The municipal bond market is gearing up for the biggest volume week of the year, as issuers expect to bring just under $10 billion of new paper.
Ipreo estimates volume will swell to $9.89 billion, from the revised total of $6.58 billion sold in the past week, according to updated figures from Thomson Reuters. The calendar for the week ahead is composed of $5.90 billion of negotiated deals and $3.99 billion in competitive sales.
Although volume for the week will be the highest it’s been since the week of Dec. 11, 2017 when issuers were in tax-reform rush mode, the market shouldn’t have a hard time digesting the issuance according to Fred Bacani, partner and head of fixed income & trading at Veritable, LP.
“I think demand next week for new issue deals should remain healthy given the strong demand this past week that recalibrated credit spreads for some high grade names,” he said.
Bacani added that while the calendar is relatively heavy, professional investors are likely to plan ahead, as new issue volume appears set to recede after next week’s surge.
“The summer reinvestment season is on the horizon, which has the potential to pull net supply into deep negative territory and act as a tailwind for municipal outperformance,” he said. “Relative valuations are becoming stretched given the recent municipal outperformance, so I have become quite selective in my buying activity.”
For example, he said he favors high coupon callable bonds over bullets right now as a way to improve ratios and “steepen” a flat curve.
There are 21 deals scheduled of $100 million or larger, seven of them coming via the competitive route. Three different issuers are each expected to bring over $1 billion as well.
The Commonwealth of Pennsylvania is set to sell $1.25 billion of general obligation bonds competitively on Wednesday. The deal is rated A-plus by S&P Global Ratings and AA-minus by Fitch Ratings.
Also in the competitive arena, the New York City Transitional Finance Authority is scheduled to sell a total of $1.1 billion of taxable and tax-exempt future tax secured subordinate bonds in five separate sales on Tuesday.
“In terms of competitive deals, it will be interesting to see how the $1.2 billion Pennsylvania GO deal is absorbed by the municipal market,” Bacani said. “Credit spreads will have to be sufficiently compensatory in order to lure investors who are skeptical given the Commonwealth’s structurally unbalanced budget.”
Over on the negotiated side, Citi is expected to run the books on the largest single deal of the week when the Airport Commission of the City and County of San Francisco sells $914 million of airport second series revenue and revenue refunding bonds on Wednesday. The mixture of taxable, alternative minimum tax and non-AMT bonds are rated A1 by Moody’s Investors Service and A-plus by S&P and Fitch.
“I may participate in the AMT portion of the San Francisco Airport deal if yields are attractive for individuals not subject to the AMT,” he said. “Private activity municipal bonds are great in terms of yield enhancement for investors not subject to the AMT.”
Goldman Sachs is scheduled to price a total of $1.52 billion for the Grand Parkway Transportation Corp. in Texas. There will be a $911.305 million offering of subordinate tier toll revenue bonds and $610.615 million of bond anticipation notes both on Wednesday. The bond deal is rated AA-plus by S&P and AA by Fitch, while the BAN’s are rated BBB by S&P and A-minus by Fitch.
Municipal bonds were stronger on Friday, according to a late read of the MBIS benchmark scale.
Benchmark muni yields fell as much as one basis point in the three- to 30-year maturities. The yield on the 2019 maturity nudged up slightly, while the 2020 maturity was flat. High-grade munis were also stronger with yields calculated on MBIS’ AAA scale falling by as much as a basis point in the five- through 30-year maturity. The first four years on the front end of the curve were the lone ones to increase by less than a basis point.
Municipals were mixed according to Municipal Market Data’s AAA benchmark scale, which showed yields unchanged in the 10-year general obligation muni and dropping two basis points in the 30-year muni maturity.
On Friday, the 10-year muni-to-Treasury ratio was calculated at 82.2% while the 30-year muni-to-Treasury ratio stood at 95.0%, according to MMD.
“Institutional supply in the secondary market remains a wildcard,” Bacani said. “Although recently subsided, will a further decline in municipal-to-Treasury yield ratios spur another rounding of selling by institutions swapping into taxable paper for better after-tax yields given the recently-cut corporate tax rate?”
Week's actively traded issues
Some of the most actively traded bonds by type in the week ended May 11 were from Kansas, Virginia and New York issuers, according to Markit.
In the GO bond sector, the Wyandotte USD No. 203, Kan., 4s of 2048 traded 27 times. In the revenue bond sector, the Norfolk Economic Development Authority, Va., 4s of 2048 traded 57 times. And in the taxable bond sector, the DASNY 4.85s of 2048 traded 45 times.
Week's actively quoted issues
California, Connecticut and Puerto Rico names were among the most actively quoted bonds in the week ended May 11, according to Markit.
On the bid side, the California revenue 5.25s of 2040 were quoted by 43 unique dealers. On the ask side, the Connecticut GO 5s of 2026 were quoted by 196 dealers. And among two-sided quotes, the Puerto Rico Commonwealth GO 8s of 2035 were quoted by 26 dealers.
Lipper: Muni bond funds saw inflows
Investors in municipal bond funds reversed course and put cash into the funds in the latest reporting week, according to Lipper data released on Thursday.
The weekly reporters saw $167.323 million of inflows in the week ended May 9, after outflows of $344.710 million in the previous week.
Exchange traded funds reported inflows of $24.407 million, after inflows of $10.102 million in the previous week. Ex-ETFs, muni funds saw $142.915 million of inflows, after outflows of $354.813 million in the previous week.
The four-week moving average remained negative at -$115.765 million, after being in the red at -$218.779 million in the previous week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.
Long-term muni bond funds had inflows of $252.252 million in the latest week after outflows of $183.551 million in the previous week. Intermediate-term funds had inflows of $68.529 million after outflows of $43.953 million in the prior week.
National funds had inflows of $200.965 million after outflows of $206.274 million in the previous week. High-yield muni funds reported inflows of $220.975 million in the latest week, after inflows of $28.680 million the previous week.
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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Corrected May 18, 2018 at 2:24PM: Corrects Lipper high-yield fund inflows.