Top-rated municipal bonds were weaker at mid-session, according to traders, as the week's action got underway in the primary market Tuesday.
Secondary Market
The yield on the 10-year benchmark muni general obligation rose three to five basis points on Tuesday from 2.40% on Monday, while the yield on the 30-year increased one to three basis points from 3.13%, according to a read of Municipal Market Data's triple-A scale.
U.S. Treasuries were little changed on Tuesday. The yield on the two-year was unchanged from 1.11% on Monday, the 10-year Treasury inched up to 2.33% from 2.32%, while the yield on the 30-year Treasury bond was flat from 2.98%.
On Monday, the 10-year muni to Treasury ratio was calculated at 103.5% compared to 100.7% on Friday while the 30-year muni to Treasury ratio stood at 104.9% versus 102.6%, according to MMD.
MSRB: Previous Session's Activity
The Municipal Securities Rulemaking Board reported 47,191 trades on Monday on volume of $9.62 billion.
Primary Market
The week's calendar is comprised of $6.72 billion of negotiated deals and $2.38 billion of competitive sales.
Wells Fargo priced the Board of Regents of the University of Texas System's $307.38 million of Series 2016J revenue financing system bonds on Tuesday.
The issue was priced to yield from 1.31% with a 5% coupon in 2018 to 3.15% with a 3% coupon and 2.86% with a 5% coupon in a split 2028 maturity. A 2017 maturity was offered as a sealed bid.
The deal is rated triple-A by Moody's Investors Service, S&P Global Ratings and Fitch Ratings.
Barclays Capital issued a premarketing scale on the District of Columbia's $577.59 million of general obligation bonds, slated to be priced on Wednesday.
The $309.25 million of Series 2016D GOs were premarketed with spreads of about 16 basis points over the interpolated MMD scale in 2019 to 45 basis points over MMD in the 2036 and 2041 maturities. The $187.34 million of Series 2016E GO refunding bonds were premarketed with spreads of about 12 basis points over the interpolated MMD scale in 2018 to 45 basis points over MMD in 2033.
The Washington, D.C., bonds are rated Aa1 by Moody's and AA by S&P and Fitch.
In the competitive arena on Tuesday, the city and county of San Francisco's Public Utility Commission sold $256.49 million of Series 2016C taxable water revenue green bonds. Wells Fargo Securities won the deal with a true interest cost of 3.90%.
The issue was priced to yield from 0.87% at par in 2017 to 3.95% at par in 2036; a 2041 maturity was priced at par to yield 4.035% and a 2046 maturity was priced at par to yield 4.185%. The deal is rated Aa3 by Moody's and AA-minus by S&P.
Also on Tuesday, Orange County, Fla., sold two separate competitive issues totaling $296.57 million.
Bank of America Merrill Lynch won the $206.74 million of Series 2016B tourist development tax refunding revenue bonds with a TIC of 4.04%. The issue was priced to yield from 2.83% with a 5% coupon in 2025 to 4.05% with a 4% coupon in 2034; a 2036 maturity was priced as 4s to yield 4.10%.
BAML also won the $89.83 million of Series 2016A tourist development tax refunding revenue bonds with a TIC of 4.05%. The issue was priced to yield from 2.83% with a 5% coupon in 2025 to 4.05% with a 4% coupon in 2034; a 2036 maturity was priced as 4s to yield 4.10%.
Both sales are rated Aa3 by Moody's, AA-minus by S&P and AA by Fitch.
Since 2006, the county has sold roughly $1.5 billion of securities, with the highest issuance before this year occurring in 2007 when it sold $307 million. The county did not come to market at all in 2008, 2011 or 2014. Tuesday's sales put the county over $400 million for the year.
Bond Buyer Visible Supply
The Bond Buyer's 30-day visible supply calendar increased $1.17 billion to $17.95 billion on Tuesday. The total is comprised of $4.72 billion of competitive sales and $13.23 billion of negotiated deals.
Ramirez Forecasts Gross Supply at $368B in '17
Ramirez & Co. is projecting that gross municipal bond supply will total $368 billion in 2017 while net supply is forecast to come in at $1.4 billion next year.
The gross supply total is made up of $204 billion of new money, $106 billion of current refundings and $58 billion of advance refundings, according to Ramirez's weekly municipal strategy report. The net supply figure includes about "$166 billion of bonds maturing in 2017 and about $94 billion of bonds escrowed to call dates in 2017," according to the report.
"The 2017 new money forecast is marginally impacted by the $60 billion of bond authorizations passed in November, which we assume about $30 billion, or 50% of which will be issued in 2017, but more heavily influenced by higher rates and credit spreads," the report said. "The MMD scale is 52 basis points wider in the 10-year spot vs the beginning of 2016 and credit spreads are at a one-year wide."
As municipal bond fund outflows continue, the report said, lower-rated issuers will find their credit quality will figure more prominently in the decision whether to issue bonds or not.
"Like new money, the 2017 refunding supply forecast is also influenced by higher rates and spreads and the fact that muni issuers have mostly taken advantage of the historically low rate environment by pulling forward a significant amount of new money and advance refunding activity over the last two to three years," the report stated.
Ramirez expects about 25% of the bonds eligible to be advance refunded with new bonds in 2018-2020 will be advance refunded.
Nuveen: Many Positives Ahead for Munis
While there were several negatives for the municipal market last week – muni bonds sold off and underperformed Treasuries, there was virtually no new issuance due to the Thanksgiving holiday, and funds saw outflows of over $2 billion – there were also several reasons to be optimistic, according to John Miller, co-head of fixed income at Nuveen Asset Management.
"We see many positives despite the challenging market environment. The possibility of a credit driven event is very low. Demand could pick up on Dec. 1, with cash flow from bond calls, etc., expected to be $46 billion. The Jan. 1 total is estimated at $35 billion," Miller wrote, adding, "Major investment firms tell us of increased purchases of individual bonds by retail investors. Finally, high-grade municipal bonds are cheap versus U.S. Treasuries. We believe crossover buyers will eventually take advantage of this mispricing."
