Munis seen singing a soothing ballad in 2019 while other markets rock'n'roll

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New York and Massachusetts issuers led a spate of new deals Tuesday as analysts highlighted the relative stability of municipal bonds in the turbulent financial markets.

Munis were mostly stronger as New York's Empire State Development competitively sold about $1.3 billion of Urban Development Corp. tax revenue bonds and Massachusetts sold $918 million of general obligations.

With the start of the new year, municipal bonds continue to offer advantages, Bank of America Merrill Lynch said in a report that forecasts strong outperformance, liquidity, and credit quality in munis in 2019.

Municipals are both low volatility and tax-advantaged, which bodes well for liquidity when compared to the extreme volatility and low liquidity in other markets, according to the report released Monday by BAML municipal strategists Phil Fischer, Yingchen Li, Ian Rogow, Lauren Sobel, and Molly McGown.

“The muni market, by contrast, is functioning with little disruption," the strategists wrote. "Indeed, despite a long period of negative outflows, together with bouts of political risk at the state and local level, issuers have regularly and frequently come to market distributing securities within historical spreads.

“After April, investors likely will appreciate munis even more, and regulators should note muni credits' continuing strength, along with their steady yields — even as it is rock'n'roll for most other markets,” the report said. “Tax-adjusted muni returns were favorable and even better on a risk-adjusted basis.”

After a strong rally due to the heightened stock market volatility and speculation of a slowing economy over the last few weeks, the firm called its 2019 target of 2% for the 10-year AAA “a little conservative.”

“The December 2018 Fed rate hike proved to be a rather controversial move and accelerated the stock market decline,” Li wrote in his portion of the report.

BAML’s U.S. economists continue to expect 2.8% GDP growth for 2019, and two more Fed rate hikes this year. The market, he noted, is pricing in a 52% probability of a rate cut by January 2020.

“The two and 10-year triple-A curve flattening should continue and break the 47 basis point support,” the report said.

“Technicals dictate that this flattening will continue and likely will work toward the 25 basis point to 30 basis point range,” Li pointed out. “This will probably coincide with 2/10 curve inversion in the Treasury market.” A mild 10- and 30-year curve steepening should be “quite limited,” according to Li.

He noted that since 1975, the Fed has never raised rates after a 20% stock market decline, only when the stock market indexes lost a little over 10% or, in some cases, not at all. “It remains a central issue this year how the Fed will view the stock market decline versus its rates decisions,” Li wrote.

Overall, there is opportunity ahead in the municipal market, according to the BAML strategists. “The micro market structure of munis worked well in 2018, and we expect that to continue in 2019,” they said.

Primary market
In the competitive arena on Tuesday, New York’s Empire State Development sold about $1.3 billion of Urban Development Corp. state personal income tax revenue bonds in five sales.

Bank of America Merrill Lynch won the $396.38 million of Series 2019A Bidding Group 1 general purpose bonds with a true interest cost of 3.8004%.

Citigroup won the $345.555 million of Series 2019A Bidding Group 2 general purpose bonds with a TIC of 3.9574% and the $190.695 million of Series 2019B Bidding Group 2 taxable general purpose bonds with a TIC of 3.4709%.

JPMorgan Securities won the $259.985 million of Series 2019B Bidding Group 1 taxable general purpose bonds with a TIC of 3.1724%.

Morgan Stanley won the $353.265 million of Series 2019B Bidding Group 3 taxable general purpose bonds with a TIC of 3.9394%.

The bonds are rated Aa1 by Moody’s Investors Service and AA-plus by Fitch.

Since 2009, the ESDC has sold about $17.5 billion of bonds, with the most issuance occurring in 2017 when is issued around $3.59 billion of debt. It did not come to market in in 2012 or 2018.
Bank of America Merrill Lynch priced Massachusetts’ $918.49 million of tax-exempt general obligation bonds after holding a two-day retail order period.

The bonds are rated Aa1 by Moody’s, AA by S&P Global Ratings and AA-plus by Fitch.

"We got the deal done at decent levels and with pretty good results and order flow given the cheapening market tone and other comparable transactions that priced today," said Sue Perez, Massachusetts Deputy Treasurer for Debt Management.

After two strong retail order periods last Friday and Monday, the momentum was slowed a bit by bad timing, as the market was once again weaker by a few basis points.

