Municipal bond yields continued their march higher on Wednesday as the primary sector saw a few new deals come to market.
Secondary market
Municipal bonds were weaker on Wednesday, according to a midday read of the MBIS benchmark scale. Benchmark muni yields rose as much as two basis points in the six- to 30-year maturities while falling as much as a basis point in the one- to five-year maturities.
High-grade munis were also weaker, with yields calculated on MBIS' AAA scale rising as much as two basis points in the three-to 30-year maturities, falling less than a basis point in the one-year maturity and remaining unchanged in the two-year maturity.
Municipals were weaker on Municipal Market Data’s AAA benchmark scale, which showed the yield on the 10-year muni general obligation rising one to three basis points while the yield on 30-year muni maturity gained as much as one basis point.
Treasury bonds were strongerand stock prices traded lower.
On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 84.8% while the 30-year muni-to-Treasury ratio stood at 100.9%, 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 54,727 trades on Tuesday on volume of $12.06 billion.
New York, California and Texas were the municipalities with the most trades, with the Empire State taking 15.101% of the market, the Golden State taking 14.605%, and the Lone Star State taking 10.644%.
Primary market
In the competitive arena on Wednesday, the Fremont Unified School District, Calif., is selling $127 million of Series C Election of 2014 general obligation bonds.
Proceeds are being issued to buy, repair and build school equipment, sites and facilities. The financial advisor is Keygent; bond counsel is Stradling Yocca.
The deal is rated AA-minus by S&P Global Ratings.
In the negotiated sector on Wednesday, Barclays Capital is expected to price the Michigan State Housing Development Authority’s $318 million of Series 2018C fixed-rate single-family mortgage revenue bonds not subject to the alternative minimum tax.
The deal is rated Aa2 by Moody’s Investors Service and AA-plus by S&P.
Ramirez & Co. is set to price the Los Angeles Department of Water and Power’s $300 million of Series 2018B&C power system revenue bonds.
The deal is rated Aa2 by Moody’s and AA by S&P and Fitch Ratings.
JPMorgan Securities is expected to price the State of California Department of Water Resources’ $216 million of Series AZ water system revenue bonds for the Central Valley water system.
The deal is rated Aa1 by Moody’s and AAA by S&P.
And Bank of America Merrill Lynch is holding a retail order period on the Indiana Finance Authority’s $292 million of Series 2018A state revolving fund program green bonds.
The deal is rated triple-A by Moody’s, S&P and Fitch.
On Thursday, JPMorgan is set to price the Maricopa County Special Health Care District, Ariz.’s $400 million of Series 2018C general obligation bonds.
Siebert Cisneros Shank & Co. is expected to price the North Texas Tollway Authority’s $347 million of Series 2018 second tier revenue refunding bonds on Thursday.
Bond Buyer 30-day visible supply at $9.49B
The Bond Buyer's 30-day visible supply calendar increased $173.6 million to $9.49 billion for Wednesday. The total is comprised of $3.71 billion of competitive sales and $5.79 billion of negotiated deals.
Block: Uncertainty won’t hurt muni opportunities
Uncertainty in the municipal market stemming from rising yields won’t curtail opportunities for municipal investors, according to a weekly report from Peter Block, managing director and head of credit strategy at Ramirez & Co.
A “chronic and very high level” of secondary market supply requires keeping an eye on any significant reversal of mutual fund flows, as a sell-off by investors or dealers would put additional pressure on an already overburdened secondary market, Block noted in his Tuesday note.
However, “Despite the recent and marked rate increases, we expect that munis will remain attractive for retail investors as the last remaining — and relatively liquid — income tax shelter, particularly following the Federal curb on SALT deductions,” Block wrote.
“The tax-exempt asset class should also continue to attract international investor interest due to the higher absolute yield levels versus global income assets,” he added.
Block said municipals inside of 10 years continue to benefit from strong retail demand due to flatness of the Municipal Market Data curve — with 132 basis points between the two and 30 year maturities. The intermediate and long-dated maturities 15 years or longer generally have weaker sponsorship due to lower bank and insurance company participation following tax reform, he noted.
The two-year and five-year sectors have outperformed year-to-date by 11.7% and 1.1%, respectively. The 10-year and 30-year sectors have underperformed year-to-date by 1.7% and 7%, which Block said indicates more upside in intermediate and longer-duration.
“Dealers are now holding a fair amount of unsold new issue balances and inventory — 40% above average — that could be sold towards year-end 2018 to clean up balance sheets,” Block said in the report. Investors could also begin selling bonds to offset capital gains in the equity markets and reposition for what appears to be higher-than-expected rates, he pointed out.
“Fortunately for now, investor bid-wanteds remain relatively manageable, given the mitigating effect of positive fund flows and outperformance versus Treasuries,” he added.
Treasury auctions $36B 3-year notes
The Treasury Department auctioned $36 billion of three-year notes with a 2 7/8% coupon at a 2.989% high yield, a price of 99.675199. The bid-to-cover ratio was 2.56.
Tenders at the high yield were allotted 32.32%. All competitive tenders at lower yields were accepted in full. The median yield was 2.955%. The low yield was 2.890%.
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.
