Muni market faces short week, less than $5B in deals

Municipal supply is set to drop to less than $5 billion after the long weekend as the market struggles witha lack of supply.

Ipreo estimates volume will slip to $4.83 billion, after a revised total of $7.17 billion sold in the past week, according to updated figures from Thomson Reuters. The calendar for the holiday shortened week ahead is composed of $3.28 billion of negotiated deals and $1.55 billion of competitive sales.

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With the market closed on Monday in observance of Memorial Day, the week will be cut down to four trading sessions, with the majority of the deals set to price on Wednesday and Thursday.

Only 12 of the scheduled deals are larger than $100 million and five of those deals are of the high-grade, triple-A rated variety. The largest deal of the week is not tax-exempts, but taxable munis.

“Demand will be very good, but the market is still suffering from a lack of supply,” said Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management. “There is not a lot of paper to go around, especially when you factor in maturities and calls.”

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Photo by Dave Kaup Photography dkaup@kc.rr.com 9132193569 Photographed for U.S. Bank

He said that he was one of many who thought there would be some pick up in supply by now, but that hasn’t happened and it is unlikely to happen anytime soon.

“Unless something drastic happens, I don’t see it picking up until late third quarter, early fourth,” he said. “There is lots of money on the sidelines and its waiting for some back up in rates and it continues not to come.”

With municipal yields low, as the 10-year is below 2.00% and the 30-year below 3.00%, you would think municipalities would jump to get the ball rolling on big, long-term projects, but that seems to not be the case. Heckman blames a trickle-down effect from Washington.

“States continue to be faced with budgetary constraints, although there is some appetite for voters to approve projects,” he said. “They are thinking that funding will be coming from federal sources, but we are finding out that the wheels grind slowly in Washington. Overall, it’s taking longer to get the ball rolling in terms of new issuance, [or a clear] picture on tax policy and infrastructure funding.”

JPMorgan is expected to price the Duke University Health System Inc.’s $600 million of taxable bonds on Thursday. The deal is rated Aa2 by Moody’s Investors Service and AA by S&P Global Ratings and Fitch Ratings.

Morgan Stanley is scheduled to price Connecticut’s $370 million of state revolving fund general revenue bonds on Thursday after a one-day retail order period. The deal will consist of Series A green bonds and Series B bonds. The deal is rated triple-A by Moody’s, S&P and Fitch.

Bank of America Merrill Lynch is slated to price the Louisiana Local Government Environmental Facilities and Community Development Authority’s $250.885 million of Women’s Hospital Foundation Project refunding revenue bonds on Thursday after a one-day retail order period. The deal should feature both tax-exempts and taxable and is rated A2 by Moody’s and A by S&P.

Barclays is slated to price the State of Connecticut Health and Higher Educational Facilities Authority’s $250 million of revenue bonds on Yale University on Wednesday. The deal is expected to have a mandatory Put date of July 1, 2020 and is rated triple-A by Moody’s and S&P.

“Deals should continue to fly off the shelves, if of course they are priced attractively,” said Heckman.

In the competitive arena, there are only two deals scheduled greater than $100 million and both are rated triple-A by Moody’s, S&P and Fitch.

First on Wednesday Arlington County, V.a., is set to sell $180.095 million of public improvement bonds. Then on Thursday, Loudoun County, V.a., will sell $108.125 million of general obligation public improvement bonds.

Secondary market
Municipals finished stronger on Friday. The yield on the 10-year benchmark muni general obligation fell one basis point to 1.95% from 1.96% on Thursday, while the 30-year GO yield dropped two basis points to 2.80% from 2.82%, according to the final read of Municipal Market Data's triple-A scale.

U.S. Treasuries were mixed in late Friday trading. The yield on the two-year Treasury was unchanged from 1.29% on Thursday as the 10-year Treasury yield dipped to 2.24% from 2.25% while the yield on the 30-year Treasury bond decreased to 2.91% from 2.92%.

On Friday, the 10-year muni to Treasury ratio was calculated at 86.8%, compared with 87.0% on Thursday, while the 30-year muni to Treasury ratio stood at 96.1%, versus 96.5%, according to MMD.

Week's actively traded issues
Some of the most actively traded bonds by type in the week ended May 26 were from New York, Maryland and Florida York issuers, according to Markit.

In the GO bond sector, the Albany County, N.Y., 4s of 2018 were traded 53 times. In the revenue bond sector, the Baltimore, Md., Convention Center 5s of 2046 were traded 50 times. And in the taxable bond sector, the Florida Catastrophe 2.995s of 2020 were traded 19 times.

Week's actively quoted issues
Puerto Rico, New York and California names were among the most actively quoted bonds in the week ended May 26, according to Markit.

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On the bid side, the Puerto Rico GO 5s of 2041 were quoted by 71 unique dealers. On the ask side, the New York Metropolitan Transportation Authority revenue 4s of 2034 were quoted by 176 unique dealers. And among two-sided quotes, the California taxable 7.55s of 2039 were quoted by 25 unique dealers.

Lipper: Muni bond funds see inflows
Investors in municipal bond funds continued to put cash back into the funds in the latest week, according to Lipper data released late on Thursday.

The weekly reporters saw $394.498 million of inflows in the week ended May 24, after inflows of $426.721 million in the previous week.

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The four-week moving average was still in the green at positive $388.683 million, after being positive at $326.188 million in the previous week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.

Long-term muni bond funds also had inflows, gaining $238.275 million in the latest week after rising $280.582 million in the previous week. Intermediate-term funds had inflows of $8.640 million after inflows of $5.202 million in the prior week.

National funds had inflows of $447.135 million after inflows of $443.455 million in the previous week. High-yield muni funds reported inflows of $171.583 million in the latest reporting week, after inflows of $214.464 million the previous week.

Exchange traded funds saw inflows of $50.978 million, after inflows of $98.138 million in the previous week.

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