Municipals ended mixed on Thursday as California State, Los Angeles Airport and L.A. County Facilities Inc. hit the market.
With a flurry of new-issue supply heading to market amid a seasonal supply crunch, there is some opportunity to be had in the new issue market, though some buyers are finding prices a little rich and resorting to the less plentiful secondary market, according to municipal sources.
With the backdrop of rising rates, buyers in both camps are looking for safety in the short end of the yield curve wherever possible. The preference for the short end of the curve was observed in Thursday’s California State University deal — which was mostly heavily oversubscribed in the front-end maturities — in which the yields were lowered between five and seven basis points due to heavy demand, municipal traders said Thursday.
“We have seen insatiable demand for the short end of the curve five years and in,” said Dan Urbanowicz, senior portfolio manager at Ziegler Capital Management, on Thursday afternoon. He said he was unable to purchase bonds in that range on Thursday as the July reinvestment season is making it difficult to find paper in the new issue market.
“The July redemptions have just caused the short-end of the curve to be completely overbought,” Urbanowicz said, noting that of the $48 billion in total marketwide redemptions in the month of July, $38 billion were subject to call on July 1.
He said the secondary feels quiet amid the summer doldrums and “there’s not enough paper to go around to satisfy all the cash that’s out there.
“People are staying cautious and not wanting to extend duration too much in the face of rising rates and looking for the safety of the very short end of the curve,” Urbanowicz said.
“People are looking for a place to park their cash and that one-to-five-year area of the curve is where it’s gone,” he said. “People are even moving to floaters to keep their cash invested” as they wait for volume to improve in the fixed-rate market, he said.
“We have seen it in the bumps we are seeing today and over the course of this week,” he said.
In the negotiated sector, Morgan Stanley priced the Trustees of the California State University’s $493.49 million of Series 2018A systemwide revenue bonds for institutions after holding a one-day retail order period.
The deal is rated Aa2 by Moody’s Investors Service and AA-minus by S&P Global Ratings.
Siebert Cisneros Shank & Co. priced the Los Angeles Department of Airports’ $425 million of Series 2018C subordinate revenue bonds for the Los Angeles International Airport. The deal is rated A1 by Moody’s and AA-minus by S&P and Fitch Ratings. Barclays Capital priced and repriced the Los Angeles County Facilities Inc.’s $299.695 million of lease revenue bonds for the Vermont Corridor County administration building. The issue consists of Series 2018A tax-exempts and Series 2018B taxables.
The deal is rated AA by S&P and AA-minus.
Piper Jaffray priced the Salem-Keizer School District No. 24J of Marion and Polk Counties, Oregon’s $383.23 million of Series 2018 general obligation bonds.The deal is backed by the Oregon School Bond Guaranty Act and rated Aa1 by Moody’s and AA by S&P.
Piper Jaffray also priced the Aldine Independent School District of Harris County, Texas’ $148 million of Series 2018 unlimited tax school building bonds. The issue, backed by the Permanent School Fund guarantee program, is rated triple-A by Moody’s and S&P.
Citigroup priced the North East Independent School District of Bexar County, Texas’ $129.09 million of Series 2018 unlimited tax refunding bonds. The issue, backed by the PSF, is rated triple-A by Moody’s and Fitch.
JPMorgan Securities priced the Connecticut Housing Finance Authority’s $117.84 million of Series 2018C housing mortgage finance program bonds. The deal is rated triple-A by Moody’s and S&P.
Bank of America Merrill Lynch priced Chatham County, N.C.’s $111.58 million of Series 2018 limited obligation bonds. The deal is rated Aa2 by Moody’s and AA-plus by S&P.
In the competitive sector, the Florida State Board of Education sold $116.07 million of Series 2018B full faith and credit public education capital outlay bonds. Wells Fargo Securities won the bonds with a true interest cost of 3.48%.The deal is rated triple-A by Moody’s, S&P and Fitch.
In the short-term competitive sector, Colorado sold $600 million of general fund tax and revenue anticipation notes. Two groups won the TRANs including Wells Fargo Securities and JPMorgan Securities. The deal is rated MIG1 by Moody’s and SP1-plus by S&P.
Demand remained strong even as volume rebounded from last week’s holiday lull. “The supply-demand balance is pretty equal and is bending toward the demand side,” a New York trader said.
