Muni market eyes $7.5B calendar as redemption cash awaits buying opportunities

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The market was quiet on Friday ahead of a $7.5 billion new issue calendar as more than $50 billion in August redemptions frees up cash to buy bonds.

Ipreo forecasts weekly volume at $7.5 billion, up from a revised total of $4.1 billion in the past week, according to updated data from Thomson Reuters. The calendar is composed of $5.8 billion of negotiated deals and $1.7 billion of competitive sales.

“There is still a fair amount of money chasing few bonds,” a Nashville trader said earlier in the week, pointing to deals by the state of Michigan and Minnesota on the heels of rating upgrades. "They have an improving story credit wise, so I think both of those on the competitive side will do very well and be the bellwether deals of next week,” he said.

He also hinted that although there has been a fair amount of Connecticut paper in the market this year, a deal from the state in the new few week should again attract interest given the August redemptions.

Overall, he expected the municipal market to continue to follow the Treasury market, whose 10-year benchmark should remain in a trading range between 2.90% and 3.10% at least into next week.

A California trader, meanwhile, said he expects the pickup in new issuance will again focus investors’ attention on the New York market, even after the Empire State has issued more than one large deal this summer.

“New York City historically has a lot of short paper, but not in the recent deals, so that might help demand,” he said. The recent deals were heavily weighted in the long end of the market, he said.

With investors clamoring for paper and the August redemptions, the supply/demand imbalance should continue to prove favorable for municipal performance, according to Jim Colby, senior municipal strategist and portfolio manager at Van Eck.

“Normally, the June and July time frames are when you see the larger disparity between supply and cash, but now it’s the month of August,” Colby told The Bond Buyer. “That should bode well for the month and the remainder of the year for municipal performance — whether it’s investment-grade or high-yield.”
He said chasing fewer bonds keeps yields under control and prices stable.

“If those dollars that return to SMAs, banks, and insurance companies in the form of coupons and bond calls go back into the same asset class, it keeps the market from being volatile and keeps them fully invested,” he said.

He said the market technicals should be especially supportive of the high yield market. “High yield has done pretty well year to date. Performance is not hitting the ball out of the park, but comparing munis to other asset classes, we look pretty good,” Colby said.

The high-yield market in particular, he said, has held up well in light of the refinancings that have taken a significant portion of bonds out of the high yield secondary universe.

Tobacco issues were called in California and New Jersey, which were yielding 7% and generating high income for exchange traded funds, like Colby’s, and mutual funds in general.

“What that has done is put pressure on remaining high yield inventory and move those valuations higher,” he said. “That bodes well for the high yield industry in munis in terms of performance.”

Primary market
JPMorgan Securities is expected to price the Wisconsin Health and Educational facilities Authority’s $1.23 billion issue for the Advocate Aurora Health Credit Group on Tuesday. The deal is rated Aa3 by Moody’s Investors Service and AA by S&P Global Ratings and Fitch Ratings.

New York City is issuing about $869.555 million of general obligation bonds. The deals include $809.555 million of Fiscal 2019 Series A and B, Fiscal 1994 Series M and Subseries H3 GOs slated to be priced by RBC Capital Markets on Wednesday after a two-day retail order period. The city is also competitively selling $60 million of taxable Fiscal 2018 Series C GOs on Wednesday.

The deals are rated Aa2 by Moody’s and AA by S&P and Fitch.

Morgan Stanley is expected to price the Hawaii Airport System’s $413.62 million of revenue bonds, on Thursday, consisting of Series 2018A subject to the alternative minimum tax and Series 2018B non-AMT bonds. The deal is rated A1 by Moody’s, AA-minus by S&P and A-plus by Fitch.

In the competitive arena on Tuesday, Minnesota is offering $619.37 million of GOs in three sales: $397.37 million if Series 2018 various purpose bonds; $206 million of Series 2018B trunk highway bonds; and $16 million of Series 2018C taxable various purpose bonds.

Public Resources Advisory Group is the financial advisor and Kutak Rock is the bond counsel. The deals, which are selling on Tuesday, are rated AAA by S&P and Fitch.

Michigan is selling $$149.2 million of environmental program GOs on Tuesday.

