Munis rally ahead of slim supply

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The municipal market returned to trading on Tuesday with no supply pressure in the primary, a rally in the Treasury market and a cloud of concern over geopolitical turmoil in Italy.

“It’s Tuesday and this took everyone by surprise,” one New York trader said, noting the 10-year Treasury benchmark opened at 2.82% after some desks were bearish over the past week or so.

Treasuries have rallied alongside a number of core-European bonds as the political crisis in Italy and Spain deepens, triggering risk-off trading across capital markets.

“Between the equity market being off big again, and what’s happening in Italy, people are buying some items, but the secondary is kind of quiet and people are marking their inventory,” the trader said.

The lack of new issue volume will continue to impact the municipal market this week as the geopolitical concerns and the Treasury rally may cause municipals to naturally underperform slightly, according to another New York trader at a large Wall Street firm.

“Treasuries are putting in a very impressive performance and there’s not a lot around this week calendar-wise,” the second New York trader said. “The headlines will be dominated by geopolitical posturing in Italy and Spain.”

He added, “investors have concerns so we will underperform a little against Treasuries, and that is to be expected.”

He described the secondary market as “a little light,” adding there were some decent trades Tuesday morning.

"It feels OK today; not many sellers in the market right now because of the tone. People are a little leery of getting caught jumping in,” he said just before noon.

He added, investors were “treading water right now,” as they expect to see the triple-A benchmark MMD scale in 30-years bump as much as five basis points at midday. “There are not a whole lot of trades to point to, but that’s the general consensus,” he said.

On the primary front, he said the only two sizable deals of the $4 billion new issue calendar expected this week include a negotiated $578 million Metropolitan Washington Airports Authority offering on Thursday, and a $325 million South Carolina State Port Authority deal on Wednesday that may attract investors, if priced right.

“You also have a lot of data this week, so we are keeping one eye out for that,” the second trader added.

Secondary market
Municipal bonds were stronger on Tuesday, according to a midday read of the MBIS benchmark scale. Benchmark muni yields fell as much as five basis points in the one- to 30-year maturities. High-grade munis were also stronger with yields calculated on MBIS’ AAA scale falling by as much as four basis points across the curve.

Municipals were also stronger all along Municipal Market Data’s AAA benchmark scale, which showed yields falling five to seven basis points in the 10-year general obligation muni and dropping four to six basis points in the 30-year muni maturity.

Treasury bonds were stronger as stock prices slumped.

On Friday, the 10-year muni-to-Treasury ratio was calculated at 85.0% while the 30-year muni-to-Treasury ratio stood at 95.5%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasuries with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasuries; if it is below 100%, munis are yielding less.

Previous session's activity
The Municipal Securities Rulemaking Board reported 20,387 trades on Friday on volume of $5.77 billion.

Prior week's actively traded issues
Revenue bonds comprised 55.57% of new issuance in the week ended May 25, down from 55.84% in the previous week, according to Markit. General obligation bonds made up 38.83% of total issuance, up from 38.22%, while taxable bonds accounted for 5.60%, down from 5.94% a week earlier.

Some of the most actively traded bonds by type were from Illinois and California issuers. In the GO bond sector, the Chicago Board of Education 5s of 2035 traded 43 times. In the revenue bond sector, the Regents of the University of California 5s of 2048 traded 50 times. And in the taxable bond sector, the Illinois 5.1s of 2033 traded 17 times.
Primary market
On Wednesday, Bank of America Merrill Lynch is expected to price the South Carolina State Port Authority’s $325 million of Series revenue bonds subject to the AMT.

Wells Fargo Securities is expected to price Anchorage, Alaska’s $184.86 million of general obligation bonds for retail investors on Wednesday ahead of the institutional pricing on Thursday.

BAML is set to price Fort Collins, Colo.’s $130 million of electric utility enterprise revenue bonds on Wednesday.

In the competitive arena on Wednesday, the Brainerd Independent School District No. 181, Minn., is selling $143.58 million of GOs under the Minnesota credit enhancement program.

Also on Wednesday, the Las Vegas Valley Water District, Nev., is competitively selling $100 million of GO water improvement bonds which are additionally secured by pledged revenues.

Bond Buyer 30-day visible supply at $8.83B
The Bond Buyer's 30-day visible supply calendar increased $1.88 billion to $8.83 billion on Tuesday. The total is comprised of $4.56 billion of competitive sales and $1.08 billion of negotiated deals.

Prior week's top underwriters
The top municipal bond underwriters of last week included Bank of America Merrill Lynch, Raymond James & Associates, Citigroup, Ramirez & Co. and RBC Capital Markets, according to Thomson Reuters data.

In the week of May 20 to May 26, BAML underwrote $2.36 billion, Raymond James $713.8 million, Citi $619.1 million, Ramirez $613.9 million and RBC $257.6 million.
Treasury sells bills
Tender rates for the Treasury Department's latest 91-day and 182-day discount bills were mixed, as the three-months incurred a 1.895% high rate, unchanged from 1.895% the prior week, and the six-months incurred a 2.030% high rate, off from 2.080% the week before.

Coupon equivalents were 1.931% and 2.080%, respectively. The price for the 91s was 99.520986 and that for the 182s was 98.973722.

The median bid on the 91s was 1.860%. The low bid was 1.830%. Tenders at the high rate were allotted 83.43%. The bid-to-cover ratio was 2.82.

The median bid for the 182s was 2.005%. The low bid was 1.975%. Tenders at the high rate were allotted 75.95%. The bid-to-cover ratio was 3.10.

Treasury also auctioned $40 billion of four-week bills at a 1.750% high yield, a price of 99.863889.

The coupon equivalent was 1.777%. The bid-to-cover ratio was 3.25.

Tenders at the high rate were allotted 11.42%. The median rate was 1.720%. The low rate was 1.690%.

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.

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