While the short end of the municipal yield curve remains rich relative to equities, U.S. Treasury bonds, and corporate bonds, munis maturing in more than three years have become cheaper, creating an opportunity to add some yield to portfolios, according to J.R. Rieger, principal at Triangle Park Capital Markets Data.
“While the wave of new issue supply ebbs any further rise in [Treasury yields] will take munis cheaper as well,” he wrote in the Rieger Report released Monday.
Excluding the short end, yields of double-A and higher-rated municipals are still attractive for higher tax bracket market participants on a relative value basis to corporate bonds, he said in the report, entitled Municipal Bonds vs. U.S. Treasuries & Corporate Bonds.
In addition, Rieger said high yield municipal bond exchange traded funds still appear attractive. He cited the VanEck Vectors High Yield Municipal ETF and SPDR Nuveen S&P High Yield Municipal Bond ETF as examples. The Van Eck fund, according to Rieger, has an SEC 30-day yield of 4.07%, which is a taxable equivalent yield of 6.46% as of Sept. 21 for taxpayers in a 37% federal tax rate; meanwhile the Nuveen S&P fund has a SEC 30-day yield of 3.89% and taxable equivalent yield of 6.17%, as of Sept. 20.
Meanwhile, other analysts are finding value elsewhere.
Despite underperformance of shorter maturities last week, municipals largely maintained fair valuations versus Treasuries, according to Peter Block, managing director of credit strategy at Ramirez & Co. Only the 30-year ratio continued to read cheap on a one-year basis at 100.5%, he said.
“The fair valuations and absolute yield levels relative to historical indicate to us that munis should remain attractive for the retail investor as the last remaining — and relatively liquid tax shelter,” Block wrote in a Monday market comment. “Munis inside 10 years continue to benefit from strong retail demand due to flatness of the MMD curve, while intermediate and long-dated maturities -- in 15 years and beyond -- generally have weaker sponsorship due to lower bank and insurance company participation following tax reform.”
Block said valuations would have to to get cheaper in the 15- to 30-year part of the curve to entice investors to support longer duration, given the still very flat spread of only 130 basis points between MMD two-year and 30-year bonds.
“For now, forward Treasury rates imply further flattening of 2s 30s in one year, consistent with continued good — but not robust — U.S. and global economic growth and several additional Fed rate hikes,” Block added.
“Given this mildly negative forecast for rates and projected lower total returns across fixed-income generally, we think it makes sense to pare back credit risk and improve credit quality into ‘AA’ or better general market names," he said. "We particularly like selling muni high yield into current market strength to capture gains at this time, as we think bonds in this sector are vastly overbought at a spread of about 162 basis points.”
The spread has averaged 279 basis points since January 2016, he noted. “To the extent that credit sensitive sectors, including high yield, were to experience fund outflows, even a small amount of forced selling could adversely widen the ultra-tight spreads, resulting in further outflows and ultimately negative returns,” Block added.
Primary market
A slim supply slate awaits municipal bond buyers ahead of the Federal Open Market Committee’s monetary policy meeting and quarter end wrap-up. This week’s volume is estimated at $3.1 billion, consisting of $1.87 billion of negotiated deals and $1.26 billion of competitive sales.
On Monday, Bank of America Merrill Lynch priced the Dormitory Authority of the State of New York’s $137.77 million of Series 2018A revenue bonds.
The deal is rated Aa3 by Moody's Investors Service and A-plus by Fitch Ratings Agency.
In the competitive arena on Tuesday, Wisconsin is slated to competitively sell the biggest deal of the week when it offers $260.565 million of Series 2018B general obligation bonds.
Proceeds of the sale will be used for various governmental purposes.
Municipals officials are the financial advisors while Foley & Lardner is the bond counsel.
Greensboro, N.C., is selling $145.76 million of GO public improvement bonds consisting of $135.36 million of Series 2018B tax-exempts and $10.4 million of Series 2018A taxables.
Proceeds of the sale will be used to redeem certain outstanding BANs of the Issuer and to finance various capital improvements.
The financial advisors are DEC Associates with the Local Government Commission; the bond counsel is Womble Bond.
In the short-term competitive sector, Milwaukee will be selling $180 million of Series2018M10 school revenue anticipation notes.
