It’s feast after famine as municipal bond buyers will see a hefty new issue slate head their way next week.
Next week's deals will be pricing into an uncertain market environment, albeit one that may benefit issuers more than investors.
On Friday, the Treasury yield curve inverted for the first time since 2007, triggering the first reliable market signal of an impending recession and rate-cutting cycle. The spread on Treasury three-month and 10-year yields turned negative, an indicator of a possible recession ahead.
Primary market
IHS Markit Ipreo forecasts bond volume will increase to $8.9 billion from a revised total of $2.5 billion in the prior week, according to updated data from Refinitiv. The calendar is composed of $5 billion of negotiated deals and $3.9 billion of competitive sales.
“There are a lot of people looking to buy bonds, as it has been difficult in this environment as a buyer with deals being well over subscribed for and meager allocations,” said Dawn Mangerson, senior portfolio manager at McDonnell Investment Management. “The calendar is chunky, which helps — more variety equals more opportunity.”
In particular, the medium-sized deals should go over really well, she added.
There is also one less thing to worry about now, with the Federal Reserve not planning any more hikes for the remainder of the year, according to Jim Grabovac, senior portfolio manager at McDonnell.
“I have to applaud the Fed for how they have handled the turnaround in interest rates,” he said. “They have blocked out criticism from a lot of people, including the most powerful person in the county, and have been focused on policy and doing what is best.”
The New York City Transitional Finance Authority (Aa1/AAA/AAA) will be coming to market with almost $1.5 billion of bonds divided into negotiated and competitive offerings.
Goldman Sachs is set to price the TFA’s $850 million of tax-exempt Fiscal 2019 Series C future tax-secured subordinate revenue bonds for NYC’s Department of Administrative Services on Tuesday after a two-day retail order period that began Friday.
Also on Tuesday, the TFA is competitively selling $600 million of taxable in two sales consisting of $300 million of Fiscal 2019 Series C Subseries C-2 future tax secured subordinate revenue bonds and $300 million of $300 million of Fiscal 2019 Series C Subseries C-3 future tax-secured subordinate revenue bonds.
The financial advisors are Public Resources Advisory Group and Acacia Financial Group. The bond counsel are Norton Rose and Bryant Rabbino.
Proceeds from the sales will be used to fund various capital projects.
Barclays Capital is expected to price Connecticut’s (A1/A/A+/AA-) $850 million of Series 2019A GOs on Thursday consisting of $600 million tax-exempts and $250 million of taxables.
Barclays is also set to price Chicago’s (NAF/BBB+/BBB-/A) Series 2019 GOs on Wednesday.
In the competitive arena, California (Aa3/AA-/AA-) is selling $842 million of taxable GOs on Tuesday in two sales consisting of $422 million of Bid Group B various purpose GOs and $420.79 million of Bid Group A various purpose GOs.
The financial advisor is PRAG and the bond counsel is Orrick Herrington.
Proceeds will be used to finance certain capital improvements and refund some outstanding GO commercial paper notes.
Maryland (Aaa/AAA/AAA) is selling $489.6 million of state and local facilities loan of 2019 GOs in two sales on Tuesday consisting of $265.04 million of Bidding Group 1 GOs and $224.96 million of Bidding Group 2 GOs.
The financial advisor is PRAG and the bond counsel is Ballard Spahr.
Proceeds will be used for a variety of public purposes.
Illinois (Baa3/BBB-/BBB) will sell $452 million of GOs on Tuesday in two sales consisting of $300 million of taxable Series of April 2019A bonds and $152 million of tax-exempt Series of April 2019B.
Financial advisors are Columbia Capital Management and Sycamore Advisors. Bond counsel are Chapman and Cutler and Charity & Associates.
Proceeds will be used to refund certain outstanding debt.
Bond sale
Bond Buyer 30-day visible supply at $9.93B
The supply calendar rose $3.17 billion to $9.93 billion Friday, composed of $4.62 billion of competitive sales and $5.31 billion of negotiated deals.
