Investors are flush with cash, but they will have less to choose from in the municipal bond market this week.
Anticipated new issuance should dip at a time when demand for tax-exempts is outpacing supply and muni yields are steadily dropping. Potential new issuance for this week should total an estimated $5.17 billion, against $7.97 billion last week. Investors anticipate no real bellwether or especially large deals this week.
But with absolute yields so low — the benchmark triple-A 10-year yield sits at 1.88% — investors are looking everywhere to put cash to work in credits that offer some yield, according to Duane McAllister, portfolio manager of the BMO intermediate tax-free bond fund at BMO Funds.
“The focus for most investors is how they can put some extra yield on the books,” he said, noting that lower-rated issues tended to do very well last week. “Anything with a little bit of extra yield seemed to do very, very well. I don’t see why that trend wouldn’t continue.”
The negotiated calendar houses the week’s largest deals, but none weighs in as much as $500 million.
Leading the pack, JPMorgan is expected to price $464.2 million of Ohio hospital revenue bonds for the Cleveland Clinic Health System Obligated Group. The bonds are rated Aa2 by Moody’s Investors Service and AA-minus by Standard & Poor’s. The credits are expected to be offered to retail on Tuesday, while institutions will have their chance Wednesday. They should arrive structured as serials, maturing in 2016 through 2038.
Loop Capital Markets is expected to price $293.9 million of Dallas-Fort Worth International Airport joint revenue refunding and improvement bonds not subject to the alternative minimum tax.
The bonds are rated A1 by Moody’s and A-plus by Standard & Poor’s and Fitch Ratings. The bonds, expected on Thursday, should arrive as both serials and terms, maturing from 2013 through 2031, as well as in 2045.
Jefferies & Co. is expected to price $371.2 million of Houston general obligation taxable and tax-exempt public improvement refunding bonds. The bonds are rated AA by Fitch. They are expected to arrive structured as serials. The taxable series, $101.6 million, matures from 2013 through 2018; the tax-exempt series, $269.6 million, matures from 2017 through 2042.
Morgan Stanley is expected to price $268.5 million of Allen County, Ohio, hospital facilities revenue refunding and improvement bonds for the Catholic Health Partners. The bonds are rated A1 by Moody’s and AA-minus by Standard & Poor’s and Fitch.
A retail order period is anticipated for Wednesday. Institutions can participate on Thursday. The bonds should arrive structured as serials, maturing from 2019 through 2042.
The market shouldn’t have any issues with absorbing the week’s supply, said Rob Williams, director of income planning at Schwab Center for Financial Research at Charles Schwab.
“The composition of the calendar next week is relatively small, and there aren’t too many large deals that have broad national appeal; they’re fairly provincial in nature,” he said. “So that, coupled with some improvement in the Treasury market, would lead us to think that demand is going to be more than adequate to continue to support the market, based on the supply for [this] week.”
On the competitive side of the ledger, the New Jersey Economic Development Authority is expected to auction $434.6 of school facilities construction refunding bonds in both taxable and tax-exempt series. They are rated A1 by Moody’s and A-plus by S&P and Fitch. The tax-exempt bonds, which should reach the market on Tuesday, are expected to come structured as serials, maturing from 2015 through 2027.