Muni market is soft ahead of four-day week

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A modestly weaker tone ended the week as a lack of follow-through on long new issues continued to plague the market.

“The tone is modestly weaker after a long week and ahead of the long weekend,” said a New York trader on Friday afternoon.

“I don’t think people were particular engaged today,” he said, noting that the winter storm was attracting more interest than the municipal market for many Northeast and New England investors.

He said the story of the week is a tale of two markets when it comes to the yield curve.

“Demand is stronger on the front end and weaker on the back end of the market,” he said. The 10s and 30s curve is the widest in the last 12 months at 84 basis points, he said.

“The volatility is pushing a lot of demand to the short end,” the trader said. “There are some balances from last week and this week as far as long new issue paper in the Street.”

In addition, he is observing continued selling by arbitrage accounts, and sizable bid wanted lists in the secondary market.

Next week’s estimated $5 billion of new issuance is manageable for the amount of demand, though "there's some pressure on the market," he said.

“It just doesn’t seem on the long end that there is enough demand for what’s out there,” he said of the new and secondary supply.

Ipreo forecasts weekly bond volume will be $5.1 billion, down from a revised total of $6.59 billion in the prior week, according to updated data from Thomson Reuters. The calendar is composed of $3.6 billion of negotiated deals and $1.5 billion of competitive sales.

The slate shows a dozen scheduled deals of $100 million or larger, including three being sold competitively.

JPMorgan is set to price the biggest deal of the week, the Connecticut Health and Educational Facilities Authority’s $535.865 of revenue bonds for Yale University, on Thursday. The deal is rated triple-A by Moody’s Investors Service and S&P Global Ratings.

Citi is slated to price the New Jersey Turnpike Authority’s $426 million of revenue bonds on Thursday. The deal is rated A2 by Moody’s, A-plus by S&P and A by Fitch Ratings.

RBC Capital Markets is scheduled to price the Iowa Finance Authority’s $258.97 million of state revolving fund revenue green bonds and taxable green bonds on Wednesday. The deal carries top-tier ratings from Moody’s, S&P and Fitch.

CreditSights: Prepare for changes in 2019
CreditSights released part one of its yearly outlook for munis, in which Patrick Luby, senior municipal strategist writes that the firm is cautiously optimistic total returns will be positive this year.

“[T]he premium coupon structure of the muni market ... should generate enough income return to more than offset potential negative price returns,” Luby wrote in the report. “However, a large increase in tax-exempt supply could put downward pressure on prices because of the absence of bank demand.”

Luby said his firm will be looking for a continuation of steady demand from domestic retail investors, but expects the continued absence of bank demand, due to banks' lower maximum tax rate and the current relative valuation of muni to corporate bond yields.

“We anticipate that municipal bond ETFs will continue to accumulate assets at a rate faster than their assets under management might suggest and that actively-managed muni ETFs will grow in popularity,” according to the report. “Although total foreign ownership of municipals is a small part of the overall market, non-U.S. investor demand has grown over the past several years and recent growth in the total amount of negative-yielding debt makes even tax-exempt muni yields more attractive.”

Luby said liquidity (and therefore valuations) will be affected by changes in dealer inventories, increased use of muni ETFs, and the growing "professionalization" of the municipal bond market.

“Increasing use of electronic trading platforms has allowed auto-bidders and algorithmic traders to get more involved in the day-to-day flows of the secondary market, adding scalability and liquidity,” he said. “The biggest changes in the market will happen because of the growing popularity of Separately Managed Accounts (SMAs). This growing ‘professionalization’ of the muni market will result in more trading activity, not less, and will further concentrate demand in the new issue market, allowing values to emerge in the secondary market for "out of favor" bonds and creating opportunities for active managers.”

Lipper: Muni bond funds see inflows again
Investors in municipal bond funds continued to put cash into them in the latest week, according to Lipper data released on Thursday.

The weekly reporters saw $945.911 million of inflows in the week ended Jan. 16 after inflows of $1.554 billion in the previous week.

Exchange traded funds reported outflows of $306.220 million, after inflows of $205.218 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.252 billion after inflows of $1.348 billion in the previous week.

The four-week moving average remained positive and grew to $707.936 million, after being in the green at $535.216 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 $401.730 million in the latest week after inflows of $949.276 million in the previous week. Intermediate-term funds had inflows of $497.610 million after inflows of $494.374 million in the prior week.

National funds had inflows of $774.506 million after inflows of $1.388 billion in the previous week. High-yield muni funds reported inflows of $411.038 million in the latest week, after inflows of $508.889 million the previous week.

Secondary market
Municipal bonds were weaker on Friday, according to a late read of the MBIS benchmark scale. Benchmark muni yields rose as many as one basis point in the one- to six-year and nine- to 30-year maturities. The remaining two maturities saw yields decrease by less than a basis point.

High-grade munis were also weaker, with yields calculated on MBIS' AAA scale increasing as many as one basis point in the one- to four-year and 10- to 30-year maturities. The five leftover maturities saw yields dip by no more than one basis point.

Municipals were weaker on Municipal Market Data’s AAA benchmark scale, which showed the yield on the 10-year muni general obligation increased by one basis point and the 30-year muni maturity up by two basis points.

On Friday, the 10-year muni-to-Treasury ratio was calculated at 79.4% while the 30-year muni-to-Treasury ratio stood at 99.0%, 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
California, New York and Texas were the municipalities with the most trades, with the Golden State taking 17.582% of the market, the Empire State taking 13.172% and the Lone Star State taking 8.923%.

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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Primary bond market Secondary bond market Sell side Municipal bond funds Connecticut Health & Educational Facilities Authority New Jersey Turnpike Authority Iowa Finance Authority State of California State of New York State of Texas