Calif. Treasurer lauds veteran bond sale
The California Department of Veterans Affairs this week sold $78 million of home purchase revenue bonds in a deal that was senior managed by veteran-owned Academy Securities and JPMorgan Securities.
“This is such a fabulous way of saying ‘thank you’ to our veterans and their families for their service and sacrifice," California State Treasurer Fiona Ma said in a press release. She said proceeds from this sale, along with $100 million of GOs set to be sold on April 4, will provide CalVet with funding sufficient to offer low-interest home loans to hundreds of qualified veterans.
Academy, which is certified by the state as a Disabled Veterans Business Enterprise and by the federal government as a Service Disabled Veteran Owned Business Enterprise, was recently honored with the first annual Patriots in Business Award for its outstanding contributions to helping America’s veteran and active duty military. In August 2012, JPMorgan Chase, the parent company of JPMorgan Securities, entered into a mentor-protégé agreement with Academy under a Treasury Department program. Under this agreement, JP Morgan provided capital to Academy Securities and continues its mentorship by offering training and consultation on overall business and organizational management matters.
Lipper: More inflows into muni funds
For the 11th straight week, cash rushed into municipal bond funds, according to data from Refinitiv Lipper released late Thursday.
Mutual funds which reports flows weekly saw $1.425 billion of inflows in the week ended March 20 after inflows of $1.646 billion in the previous week.
Exchange traded muni funds reported inflows of $168.827 million after inflows of $415.919 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.256 million after inflows of $1.230 billion in the previous week.
The four-week moving average remained positive at $1.393 billion, after being in the green at $1.404 billion in the previous week.
Long-term muni bond funds had inflows of $1.102 billion in the latest week after inflows of $1.009 billion in the previous week. Intermediate-term funds had inflows of $307.389 million after inflows of $435.856 million in the prior week.
National funds had inflows of $1.427 billion after inflows of $1.483 billion in the previous week. High-yield muni funds reported inflows of $480.331 million in the latest week, after inflows of $387.164 million the previous week.
On Wednesday, the Investment Company Institute reported long-term municipal bond funds and exchange-traded funds saw a combined inflow of $2.515 billion in the week ended March 13, while long-term muni funds alone saw an inflow of $2.040 billion as ETF muni funds saw an inflow of $475 million.
Secondary market
Munis were stronger on the MBIS benchmark scale Friday, which showed yields falling four basis points in the 10-year maturity and three basis points in the 30-year maturity. High-grade munis were also stronger, with yields dropping four basis points in the 10-year maturity and three basis points in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year GO muni dropped seven basis points while the yield on the 30-year muni declined seven basis points.
The 10-year muni-to-Treasury ratio was calculated at 78.0x% while the 30-year muni-to-Treasury ratio stood at 92.4%, according to MMD.
Treasuries were stronger as stocks traded down.
On Friday, the Treasury yield curve inverted for the first time since 2007, triggering the first reliable market signal of an impending recession and rate-cutting cycle. The spread on Treasury three-month and 10-year yields turned negative, an indicator of a possible recession ahead.
Demand outpaces rally
Municipals kept pace with the fierce Treasury market rally this week and ended Friday poised for continued strong market technicals in the upcoming week, according to a Florida institutional trader.
On Friday, a global bond rally in the wake of weak Eurozone economic data pulled down yields, causing the yield on the 10-year Treasury note to fall as low as 2.42% — falling below the 2.455% yield of the three-month Treasury bill. But the municipal market held its own.
“The market is hot taking after the Treasury market,” a New York trader said, adding that there was a very active secondary market.
He quoted yields at least five basis points lower on the long end of the yield curve — especially on deals like Florida and Wilkes Barre Schools, which were between five and as much as seven basis points lower in yield Friday.