The financial advisor is PFM Financial Advisors and the bond counsel are Katten Muchin and Hurtado Zimmerman.
The Palm Beach County School District is selling $115 million of Series 2018 tax anticipation notes.
The financial advisor is PFM Financial Advisors; the bond counsel is Greenberg Traurig.
In the negotiated sector on Tuesday, PNC Capital Markets is set to price the Ohio Higher Educational Facilities Commission’s $113.735 million of Series 2018 hospital revenue bonds for the University Hospital Health System.
Raymond James & Associates is set to price the New Orleans Aviation Board’s $109.24 million of special facilities revenue bonds and refunding bonds on Tuesday.
Monday's bond sale
New York
Prior week's top underwriters
The top municipal bond underwriters of last week included Citigroup, Bank of America Merrill Lynch, Wells Fargo Securities, Robert W. Bard & Co., and JPMorgan Securities, according to Thomson Reuters data.
In the week of Sept. 16 to Sept. 22, Citi underwrote $2.6 billion, BAML $1.4 billion, Wells $696.2 million, Robert W. Baird $318.3 million and JPMorgan $301.6 million.
Bond Buyer 30-day visible supply at $5.46B
The Bond Buyer's 30-day visible supply calendar increased $26.2 million to $5.46 billion for Monday. The total is comprised of $2.0 billion of competitive sales and $3.46 billion of negotiated deals.
Secondary market
Municipal bonds were weaker on Monday, according to a late read of the MBIS benchmark scale. Benchmark muni yields rose as much as one basis point in the one- to 30-year maturities.
High-grade munis were also weaker, with yields calculated on MBIS' AAA scale rising as much as one basis point across the curve.
Municipals were weaker on Municipal Market Data’s AAA benchmark scale, which showed the yield on the 10-year muni general obligation rising by two basis points while the yield on 30-year muni maturity gained one basis point.
Treasury bonds were weaker as stock prices traded lower.
On Monday, the 10-year muni-to-Treasury ratio was calculated at 84.7% while the 30-year muni-to-Treasury ratio stood at 100.9%, 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 36,265 trades on Friday on volume of $9.76 billion.
California, New York and Texas were the municipalities with the most trades, with Golden State taking 15.103% of the market, the Empire State taking 12.168% and the Lone Star State taking 11.023%.
Prior week's actively traded issues
Revenue bonds comprised 56.65% of total new issuance in the week ended Sept. 21, down from 56.73% in the prior week, according to
Some of the most actively traded munis by type in the week were from Texas, California and Puerto Rico issuers.
In the GO bond sector, the Hidalgo County, Texas, 4s of 2043 traded 42 times. In the revenue bond sector, the Long Beach, Calif., 5s of 2020 traded 54 times. And in the taxable bond sector, the Puerto Rico Government Development Bank 5s of 2023 traded 18 times.
Treasury auctions $37B of 2-year notes
The Treasury Department Tuesday auctioned $37 billion of two-year notes with a 2 3/4% coupon at a 2.829% yield, a price of 99.847531.
Tenders at the high yield were allotted 44.96%. The bid-to-cover ratio was 2.44. The median yield was 2.800%. The low yield was 2.700%.
The two-year notes are dated Oct. 1 and are due on Sept. 30, 2020.
Treasury sells discount rate bills
Tender rates for the Treasury Department's latest 91-day and 182-day discount bills were higher, as the $48 billion of three-months incurred a 2.180% high rate, up from 2.125% the prior week, and the $42 billion of six-months incurred a 2.320% high rate, up from 2.290% the week before.
Coupon equivalents were 2.223% and 2.380%, respectively. The price for the 91s was 99.448944 and that for the 182s was 98.827111.
The median bid on the 91s was 2.160%. The low bid was 2.130%. Tenders at the high rate were allotted 11.22%. The bid-to-cover ratio was 3.01.
The median bid for the 182s was 2.310%. The low bid was 2.300%. Tenders at the high rate were allotted 88.04%. The bid-to-cover ratio was 3.28.
Treasury to offer $40B of 4-week bills
The Treasury Department said Monday it will sell $40 billion of four-week discount bills on Tuesday.
The bills have an issue date of April 26 and are due on Oct. 25.
There are currently $93.007 billion of four-week bills outstanding.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
