Week kicks off early as NYC TFA BARBs price for retail; $9.2B calendar on tap
Hungry investors with July redemption cash to reinvest began lining up for the New York City Transitional Finance Authority’s nearly $1 billion building aid revenue bond offering on Friday -- when lead underwriter Ramirez & Co. began the first day of the retail order period.
The deal is one of the largest deals in the primary market calendar for the week ahead. Ipreo estimates weekly bond volume at $9.2 billion, up from a revised total of $6.9 million in the past week, according to updated data from Thomson Reuters. The calendar is composed of $7.5 billion of negotiated deals and $1.7 billion of competitive sales.
Ramirez priced the TFA’s $919.285 million of tax-exempt Fiscal 2019 Series S-1 and Fiscal 2019 Series S-2 Subseries S-2A building aid revenue bonds for retail and will hold a second day of retail orders on Monday ahead of the institutional pricing on Tuesday. Also on Tuesday, the NYC TFA will competitively sell $111.455 million of taxable Fiscal 2019 Subseries S-2B BARBs.
The BARBs are rated Aa2 by Moody’s Investors Service and AA by S&P Global Ratings and Fitch Ratings.
The majority of the bonds are tax-exempt. The deal will also appeal to investors because of its availability in one of the higher-taxed states under new limitations on state and local taxes under the new tax reform, municipal traders said. In addition, investors are likely to flock to the 5% current coupons available in under 10 years.
“It’s a slightly different credit as a building aid revenue bond -- as opposed to the future tax secured subordinate bonds -- and we don’t see much of it in the market,” a New York trader said Friday.
He expects the securities to be priced slightly on the rich side due to the overall shortage of new issue volume this year, though he said the spreads should be “not much wider” than on the TFA’s future tax secured revenue bonds.
In general, the trader said, “deals are getting more aggressive because the market needs bonds.” At the same time, the market’s reaction to a potential swell in volume can sometimes help the market climate and tone, he said.
“Sometimes the fear of supply coming overhangs the market, and then it ends up getting tighter because of the price discovery when the paper comes,” he said.
Topping the new issue slate is a $1.2 billion deal from the New Jersey Transportation Trust Fund Authority.
Morgan Stanley is set to price the Series 2018A federal highway reimbursement revenue refunding notes on Wednesday after a one-day retail order period.
The deal consists of tax-exempt GARVEE notes not subject to the alternative minimum tax. It is rated Baa1 by Moody’s, A-plus by S&P and A-minus by Fitch.
Houston is selling $600 million of airport system subordinate lien revenue refunding bonds.
Siebert Cisneros Shank & Co. is set to price the Series 2018C bonds subject to the AMT and the Series 2018D non-AMT bonds on Tuesday. The deal is rated A1 by Moody’s.
And North Carolina is competitively selling $400 million of general obligation public improvement Connect N.C. bonds on Wednesday. The deal is rated triple-A by Moody’s, S&P and Fitch.
Click here for the NYC TFA retail pricing, Day 1
Bond Buyer 30-day visible supply at $11.77B
The Bond Buyer's 30-day visible supply calendar increased $158.9 million to $11.77 billion on Monday. The total is comprised of $3.83 billion of competitive sales and $7.95 billion of negotiated deals.
Municipal bonds were stronger on Friday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell as much as one basis point in the one- to 30-year maturities.
High-grade munis were also stronger, with yields calculated on MBIS’ AAA scale falling less than a basis point throughout the curve.
Municipals were mixed on Municipal Market Data’s AAA benchmark scale, which showed the 10-year muni general obligation yield remaining steady while the 30-year muni maturity fell by one basis point.
Treasury bonds were stronger as stocks traded mixed.
On Friday, the 10-year muni-to-Treasury ratio was calculated at 85.2% while the 30-year muni-to-Treasury ratio stood at 98.9%, 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.
Previous session's activity
The Municipal Securities Rulemaking Board reported 42,520 trades on Thursday on volume of $15.259 billion.
California, New York and Texas were the states with the most trades, with the Golden State taking 16.284% of the market, the Empire State taking 12.822% and the Lone Star State taking 8.811%.
Week's actively traded issues
Some of the most actively traded munis by type in the week ended July 13 were from Colorado and California issuers, according to Markit.
