The municipal market bent under the weight of a surge in bond sales, led by the Dormitory Authority of the State of New York and the Illinois Toll Highway Authority, as issuers pushed to get deals done ahead of year-end.
The market was weaker by two to three basis points on Tuesday afternoon, as sizable bid lists circulated in the secondary market, according to a New York trader.
“New issues were being received well and the calendar is manageable,” he said. “Liquidity is starting to feel strained, but that is typical for December.”
Another New York trader agreed that heavy bid wanted lists combined with an above average primary market calendar, is creating weakness in municipals.
“Early reads on many loans suggest serial interest continues; however, the back end is struggling,” he said. “This mirrors secondary activity where liquidity inside of 12 years is solid, and everything else is a case-by-case basis.”
He added that he’s observed a less "constructive" tone in the market, and said dealers are “cognizant that the issuing window is closing.”
“Optimism remains that demand will outpace supply going into year end," he said. "In the meantime the long end will struggle against a needed adjustment to clearing spreads.”
In addition, he said municipals are under-performing rates, resulting in very little additional value versus recently trades.
“If weakness in the primary continues, we believe the market would view this ultimately as a buying opportunity for willing long term investors,” he said.
Bank of America Merrill Lynch priced the biggest deal of the week, the Dormitory Authority of the State of New York’s $1.5 billion of state personal income tax revenue bonds. The offering consists of Series 2018A tax-exempt PITs and Series 2018B taxable PITs. The deal is rated Aa1 by Moody’s Investors Service and AA-plus by S&P Global Ratings.
JPMorgan priced the Illinois State Toll Highway Authority's $516 million of toll highway senior revenue refunding bonds. The deal is rated Aa3 by Moody's and AA-minus by S&P and Fitch.
In the competitive arena on Tuesday, the Washington Suburban Sanitary District, Md., sold $390 million of consolidated public improvement bonds of 2018, Goldman Sachs won with a true interest cost of 3.5936%. The deal is rated triple-A by Moody’s, S&P and Fitch Ratings.
Tuesday’s bond sales
Secondary market
Municipal bonds were weaker on Tuesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields were either flat or higher by less than one basis point in the one- to seven-year, and the 11- to -19 and the 26- and 30-year maturities. The remaining nine maturities had yields lower by less than one basis point.
High-grade munis were weaker, with yields calculated on MBIS' AAA scale either flat or increasing as much as one basis in the three- to seven-year, 10- to 21-year, and the 25- to 30-year maturities. The remaining 7 maturities saw yields falling 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 higher by two basis points and on the 30-year muni maturity increased two basis points.
On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 83.6% while the 30-year muni-to-Treasury ratio stood at 100.1%, 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.
Let the good times roll
2019 should be a good year for municipal bond investors, the research team at Bank of America Merrill Lynch said in a report released Tuesday morning.
“This year has been a good year for muni investors, and we anticipate that 2019 will be, too. Munis proved to be a credit-stable, quality asset in a high volatility period,” the report says. While muni credits should be solid in 2019, BAML recommends some caution on high-yield products.
“We are bullish on muni rates for the year, with the 10-year AAA likely reaching 2% or lower in 2019,” the report says.
Although there will be a new Congress, the research team at BAML expects very little progress. “A divided 116th Congress implies little will be done, but also little will be undone. The SALT cap will remain, but we are very cautiously optimistic on a small infrastructure package, though, if small, it is unlikely to move the needle.”
Previous session's activity
The Municipal Securities Rulemaking Board reported 44,663 trades on Monday on volume of $10.342 billion.
California, New York and Texas were the municipalities with the most trades, with the Golden State taking 14.052% of the market, the Empire State taking 12.409% and the Lone Star State taking 9.42%.
Three-year notes auctioned
The Treasury Department auctioned $38 billion of three-year notes with a 2 5/8% coupon at a 2.748% high yield, a price of 99.648536.
The bid-to-cover ratio was 2.59.
Tenders at the high yield were allotted 84.56%. All competitive tenders at lower yields were accepted in full.
The median yield was 2.709%. The low yield was 2.630%.
Treasury to sell $40B 4-week bills
The Treasury Department said it will sell $40 billion of four-week discount bills Thursday. There are currently $30.000 billion of four-week bills outstanding.
Treasury also said it will sell $30 billion of eight-week bills Thursday.
Gary E. 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.