“At some point buyers will reject the market, but there’s too much demand right now,” the Florida trader said on Friday after what he described as a challenging week where customers got caught short on the market waiting for rates to rise.
“The demand is strong enough to keep pace during these big violent rallies,” he added. “A lot of people were counting on SIFMA rates rising into tax time and it has done nothing but go down.
”Although this week’s significant rally caused municipal evaluations and relative value models to get skewed," the trader said it will take a day or so for the market to catch up and allow investors “a better spot to engage the market.” . He observed a lot of selling by customers who were raising cash and going into variable-rate demand notes trying to capture the returns of five- and 10-year paper.
“Today there was a lot of movement and it started out as a dealer-led rally,” he said. “Dealers are light, arbs are light, and many customers are short the market sitting in cash, but they can’t hold out forever and will have to be forced to capitulate.”
He called the scenario a “recipe for a continued rally in the marketplace,” even though it may spook some investors. “It’s going to pull retail out because they can’t react as quickly and will suffer some sticker shock,” he said. But those investors can’t wait much longer in cash, he said.
"If you are a muni buyer and can only buy tax-exempt munis and are sitting on cash you have to put it to work,” he said.
Investors who own bonds with short call structures are shy of their duration bogeys, he noted. “They’re going to have to right size that at some point, but as long as those conditions exist, the muni market will fundamentally do better,” the trader said.
As the second quarter approaches, the trader said the market will seek to maintain its strength as its bucks a seasonal trend. Historically, heading into tax season volume increases and investors usually park money on sidelines for taxes. “This year, due to the multitude of market technicals, we will see a shift in that typically historical pattern,” he said.
Given the impact of the deduction of state and local taxes affecting taxpayers, the trader said that will continue to boost demand for municipals at the same time as the market is rallying. “You can’t deny there’s too much demand for the amount of supply.”
Previous session's activity
The MSRB reported 36,492 trades Thursday on volume of $11.16 billion. California, Texas and New York, California and Texas were most traded, with the Golden State taking 15.374% of the market, the Lone Star State taking 12.308% and the Empire State taking 11.523%. The most actively traded issue was the Puerto Rico COFINA restructured Series 2018 A-1 revenue 5s of 2058 which traded 140 times on volume of $64.23 million.
Week's actively traded issues
Some of the most actively traded munis by type in the week ended March 22 were from Puerto Rico and California issuers, according to
In the GO bond sector, the Puerto Rico 8s of 2035 traded 23 times. In the revenue bond sector, the Puerto Rico Sales Tax Financing Corp. 5s of 2058 traded 60 times. In the taxable bond sector, the Regents of the University of California 3.349s of 2029 traded 24 times.
Week's actively quoted issues
Puerto Rico and Texas names were among the most actively quoted bonds in the week ended March 22, according to IHS Markit.
On the bid side, the COFINA revenue 5s of 2058 were quoted by 209 unique dealers. On the ask side, the Dallas GO 5s of 2028 were quoted by 167 dealers. Among two-sided quotes, the COFINA revenue 5s of 2058 were quoted by 45 dealers.
Perfect storm
Rich levels on the extreme short end of the market was impacting investor demand on the heels of the Federal Reserve Board’s decision on interest rates and policy, according to a New York trader.
The lack of supply was already creating some richness -- but the announcement added to the dilemma. “The Fed conversation yesterday following the Treasury market and the lack thereof paper this week didn’t help and added fuel to the fire,” the trader said on Thursday. “We are richer and the demand for paper is still out there greatly,” he added, calling the scenario a “perfect storm.”
“If you own bonds and you don’t have to buy anything you’re fine,” he said, “but there is lot of cash on the sidelines and it’s particularly hard to spend ."
The richness is extremely problematic five years and under, he said. “There is some value when you go out to six or seven years — there’s pockets of value and places you can strategize that look attractive, like kicker bonds, but I don’t know how long that will last.”
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
