Muni market 'firming' as issuance drought resumes

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Trading was muted Monday after last week’s bounty of bond sales, as the market looked ahead to this week’s larger deals, including a $920 million Illinois financing.

The strength of municipal demand was demonstrated last week with the successful issuance of $11 billion, said Stephen Winterstein, managing director of research & chief municipal strategist at Wilmington Trust.

“The tax-exempt market dispensed with the supply surge without fanfare and appeared mostly indifferent, with perhaps a vaguely firm tone,” Winterstein wrote in his weekly municipal report.

Despite the extraordinary volume, Winterstein said performance didn’t suffer.

“The municipal bond market seemed to wave off the huge new issue slate and printed a positive total return for the past five trading sessions,” he said.

This week, he said there is potential for a firm tone, especially with the light calendar.

With supply down year to date following U.S. tax cuts, the market has been met with supply challenges. Winterstein said volume should begin to bounce back in early fall.

“New issuance may continue to flag over the next several weeks as we approach August’s close and the Labor Day holiday,” Winterstein wrote. “But it should reignite and accelerate in mid-September, continuing at a healthy pace until the week leading up to Thanksgiving.”

He also pointed out that short-term variable-rate demand note rates “seem alluring and crossover investors who focus on the cash and near-cash portion of the curve should pay close attention to key municipal-to-taxable ratios.”

One Atlanta based trader said he would call the market quiet to firm — a typical Monday — mostly uneventful, with as pros waiting for direction from the primary.

“Last week, the primary led the market and overall it was well placed. The recent trend in Treasuries has been lower in yield, but munis have not followed that much.”

Secondary market
Municipal bonds were mostly stronger on Monday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell as much as one basis point in the four-to-30-year maturities, while the first three maturities were weaker by less than a basis point.

High-grade munis were mostly stronger, with yields calculated on MBIS’ AAA scale falling as much as one basis point in the three-to-30-year maturities, with the one-year maturity slightly up and the two-year unchanged.

Municipals were mixed on Municipal Market Data’s AAA benchmark scale, which showed the yields on the 10-year muni general obligation steady and yields on the 30-year muni falling by one basis point.

On Monday, the 10-year muni-to-Treasury ratio was calculated at 86.2% while the 30-year muni-to-Treasury ratio stood at 100.7%, 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.

“The A & AA curves are showing steeping this morning, which is movement contrary to UST curve. New issue supply may have finally had an impact,” said J.R. Rieger, principal at Triangle Park Capital Markets Data.

Primary market
Lack of supply continues to plague the market, despite last week’s $12 billion bulge, as the loss of tax-exempt refundings has cut volume 15% to 20%, a Georgia trader said.

“That’s made it a little challenging,” he said. This week investors will be considering the $920 million Illinois general obligation refunding deal. Its pricing will be “interesting,” the trader said, given the tightening spreads on the state's debt.

The deal, expected to be priced by JPMorgan Securities Wednesday, is rated Baa3 by Moody’s Investors Service, BBB-minus by S&P Global Ratings and BBB by Fitch Ratings.

Proceeds of the sale will be used to shed the state’s $600 million of floating rate paper and cover the $74 million cost of swaps that synthetically fixed the 2003 issue.

In addition, the Atlanta trader said a large deal from the Texas State Water Implementation Fund should also help investors quench their thirst for supply in the coming weeks.

The deal benefits from size, timing, quality, and hails from a state with strong inherent demand for paper.

Besides the long-term market, there are also two short-term note deals on tap this week as Texas is selling $7.2 billion of Series 2018 tax and revenue anticipation notes on Wednesday, followed by a $1.5 billion sale of RANs by Massachusetts on Thursday.

However, in the meantime, trading activity remained low-key Monday morning.

“Volume is starting off a little slow, the market’s firmer, but when you see that happening, it usually means people who own bonds tend to get a little more aggressive marking them up and it’s hard to get trades done,” the Atlanta trader explained.

Prior week's top underwriters
The top municipal bond underwriters of last week included Bank of America Merrill Lynch, Citi, JPMorgan, Jefferies and Siebert Cisneros Shank and Co., LLC, according to Thomson Reuters data.

In the week of Aug. 12 to Aug. 18, BAML underwrote $3.62 billion, Citi $1.74 billion, JPM $1.53 billion, Jefferies $954 million, and Siebert $889 million.

Previous session's activity
The Municipal Securities Rulemaking Board reported 33,508 trades on Friday on volume of $9.731 billion.

California, New York and Texas were the municipalities with the most trades, with Golden State taking 14.981% of the market, the Empire State taking 13.184% and the Lone Star State taking 11.017%.

Treasury auctions discount rate bills
Tender rates for the Treasury Department's latest 92-day and 182-day discount bills were higher, as the three-months incurred a 2.035% high rate, up from 2.030% the prior week, and the six-months incurred a 2.185% high rate, up from 2.180% the week before.

Coupon equivalents were 2.074% and 2.240%, respectively. The price for the 92s was 99.479944 and that for the 182s was 98.895361.

The median bid on the 92s was 2.020%. The low bid was 2.000%.

Tenders at the high rate were allotted 96.86%. The bid-to-cover ratio was 2.96.

The median bid for the 182s was 2.160%. The low bid was 2.140%.

Tenders at the high rate were allotted 62.66%. The bid-to-cover ratio was 3.11.

Treasury to sell $70B 4-week bills
The Treasury Department said it will sell $70 billion of four-week discount bills Tuesday. There are currently $92.996 billion of four-week bills outstanding.

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 Ziad Saba at 212-803-6079 for more information.

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