Pointing to yesterday’s Dormitory Authority of New York sales tax revenue offering, he said the bonds were aggressively bid due to the availability of current coupons in a supply-starved market. “It was aggressively bid more because in the dealer community there is net negative supply and they need paper moving forward,” he said. “Stocking bonds is not all that much of a problem.”
He said bank portfolios bought the longer end of that deal — especially the 4% coupon. “There definitely looks like more money being put to work now and more secondary trading going on,” he said.
Overall, the yield curve is steep to Treasuries, with the short end priced slightly richer and the long end cheaper due to the overhang of the fear of rising interest rates, he said. “The short end is richer, but buyers in that sector of the market are buying because the yields make sense in the current tax rate scenario — the short end is not rich to those that need the tax exemption.”
Click here for the State University pricing
Click here for the HFA pricing
Click here for the Chatham County pricing
Click here for the note sale
Click here for the BOE sale
Municipal bonds were little changed on Thursday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell less than one basis point in the three- to seven-year maturities, rose less than a basis point in the one- and two-year, eight- to 18-year, 26-year and 28- to 30-year maturities and were unchanged in the 19- to 25-year and 27-year maturities.
High-grade munis were mixed, with yields calculated on MBIS’ AAA scale falling less than one basis point in the three- to seven-year and 28- to 30-year maturities, rising as much as one basis point in the one- and two-year and nine- to 24-year maturities and remaining unchanged in the eight-year and 25- to 27-year maturities.
Municipals were unchanged on Municipal Market Data’s AAA benchmark scale, which showed both the 10-year muni general obligation yield and the 30-year muni maturity yield steady.
Treasury bonds were weaker as stocks traded higher.
On Thursday, the 10-year muni-to-Treasury ratio was calculated at 84.5% 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 41,552 trades on Wednesday on volume of $11.03 billion.
California, New York and Texas were the states with the most trades, with the Golden State taking 17.898% of the market, the Empire State taking 13.487% and the Lone Star State taking 10.086%.
ICI: Long-term muni funds see $356M inflow
Long-term municipal bond funds saw an inflow of $356 million in the week ended July 3, the Investment Company Institute reported.
This followed an inflow of $525 million into the tax-exempt mutual funds in the week ended June 27 and inflows of $742 million, $326 million, $648 million, $661 million, $185 million and $450 million in the six prior weeks.
Taxable bond funds saw an estimated inflow of $4.23 billion in the latest reporting week, after seeing an inflow of $2.45 billion in the previous week.
ICI said the total estimated outflows to long-term mutual funds and exchange-traded funds were $9.61 billion for the week ended July 3 after outflows of $16.79 billion in the prior week.
Tax-exempt money market funds saw inflows
Tax-exempt money market funds saw inflows of $1.74 billion, raising total net assets to $138.56 billion in the week ended July 9, according to The Money Fund Report, a service of iMoneyNet.com. This followed an inflow of $1.41 billion to $136.82 billion in the prior week.
The average, seven-day simple yield for the 201 weekly reporting tax-exempt funds fell to 0.81% from 1.02% the previous week.
The total net assets of the 831 weekly reporting taxable money funds rose $22.64 billion to $2.673 trillion in the week ended July 10, after an outflow of $1.68 billion to $2.651 trillion the week before.
The average, seven-day simple yield for the taxable money funds decreased to 1.54% from 1.55% from the prior week.
Overall, the combined total net assets of the 1,032 weekly reporting money funds rose $24.39 billion to $2.812 trillion in the week ended July 10, after outflows of $274 million to $2.787 trillion in the prior week.
Treasury announces auction details
The Treasury Department announced these auctions:
- $13 billion of 10-year TIPs selling on July 19;
- $26 billion of 364-day bills selling on July 17
- $45 billion of 182-day bills selling on July 16; and
- $51 billion of 91-day bills selling on July 16.
- Treasury sells $14B re-opened 30-year bonds
The Treasury Department Thursday auctioned $14 billion of 29-year 10-month bonds with a 3 1/8% coupon at a 2.958% high yield, a price of 103.289415. The bid-to-cover ratio was 2.34.
Tenders at the high yield were allotted 46.90%. The median yield was 2.914%. The low yield was 2.688%.
Gary Siegel contributed to this report.
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 Vanessa Kim at 212-803-8474 for more information.