The municipal market this week should see its biggest slate of new issuance so far in 2011, with $8.27 billion expected to come to market.
The estimate is up from last week’s revised $5.71 billion, and more than the previous 2011 high of $8.1 billion the last week of June.
The unexpected increase of volume has some analysts raising forecasts.
“After the sharp rebound in supply during June, we are beginning to believe that our most recent estimate of supply for 2011 of $230 billion to $240 billion is too low,” Citi municipal analysts wrote in a report last week. “There are reasons to believe that a $280 billion issuance level is achievable.”
Negotiated bond issuance is up slightly, with $5.18 billion coming to market, an increase from last week’s revised $4.55 billion, and competitive issuance will jump to $3 billion, up from a revised $1.16 billion.
Leading the long-term new-issue market, Citi will price $760 million of general obligation debt for New York City. The sale will have a retail order period on Monday and Tuesday, followed by an institutional order period on Wednesday. The bonds are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s. The bonds mature serially from 2017 through 2031, with a term bond in 2035.
In the competitive market, Washington State will issue about $742 million of GO bonds that will be priced in three separate issues of $391 million, $28 million and $323 million.
On Thursday, the San Francisco Public Utilities Commission will competitively sell $700 million of bonds in two separate issues of $634 million and $66 million.
Leading short-term issuance, Citi will price $788 million of tax anticipation notes for Oregon. The notes will come to market Wednesday and are rated M1G-1 by Moody’s, SP-1-plus by Standard & Poor’s, and F1-plus by Fitch Ratings.
With this week’s issuance setting the record for 2011, many participants are wary about how the supply-starved market will react to increased volume.
“We haven’t had this level of issuance thus far this year, so there is uncertainty as to how the market will react,” said James Ahn, municipal bond portfolio manager at JPMorgan Asset Management.
He added that yields are near all-time lows so the deals that have generally done better in the past few weeks are those that step out on the yield curve.
“In the past two to three weeks of issuance, the deals that have received the most attention and done the best are the ones that offered a little incremental yield,” Ahn said.
The portfolio manager said deals with more yield generally have been doing a little better than high-quality offerings because investors aren’t happy with where rates are now.
“As muni rates moved higher last month along with Treasuries, investors welcomed that as we moved into the traditionally strong June and July reinvestment period,” Ahn said, adding that investors were hoping for a better entry point to reinvest.
“We have not had supply like this, so we could potentially see the muni market get somewhat decoupled from Treasuries,” he said. “Absent a major move in Treasury rates, could the elevated level of supply contribute to a movement in muni rates either way?”
Ahn said the bulk of next week’s new issuance will serve well to meet rollover demand that has been strong so far this year.
“We expect about $35 billion to $40 billion in municipal bond redemptions to take place in July, some of which is yet to be reinvested back into the municipal market,” he said.