Robert W. Baird is the financial advisor and Dickinson Wright is the bond counsel. The deal is rated Aa1 by Moody’s and AA by S&P and Fitch.

Secondary market
Municipal bonds were mixed on Friday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell as much as one basis point in the one- to nine-year, 13- to 18-year and 26- to 30-year maturities and rose less than a basis point in the 10- to 12-year and 19- to 25-year maturities.

High-grade munis were also mixed, with yields calculated on MBIS’ AAA scale falling as much as one basis point in the one- to eight, 13- to 18-year and 27- to 30-year maturities, rising as much as one basis point in the 10- to 12-year and 20- to 26-year maturities and remaining unchanged in the nine-year and 19-year maturities.

Municipals were steady on Municipal Market Data’s AAA benchmark scale, which showed the yield on the 10-year muni general obligation and the yield on the 30-year muni maturity both remaining unchanged.

“The monthly employment figures for July printed a headline number below estimates,” ICE Data Services said in a Friday market comment. “Non-farm payrolls increased by 157,000 for month, well below the 190,000 economists’ consensus estimate. However, the prior two months’ numbers were revised upward by a combined 59,000, which more than offsets the July shortfall. The average gain over the past three months is 224,000, a healthy number by any measure. The unemployment rate, as expected, fell 0.1% to 3.9%, as the size of the labor force increased by just 105,000 after a 601,000 gain in June.”

Treasury bonds were mixed as stocks also traded mixed.

On Friday, the 10-year muni-to-Treasury ratio was calculated at 84.0% while the 30-year muni-to-Treasury ratio stood at 98.6%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.

Previous session's activity
The Municipal Securities Rulemaking Board reported 42,488 trades on Thursday on volume of $16.65 billion.

California, New York and Texas were the states with the most trades, with the Golden State taking 18.136% of the market, the Empire State taking 13.659% and the Lone Star State taking 11.449%.

Week's actively traded issues
Some of the most actively traded munis by type in the week ended Aug. 3 were from Puerto Rico, California and New York issuers, according to Markit.

In the GO bond sector, the Puerto Rico Commonwealth 8s of 2035 traded 22 times. In the revenue bond sector, the Los Angeles 4s of 2019 traded 73 times. And in the taxable bond sector, the DASNY 4.946s of 2048 traded 69 times.

Week's actively quoted issues
Puerto Rico, New York and California names were among the most actively quoted bonds in the week ended Aug. 3, according to Markit.

On the bid side, the Puerto Rico Electric Power Authority revenue 5s of 2037 were quoted by 46 unique dealers. On the ask side, the NYC Transitional Finance Authority BARB 3.5s of 2047 were quoted by 332 dealers. And among two-sided quotes, the Bay Area Toll Authority taxable 6.907s of 2050 were quoted by 25 dealers.

Lipper: Muni bond fund outflows
Investors in municipal bond funds pulled back and took cash out of the funds during the latest reporting week, according to Lipper data released on Thursday.

The weekly reporters saw $368.353 million of outflows in the week ended Aug. 1, after inflows of $550.041 million in the previous week.
Exchange traded funds reported outflows of $115.709 million, after inflows of $130.955 million in the previous week. Ex-ETFs, muni funds saw $252.643 million of outflows, after inflows of $419.087 million in the previous week.

The four-week moving average remained positive at $522.791 million, after being in the green at $567.565 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 had outflows of $294.317 million in the latest week after inflows of $408.358 million in the previous week. Intermediate-term funds had inflows of $60.620 million after inflows of $117.106 million in the prior week.

National funds had outflows of $268.958 million after inflows of $494.716 million in the previous week. High-yield muni funds reported outflows of $78.037 million in the latest week, after inflows of $216.171 million the previous week.

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, or contact Ziad Saba at 212-803-6079 for more information.

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Primary bond market Secondary bond market Municipal bond funds State of California State of Texas State of New York City of New York, NY New York City Transitional Finance Authority New York State Dormitory Authority Wisconsin Health & Educational Facilities Authority State of Hawaii State of Minnesota State of Michigan Commonwealth of Puerto Rico Puerto Rico Electric Power Authority City of Los Angeles, CA Bay Area Toll Authority