No digestive problems for municipals in sight with another $12B expected
Although the supply/demand ratio is still lopsided, the recent supply surge has brought more balance in the muni market, causing rates to rise across the board and spreads to widen. However, muni investors will find good market entry points over the next couple of weeks.
The market is expected to see around $12 billion of securities, with 33 deals scheduled $100 million or larger, six of those being competitive deals and13 of those are either partially or entirely taxable or corporate CUSIPs.
Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management, said that this past week the new deals that came were priced aggressively and got done — and he expects the same for the upcoming week.
“There is definitely an appetite for muni bonds and plenty of money to be put to work,” he said. “The increased issuance has made the market more normal and balanced in terms of the supply/demand dynamic. I don’t see the market having a digestive problem this upcoming week or anytime in the near future.”
He noted that rates have tightened some over the past few weeks and there is still a slope to the muni curve with the short end being "pretty flat."
“I don’t see the short end getting any flatter and it won’t invert, but I don’t see the Fed lowering rates this month or even for the rest of the year and that is the only thing that could make it even flatter,” Heckman said. “Rates will remain at a low level between now and the end of the year. Right now, you are getting compensated enough from going from two year to three years, or from three years to four years, for example.”
Heckman added that while munis are in prime position to have a good finish to the year, he senses that a lot of managers and individuals are still too short duration.
“They can’t keep reinvesting on the short end, given how little value there it. It will not make their clients happy, which should lead to more scrambling to extend durations,” he said. “They might be hoping the Fed lowers rates more, but hope is not a plan.”
Healthcare/hospital deals will lead the issuance wave for the upcoming week.
JP Morgan is slated to price Kaiser Permanente (NR/AA-/AA-) $1 billion of taxable corporate CUSIP bonds on Thursday.
RBC Capital Markets is scheduled to price Adventist Health System/West’s ( /A/A+) $810 million of taxable corporate CUSIP bonds on Wednesday.
“One of the things I will be watching during the week, is how these big hospital/healthcare deals go, as there is a lot of margin pressure in that sector and it’s a political hot ball,” Heckman said. “I probably won’t participate, but I will be curious to see how its priced and what the reception is, file away the information and review it the next time they come to market.”
With so much consolidation in the healthcare space, Heckman cautioned that investors have to be careful as not all acquisitions are good ones.
Jefferies is expected to price Miami-Dade County, Fla.’s (Aa3/AA-/A+) $1.15 billion of water and sewer system revenue and revenue refunding taxable bonds, with the taxables pricing on Monday and the tax-exempts on Wednesday.
“Even before Flint, water infrastructure has been and is still in need all over, as most of it that is in place isn’t up to date with current regulations and will be even further behind on future regulations,” Heckman said. “Water is an ever-important utility and the cash flow is pretty consistent.”
He added that unlike bridges and tunnels, water infrastructure is hidden and is sort of out of sight, out of mind, since for the most part, water comes out when you turn the faucet on and your toilet drains when you flush it.
“Not too many municipalities will get voted down on water and sewer deals, but as Flint taught us, there are inadequate pipes and systems all over,” he said. “It is a very important issue that won’t be going away, so we will see more issuance in this space as time goes on.”
Lipper sees back-to-back billion-dollar inflow
For 41 weeks in a row investors have poured cash into municipal bond funds, according to the latest data released by Refinitiv Lipper on Thursday.
Tax-exempt mutual funds that report weekly received $1.203 billion of inflows in the week ended Oct. 16 after inflows of $1.385 billion in the previous week. This marks the third time in the past four weeks inflows have exceeded $1 billion.
Exchange-traded muni funds reported inflows of $109.211 million after inflows of $242.819 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.094 billion after inflows of $1.142 billion in the previous week.
The four-week moving average remained positive and remained higher than $1 billion at $1.277 billion, after being in the green at $1.029 billion in the previous week.
Long-term muni bond funds had inflows of $985.537 million in the latest week after inflows of $1.002 billion in the previous week. Intermediate-term funds had inflows of $57.958 million after inflows of $258.992 million in the prior week.
National funds had inflows of $1.074 billion after inflows of $1.120 billion in the previous week. High-yield muni funds reported inflows of $320.969 million in the latest week, after inflows of $527.764 million the previous week.
Munis were mixed on the MBIS benchmark scale, with yields rising one basis point in the 10-year maturity and falling less than two basis points in the 30-year. High-grades were mixed, with yields on MBIS AAA scale increasing less than two basis points in the 10-year maturity and decreasing by less than a basis point in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year rose two basis points to 1.47% while the 30-year rose two basis points to 2.07%.
The 10-year muni-to-Treasury ratio was calculated at 84.0% while the 30-year muni-to-Treasury ratio stood at 92.4%, according to MMD.
Treasuries were mostly lower, while stocks where in the red. The Treasury three-month was yielding 1.669%, the two-year was yielding 1.574%, the five-year was yielding 1.561%, the 10-year was yielding 1.750% and the 30-year was yielding 2.248%.
Week's actively traded issues
Some of the most actively traded munis by type in the week ended Oct. 18 were from California, New York and Massachusetts issuers, according to IHS Markit.
In the GO bond sector, the San Diego Unified School District, Calif., 4s of 2021 traded 16 times. In the revenue bond sector, the Metropolitan Transportation Authority, 4s of 2020 traded 40 times. In the taxable bond sector, the Massachusetts State Water Resources Authority 3.104s of 2039 traded 24 times.
Week's actively quoted issues
Puerto Rico, Florida and Illinois bonds were among the most actively quoted in the week ended Oct. 18, according to IHS Markit.
On the bid side, the Puerto Rico Sales Tax Financing Corp., revenue 5s of 2058 were quoted by 25 unique dealers. On the ask side, the Alachua County Health Facilitates Authority revenue 3s of 2046 were quoted by 139 dealers. Among two-sided quotes, the State of Illinois taxable 5.1s of 2033 were quoted by 16 dealers.
Previous session's activity
The MSRB reported 33,715 trades Thursday on volume of $13.720 billion. The 30-day average trade summary showed on a par amount basis of $10.90 million that customers bought $5.92 million, customers sold $3.09 million and interdealer trades totaled $1.88 million.
California, New York and Texas were most traded, with the Golden State taking 14.311% of the market, the Empire State taking 11.907% and the Lone Star State taking 11.338%.
The most actively traded security was the Rutgers University, taxable general obligation, 3.915s of 2119, which traded 25 times on volume of $56.76 million.
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.