In the GO bond sector, the Colorado 4s of 2019 traded 24 times. In the revenue bond sector, the Los Angeles 4s of 2019 traded 71 times. And in the taxable bond sector, the California 7.55s of 2039 traded 12 times
Week's actively quoted issues
Texas, Maryland and Illinois names were among the most actively quoted bonds in the week ended July 13, according to Markit.
On the bid side, the Grand Parkway Transportation Corp., Texas’ revenue zeroes of 2047 were quoted by 37 unique dealers. On the ask side, the Maryland GO 5s of 2026 were quoted by 182 dealers. And among two-sided quotes, the Illinois taxable 5.1s of 2033 were quoted by 13 dealers.
Lipper: Muni bond funds saw inflows
Investors in municipal bond funds reversed course and put cash back into the funds in the latest reporting week, according to Lipper data released on Thursday.
The weekly reporters saw $650.966 million of inflows in the week ended July 11, after outflows of $189.260 million in the previous week. It was the first outflow since May 2.
Exchange traded funds reported inflows of $22.877 million, after outflows of $14.571 million in the previous week. Ex-ETFs, muni funds saw $628.089 million of inflows, after outflows of $174.689 million in the previous week.
The four-week moving average remained positive at $382.277 million, after being in the green at $331.939 million in the previous week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.
Long-term muni bond funds had inflows of $438.059 million in the latest week after outflows of $25.904 million in the previous week. Intermediate-term funds had inflows of $168.848 million after inflows of $25.976 million in the prior week.
National funds had inflows of $621.558 million after outflows of $108.311 million in the previous week. High-yield muni funds reported inflows of $313.919 million in the latest week, after inflows of $94.315 million the previous week.
Block: Primary grows, still lags 2017 levels
This week, the primary’s gross new-issue supply is about 33% above the 12-week moving average, with negotiated transactions representing 65% of the total, Peter Block of Ramirez & Co. pointed out in a weekly municipal report.
Gross supply year to date, on the other hand, is down 17% year over year at $156.3 billion, which is tracking slightly better versus Ramirez’ full-year 2018 estimate of negative 27% year over year, or $317 billion. Meanwhile, 30-day net supply is currently negative $16.82 billion, comprised of $8.53 billion in new issues, $17.56 billion maturing, and $7.79 billion in announced calls, he reported.
New York and California are among the states that stand to experience the largest change in outstanding debt at negative $4.35 billion, and negative $3.97 billion, respectively.
“Despite the favorable technical factors and likely outperformance in spots over the summer months, a defensive posture, both in terms of duration and credit quality, remains warranted given anticipation of higher rates generally across the curve,” Block wrote.
A full-blown trade war with lower economic growth could change this calculus, he said, which is why he continues to advocate five to seven years of effective duration using a laddered approach that includes intermediate maturities between 14 and 16 years, with five- to eight-year calls, mostly in double-A- rated and some single-A-rated credits, he said.
The flat two- to 30-year yield curve of only 126 basis points makes Block’s favored five- to eight-year call structure relatively cheaper versus shorter, two- to four-year calls of 20 to 30 basis points, he noted. “These structures also capture 80% of the MMD yield curve with consistent, low-volatility roll-down of 50 basis points,” he explained.
He also advocates for higher credit quality in 10 years because he views it as fairly priced or in-line with two-year averages across virtually all municipals sectors and rating categories — with the only exception being single-A-rated water and sewer and high yield municipals, which appear rich.
“The fair valuations are largely the result of dramatic spread compression across sectors that, despite rate increases, have accompanied the chronic, supply-demand imbalance in the muni market and the reach for yield down the credit spectrum,” Block wrote.
“The spread compression, while creating some homogenization of spread across credits, has actually created an opportunity for investors to buy higher-grade credits and capture a relatively larger percentage of lower quality spread versus the historical trend,” he added.
For example, the percentage of A-rated credit spread that can be captured by AA-rated bonds in 10 years is at a multi-year high of 77% versus the two-year average of only 57%, according to Block.
“Given this, and the fact that that this relationship will likely not be maintained long-term, we think that it’s appropriate — while prices are high — at this time to reduce lower rated credit exposure and in the process reduce portfolio volatility by selling lower rated bonds and purchasing higher rated credit,” Block wrote.
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 Vanessa Kim at 212-803-8474 for more information.