Municipal bond market shows its vigor as demand, issuance start to grow
The municipal bond market is looking healthy ahead of this week’s $7.2 billion new issue slate.
Demand is growing and new issuance is up year over year, even though supply is still lagging for January, according to a report released Monday by Stephen Winterstein, managing director at Wilmington Trust.
“While 2019 is developing nicely with $24.123 billion in new issuance through Friday’s close … it is still short of the $27.546 billion the five prior Januaries averaged from 2013 through 2017,” Winterstein wrote.
“Fatigue characterized the first months of 2018 and resulted in 1Q new issuance of only $65.72 billion,” he said. “While a recurrence of such an episode doesn’t appear likely in 2019, we expect 1Q 2019 supply to exceed that of the same period in 2018,” Winterstein said. Overall, he anticipates volume to climb to roughly $375 billion for 2019.
Winterstein pointed out that demand is healthy, according to last Wednesday’s Investment Company Institute report of the third consecutive week of strong mutual fund inflows, with a net influx of $1.53 billion in capital for the mid-week ending on Jan. 23.
“Demand, as measured by fund flows has accelerated over the past three weeks and augurs well for an orderly market over the near term,” he said.
During a strong week last week, triple-B securities fared the best of the ratings categories, generating +0.469%, while unrated bonds were the weakest, yet still delivering +0.358%, according to Winterstein.
This week’s primary volume will swell from last week, which will also aid the brisk demand.
“We are cautiously optimistic that investors are paying attention to market strength and appear to be responding by allocating to municipal bond mutual funds,” he wrote. The most recent report brings year-to-date flows to a positive $4.975 billion,” he added.
This week’s calendar is composed of $5.6 billion of negotiated deals and $1.6 billion of competitive sales.
Bank of America Merrill Lynch is set to price Hawaii’s $550 million of general obligation bonds for retail on Tuesday and for institutions on Wednesday. The bonds are being sold in three tranches: a $454.2 million tax-exempt series, a $50 million taxable series, and a $45.7 million taxable series. The deal is rated Aa1 by Moody's Investors Service, AA-plus by S&P Global Ratings and AA by Fitch Ratings.
Also on tap is the Los Angeles County Metropolitan Transportation Authority’s $545 million deal. Siebert Cisneros Shank is expected to price the Proposition C sales tax senior revenue bonds for retail on Tuesday ahead of the institutional pricing on Wednesday. The issue is composed of Series 2019A green bonds and Series 2019B revenue bonds. The deal is rated Aa2 by Moody’s, AAA by S&P and Kroll Bond Rating Agency and AA-plus by Fitch.
On the competitive side, Washington state is selling $640.925 million of general obligation bonds in two offerings on Tuesday. The deals consist of $468.695 million of Series 2019C various purpose GOs and $172.23 million of Series 2019D motor vehicle fuel tax GOs. Proceeds of the Series 2019C&D bonds will be used to reimburse expenditures for various state capital projects and programs. The financial advisors are Montague DeRose & Associates and Piper Jaffray. The bond counsel is Foster Pepper. The deals are rated Aa1 by Moody’s and AA-plus by S&P and Fitch.
Also on Tuesday, the Spokane School District No. 81, Wash., is selling $128.645 million of GOs. Proceeds will be used to finance the costs of capital construction and capital improvements in the district's educational facilities. The financial advisor is Piper Jaffray. The bond counsel is Foster Pepper. The deal, which is being issued under the Washington state school district credit enhancement program, is rated Aa1 by Moody’s and AA-plus by S&P.
The Elk Grove Unified School District, Calif., is selling $121 million of Election of 2016 Series 2019 GOs. Proceeds will be used to finance the specific school facilities projects. The financial advisor is Government Financial Strategies. The bond counsel is Lozano Smith. The deal is rated AAA by Fitch.
“The coming week should be an active one for tax-free investors,” according to a Monday market comment from Janney.
“Those seeking Massachusetts bonds will have choices this week. The Massachusetts Port Authority has a $325 million offering of AMT bonds scheduled for Logan Airport (Aa2/AA/AA),” Janney said. “The other large Mass. offering is $415 million for Wellforce (NR/BBB+/BBB+), whose obligated group includes Tufts Medical Center and Lowell General Hospital. The Wellforce offering includes an $80 million taxable piece. The issue will be wrapped by Assured Guaranty (S&P: AA).”
Bond Buyer 30-day visible supply at $9.50B
The Bond Buyer's 30-day visible supply calendar increased $912.3 million to $9.50 billion for Monday. The total is comprised of $2.35 billion of competitive sales and $7.15 billion of negotiated deals.
Municipal bonds were mostly stronger Monday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell as much as three basis points in the one- to eight-year and 12- to 17-year and 23- to 30-year maturities, rose less than a basis point in the nine to 11-year and 20- to 22-year maturities and remained unchanged in the 18- and 19-year maturities.
High-grade munis were mixed, with muni yields falling as much as three basis points in the one- to eight-year and 14-year maturities, rising less than a basis point in the nine- to 13-year and 17- to 29-year maturities and remaining unchanged in the 15- and 16-year and 30-year maturities.
Municipals were weaker on Municipal Market Data’s AAA benchmark scale, which showed the yield on the 10-year muni general obligation rising by one basis point while the yield on the 30-year muni maturity gained three basis points.
Treasury bonds were weaker as stock prices traded little changed.
On Monday, the 10-year muni-to-Treasury ratio was calculated at 80.1% while the 30-year muni-to-Treasury ratio stood at 99.8%, 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 34,976 trades on Friday on volume of $11.90 billion.
California, New York and Texas were the municipalities with the most trades, with the Golden State taking 15.917% of the market, the Empire State taking 15.101% and the Lone Star State taking 9.882%.
Prior week's actively traded issues
Revenue bonds comprised 55.54% of total new issuance in the week ended Feb. 1, down from 55.69% in the prior week, according to Markit. General obligation bonds made up 38.67%, up from 38.42% while taxable bonds accounted for 5.79%, down from 5.89%.
Some of the most actively traded munis by type in the week were from Puerto Rico, New York and California issuers.
In the GO bond sector, the Puerto Rico 8s of 2035 traded 28 times. In the revenue bond sector, the New York Metropolitan Transportation Authority 4s of 2020 traded 110 times. In the taxable bond sector, the California 7.55s of 2039 traded 18 times.
Treasury auctions discount rate bills
Tender rates for the Treasury Department's latest 91-day and 182-day discount bills were mixed, as the $45 billion of three-months incurred a 2.385% high rate, up from 2.375% the prior week, and the $39 billion of six-months incurred a 2.440% high rate, down from 2.450% the week before.
Coupon equivalents were 2.433% and 2.505%, respectively. The price for the 91s was 99.397125 and that for the 182s was 98.766444.
The median bid on the 91s was 2.360%. The low bid was 2.320%. Tenders at the high rate were allotted 26.49%. The bid-to-cover ratio was 3.03.
The median bid for the 182s was 2.400%. The low bid was 2.370%. Tenders at the high rate were allotted 46.41%. The bid-to-cover ratio was 2.66.
Gary E. 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 Ziad Saba at 212-803-6079 for more information.