The municipal bond market is setting up for another firm week on the heels of last week's strength amid a more manageable week of supply.
"Getting that large of a calendar placed in an orderly fashion tells you there's good demand out there," said Jock Wright, underwriter at Raymond James, about last week's sales.
This week, issuance falls to an estimated $9.651 billion, with $6.611 billion of negotiated deals on tap and $3.04 billion of competitives, according to LSEG.
The California Health Facilities Financing Authority leads the negotiated calendar with $1.477 billion of Sutter Health revenue bonds, followed by Atlanta with $1.089 billion of airport general revenue bonds.
The competitive calendar is led by Miami-Dade County, Florida, with $455.305 million of capital asset acquisition special obligation bonds.
There are nine Texas Permanent School Fund-insured independent school district deals this week, as the start of "PSF season" gets underway, McGregor said.
Texas paper trades wider than other AAA states mostly due to the lack of state income tax, which limits the natural in-state buyer base, said Jeff Timlin and Brett Adelglass, co-portfolio managers at Sage Advisory.
If PSF spreads widen materially in August, "the appeal is straightforward: investors would be paid incremental income to own AAA-rated, effectively default-remote paper with a strong historical tendency for spreads to compress into the fall," they said.
"That combination of higher carry at purchase plus expected price appreciation as supply fades offers a favorable asymmetry," Timlin and Adelglass said.
It has been impressive that the market can clear a lot of the deals, said Tim McGregor, managing partner at Riverbend Capital Advisors. While some came at bigger concessions than normal, they're still getting done, he said.
Deal sizes range from large to small, so there is decent demand across the board, he noted.
While munis are helped by a strong seasonal technical backdrop in the near term, history suggests a lot of August's outperformance tends to happen early in the month, with valuations often cheapening as the month progresses, said Barclays strategists.
"However, if supply remains elevated and market liquidity begins to deteriorate with the onset of the late-summer vacation season, we believe tax-exempts could start to underperform," they said.
Barclays strategists are cautious on the muni market and would prefer to wait for a more attractive entry point, which could happen later this month or in early fall, they said.
"While seasonal reinvestment demand is currently providing strong support, healthy issuance and softer liquidity conditions could eventually outweigh these technical tailwinds and put upward pressure on ratios," Barclays strategists said.
