Top-quality municipal bonds ended stronger on Wednesday, traders said, as market participants wait to see some new deals come their way, with the bulk of the week's $3 billion calendar set for sale on Thursday.
Secondary Market
The 10-year benchmark muni general obligation yield fell two basis points to 2.30% from 2.32% on Tuesday, while the yield on the 30-year GO dropped two basis points to 3.03% from 3.05%, according to the final read of Municipal Market Data's triple-A scale.
Federal Reserve officials began to worry the central bank might eventually be forced to quicken the pace of its interest rate hikes to fend off a possible rise in inflation, according to the minutes of the December meeting of the Federal Open Market Committee released on Wednesday. Many participants "indicated that the upside risks to their forecasts for economic growth had increased as a result of prospects for more expansionary fiscal policies in coming years."
U.S. Treasuries were narrowly mixed after the release of the FOMC minutes.
The yield on the two-year Treasury rose to 1.23% on Wednesday from 1.22% on Tuesday, while the 10-year Treasury yield increased to 2.46% from 2.45%, and the yield on the 30-year Treasury bond was unchanged from 3.05%.
In Puerto Rico bond prices moved higher on Wednesday, according to ICE Data Services. On Tuesday, Puerto Rico Gov. Ricardo Rossell- took steps on his first day in office to cut government spending and revenues, signaling a new approach to the island's debt crisis.
The Puerto Rick Commonwealth Series 2014A general obligation 8s of 2035 were yielding 12.45% on Wednesday, down from 12.56% on Tuesday, according to Markit. The Puerto Rico Commonwealth Series 2012A public Improvement refunding 5s of 2041 were yielding 8.96% on Wednesday, down from 9.10% on Tuesday, Markit said.
Nuveen: High Demand for High-Yield
The high-yield municipal market ended 2016 with unusually firm demand and light trading, according to Nuveen Asset Management.
"Inflows totaled $3.7 billion for the year, as investors added $9.5 billion in the first three quarters of the year and redeemed $5.8 in the fourth quarter," John V. Miller, Nuveen co-head of fixed income, wrote in a Wednesday market comment. "High-yield municipal credit spreads (excluding Puerto Rico) are higher than at any time since the end of 2013. Spreads are 35 basis points wider than the beginning of the year, and 70 bps wider than the 2016 low."
However, Nuveen said, high-yield supply is expected to be light over the next few weeks.
"High-yield municipal yields have increased 70 basis points more than AAA municipals and 80 basis points more than U.S. Treasuries since the 2016 low," Miller wrote, "offering investors attractive relative performance, a cushion from rising rates and potentially attractive returns from higher yields."
Primary Market
The market will remain subdued until Thursday, when about $2.92 billion of negotiated deals and $84.2 million of competitive sales hit the screens.
Barclays Capital is set to price the Board of Regents of the Texas State University System's $570.83 million of Series 2017A revenue financing system revenue and refunding bonds on Thursday. The deal is rated Aa2 by Moody's Investors Service and AA by Fitch Ratings.
JPMorgan Securities is expected to price the Board of Regents of the University of North Texas' $214.92 million of Series 2017A revenue financing system refunding and improvement bonds on Thursday. The deal is rated Aa2 by Moody's and AA by Fitch.
Barclays is set to price the Board of Regents of the University of North Texas' $164.99 million of Series 2017B taxable revenue financing and improvement bonds on Thursday. The deal is rated Aa2 by Moody's and AA by Fitch.
Wells Fargo Securities is expected to price the University of Pittsburgh, Pa.'s $525 million of Series 2017A taxable university refunding bonds on Thursday. The deal is rated Aa1 by Moody's and AA-plus by S&P Global Ratings.
Wells Fargo is also set to price the District of Columbia's $311.52 million of Series 2017 refunding revenue bonds for Georgetown University on Thursday. The deal is rated A2 by Moody's and A by S&P.
Since 2007, the District of Columbia has sold roughly $14.89 billion of securities, with the largest issuance occurring in 2008 when it sold $2.09 billion. In that time frame, the nation's capital failed to sell more than $1 billion only in 2013 and 2014.
Piper Jaffray is expected to price the El Paso Independent School District, Texas' $184.09 million of unlimited tax school building bonds. The deal is rated Aaa by Moody's.
Piper is also expected to price the Ysleta Independent School District, Texas' $171.38 million of unlimited tax school building general obligation bonds. The deal is rated triple-A by Moody's and S&P.
Citigroup is set to price the New York State Housing Finance Agency's $120 million of affordable housing Series 2017A climate bond certified green bonds and Series 2017B revenue bonds on Thursday.
In the competitive arena, the Cheery Creek School District Number 5, Colo., will sell $150 million of Series 2017 general obligation bonds on Thursday. The deal is rated Aa1 by Moody's and AA by S&P.
In the short-term competitive arena, Colorado is selling $375 million of Series 2016B education loan program tax and revenue anticipation notes Thursday. The deal is rated MIG1 by Moody's and SP1-plus by S&P.
MMA: Sector Default Backdrop Worsens
The new year will likely bring a higher number of municipal defaults, according to Municipal Market Analytics.
"For the first time since MMA has tracked impairments (since 2009), new defaulters have increased year-over-year. Overall the sector's default rates are likely to remain favorable compared to that of the corporate sector, but improving credit conditions are not likely on the horizon," MMA wrote in its municipal outlook on Wednesday. "Pressures facing governmental issuers -- slow revenue growth, rising fixed costs and an aging population -- are formidable."
MMA said it believes that default totals are unlikely to reach the levels seen in the cohorts leading up to the financial crisis because of the concentration of high risk development transactions in Florida during that period.
"It is quite possible, however, that the par amount of the defaulters in the 2016 cohort could skew higher because of the increasing amount of debt taken on by some strained and/or risky sector issuers, particularly should the national or regional economies suffer an unexpected setback," MMA said.
