows of $203.703 million after inflows of $397.663 million in the previous week. Ex-ETFs, muni funds saw inflows of $411.179 million after inflows of $1.957 billion in the previous week.
The four-week moving average remained positive at $1.553 million, after being in the green at $1.676 billion in the previous week.
Long-term muni bond funds had inflows of $464.451 billion in the latest week after inflows of $1.534 billion in the previous week. Intermediate-term funds had inflows of $84.099 million after inflows of $497.841 million in the prior week.
National funds had inflows of 504.030 million after inflows of $2.139 billion in the previous week. High-yield muni funds reported inflows of $171.625 million in the latest week, after inflows of $477.878 million the previous week.
Week's actively traded issues
Some of the most actively traded munis by type in the week ended Dec. 6 were from Texas, Illinois and New Jersey issuers, according to IHS Markit.
In the GO bond sector, the Crowley Independent School District, Texas 4s of 2044 traded 26 times. In the revenue bond sector, the Metropolitan Pier and Exposition Authority, 5s of 2050 traded 65 times. In the taxable bond sector, the New Jersey Transportation Trust Fund Authority, 4.131s of 2042 traded 103 times.
Week's actively quoted issues
Puerto Rico, Massachusetts and California bonds were among the most actively quoted in the week ended Dec. 6, according to IHS Markit.
On the bid side, the Puerto Rico Sales Tax Financing Corp., revenue 5s of 2058 were quoted by 26 unique dealers. On the ask side, the Massachusetts Development Finance Agency, revenue, 4s of 2036 were quoted by 74 dealers. Among two-sided quotes, the state of California taxable, 7.6s of 2040 were quoted by 12 dealers.
Previous session's activity
The MSRB reported 41,611 trades Thursday on volume of $22.05 billion. The 30-day average trade summary showed on a par amount basis of $11.38 million that customers bought $6.32 million, customers sold $3.06 million and interdealer trades totaled $1.99 million.
Texas, California and New York were most traded, with the Lone Star State taking 11.892% of the market, the Golden State taking 11.217% and the Empire State taking 10.119%.
The most actively traded security was the New Jersey Transportation Trust Fund Authority, revenue taxable 4.131s of 2042, which traded 48 times on volume of $127.38 million.
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.