"It was the first week of selling, so we had modest expectations but we offered $528 million in the two-day ROP and got almost $547 million in orders; a majority of which were usable," she said. "Some were buying one bond and some were buying blocks across multiple maturities -- it's always good to see the retail investors show up."

Morgan Stanley priced the Board of Regents of the Texas A&M University System’s $223.745 million of taxable Series 2019A revenue financing system bonds. The deal is rated triple-A by Moody’s, S&P and Fitch.

Wells Fargo Securities priced Charleston, S.C.’s $130 million of Series 2006 waterworks and sewer system capital improvement revenue bonds as a remarketing. The deal is rated triple-A by Moody’s and S&P.

On Wednesday, Wells Fargo Securities is expected to price the New Jersey Transportation Trust Fund Authority’s $500 million of transportation program bonds. The deal is rated A-minus by Fitch and Kroll Bond Rating Agency,

On Thursday, JPMorgan Securities expected to price the San Francisco Airport Commission’s $1.78 billion of tax-exempt and taxable revenue and revenue refunding bonds. The deal, which consists of bonds subject to the alternative minimum tax and non-AMT bonds, is rated A1 by Moody’s and A-plus by S&P and Fitch.

Bond sales

New York
Click here for the $396M ESDC sale

Click here for the $346M ESDC sale

Click here for the $190M ESDC sale

Click here for the $353M ESDC sale

Click here for the A&M sale

Click here for the Massachusetts final pricing

Click here for the Massachusetts institutional pricing

Click here for the Massachusetts retail pricing

South Carolina
Click here for the Charleston remarketing

Bond Buyer 30-day visible supply at $11.16B
The Bond Buyer's 30-day visible supply calendar increased $627.7 million to $11.16 billion for Tuesday. The total is comprised of $4.50 billion of competitive sales and $6.66 billion of negotiated deals.

Secondary market
Municipal bonds were mixed on Tuesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell seven basis points in the one-year maturity, four basis points in the two-year maturity, two basis points in the three-year maturity and as much as one basis point in the four- to six-year maturities while yields rose as much as one basis point in the seven- to 30-year maturities.

High-grade munis were also mixed, with yields calculated on MBIS' AAA scale falling as much as seven basis points in the one-year maturity, five basis points in the two-year maturity, three basis points in the three-year maturity, two two basis points in the four-year maturity and as much as one basis point in the five- to eight-year maturities maturities while rising as much as a basis point in the 10- to 30-year maturities and remaining unchanged in the nine-year maturity.

Municipals were weaker on Municipal Market Data’s AAA benchmark scale, which showed the yield on the 10-year muni general obligation rising three basis points while the yield on the 30-year muni maturity gained five basis points.

Treasury bonds were weaker amid continuing stock market volatility. The Treasury 30-year was yielding 2.997%, the 10-year yield stood at 2.717%, the five-year was at 2.568%, the two-year was at 2.577% while the Treasury three-month bill stood at 2.456%.

On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 82.3% while the 30-year muni-to-Treasury ratio stood at 100.9%, 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 muni curve is two basis points higher from 2030 and longer, with the shorter end unchanged to one basis point higher,” ICE Data Services said in a Tuesday market comment. “The taxable market is as much as 3.5 basis points higher in the two-year, tapering to 0.8 basis point for the 30-year space. High yield is quiet and evenly mixed. Today is the first day of new issue pricings with about $8 billion coming into the market. This is diverting participants’ attention from secondary trading.”

Previous session's activity
The Municipal Securities Rulemaking Board reported 41,498 trades on Monday on volume of $9.05 billion.

California, New York and Texas were the municipalities with the most trades, with the Golden State taking 15.335% of the market, the Empire State taking 11.976% and the Lone Star State taking 10.422%.

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 $30.001 billion of four-week bills outstanding.

Treasury also said it will sell $30 billion of eight-week bills Thursday.

Treasury auctions 3-year notes
The Treasury Department auctioned $38 billion of three-year notes with a 2 1/2% coupon at a 2.559% high yield, a price of 99.830664. The bid-to-cover ratio was 2.44.

Tenders at the high yield were allotted 63.99%. All competitive tenders at lower yields were accepted in full. The median yield was 2.523%. The low yield was 2.400%.

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. 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 Empire State Development Corporation State of New York Commonwealth of Massachusetts Texas A&M University System Board of Regents State of Texas State of Texas New Jersey Transportation Trust Fund Authority San Francisco Airport Commission State of California