Puerto Rico bonds rally; municipals mixed ahead of small slate

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Puerto Rico bonds rallied Monday in a mixed municipal market as a revised fiscal plan projected a bigger surplus.

Puerto Rico munis strengthen
The Puerto Rico Oversight Board published a revised five-year fiscal plan Monday that projects an improved debt position through 2023.

In active trading on Monday, the Puerto Rico Commonwealth Series 2014A 8% general obligation bonds of 2035 were trading at a high price of 60.875 cents on the dollar, compared with 54.75 cents on Thursday, according to the Municipal Securities Rulemaking Board’s EMMA website. Trading volume totaled $89.8 million in 39 trades compared with $6.07 million in four trades on Thursday.

The Commonwealth’s Series 2012A general obligation public improvement refunding 5s of 2012 were trading at a high of 61.75 cents on the dollar compared with 52.155 cents on Friday. Trading volume totaled $78.53 million in 35 trades compared with $260,000 in 10 trades on Friday.

The Commonwealth’s Series 2012A GO public improvement refunding 5.125s of 2037 were trading at a high price of 61.3 cents on the dollar compared with 52.381 cents on Thursday. Trading volume totaled $8.84 million in 17 trades compared with $40,000 in two trades on Thursday.

The Puerto Rico Building Authority’s Series 2012U government facilities revenue refunding 5.25s of 2042 were trading at a high price of 60.75 cents on the dollar compared with 52.5 cents on Friday, according to EMMA. Trading volume totaled $12.14 million in 14 trades compared with $400,000 in four trades on Friday.

Primary market
About $5.9 billion of volume is forecast for the week, with a slate composed of $4 billion of negotiated deals and $1.9 billion of competitive sales.

JPMorgan Securities is set to price the Tarrant County Cultural Educational Facilities Finance Corp., Texas’ $447.32 million of Series 2018AB revenue and refunding bonds for Christus Health on Tuesday. Also on Tuesday, JPMorgan is set to price for Christus Health a $339.02 million taxable corporate CUSIP deal.

The deals are rated A1 by Moody’s Investors Service and A-plus by S&P Global Ratings.

Citigroup is expected to price the Hillsborough County Aviation Authority, Florida’s $402 million of revenue bonds for the Tampa International Airport.

The deal consists of Series 2018E bonds subject to the alternative minimum tax and Series 2018F non-AMT bonds, rated Aa3 by Moody’s, AA-minus by S&P and Fitch Ratings and AA by Kroll Bond Rating Agency; and Series 2018 subordinate bonds, rated A1 by Moody’s, A-plus by S&P and Fitch and AA-minus by Kroll.

In the competitive arena on Tuesday, Clark County, Nevada, will sell $450 million of general obligation bonds in two sales consisting of $300 million of Series 2018B limited tax transportation improvement bonds and $150 million of Series 2018 limited tax park improvement bonds additionally secured by pledged revenues.

The financial advisors are Hobbs, Ong & Associates and PFM Financial Advisors; the bond counsel is Sherman & Howard.

Proceeds of the 2018B bonds will be used to finance a portion of the costs of certain improvements to transportation facilities within the Strip Resort Corridor; proceeds of the 2018 bonds will be used to finance certain park projects. The deals are rated Aa1 by Moody’s and AA-plus by S&P.

Ohio will sell $162 million of Series 2018A GO infrastructure improvement bonds on Tuesday.

Proceeds will be used to financing the cost of public infrastructure capital improvement projects of local subdivisions in the state. The financial advisor is PFM Financial Advisors; the bond counsel are Roetzel & Andress and Squire Sanders. The deal is rated Aa1 by Moody’s and AA-plus by S&P and Fitch.

Prior week's top underwriters
The top municipal bond underwriters of last week included Bank of America Merrill Lynch, Ramirez & Co., Raymond James & Associates, Goldman Sachs and Wells Fargo Securities, according to Thomson Reuters data.

In the week of Oct. 14 to Oct. 20, BAML underwrote $2.5 billion, Ramirez $1.3 billion, Raymond James $1.1 billion, Goldman $850.6 million and Wells Fargo $759.1 million.
Bond Buyer 30-day visible supply at $8.01B
The Bond Buyer's 30-day visible supply calendar increased $309.1 million to $8.01 billion for Tuesday. The total is comprised of $2.86 billion of competitive sales and $5.15 billion of negotiated deals.

Secondary market
Municipal bonds were mixed on Monday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell less than one basis point in the one- to four-year, 11- to 18-year and 28- to 30-year maturities, rose less than a basis point in the six- and seven-year, 10-year and 19- to 27-year maturities and remained unchanged in the five-year, and eight- and nine-year maturities.

High-grade munis were also mixed, with yields calculated on MBIS' AAA scale falling less than one basis point in the one- to nine year, 12- to 19-year and 25- to 30 year maturities, rising less than a basis point in the 10-yeqar and 22- and 23-year maturities and remaining unchanged in the 11-year, 20- to21-year and 24-year maturities.

Municipals were mixed on Municipal Market Data’s AAA benchmark scale, which showed the yield on the 10-year muni general obligation remaining unchanged while the yield on 30-year muni maturity fell one basis point.

Treasury bonds were weaker as stocks traded higher.

On Monday, the 10-year muni-to-Treasury ratio was calculated at 85.4% while the 30-year muni-to-Treasury ratio stood at 100.2%, 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.

Prior week's top FAs
The top municipal financial advisors of last week included Public Resources Advisory Group, PFM Financial Advisors, Hilltop Securities, Raymond James and Acacia Financial Group, according to Thomson Reuters data.

In the week of Oct. 14 to Oct. 20, PRAG advised on $2.6 billion, PFM $1.9 billion, Hilltop $1.6 billion, Raymond James $827.5 million and Acacia $706.9 million.
Previous session's activity
The Municipal Securities Rulemaking Board reported 35,006 trades on Friday on volume of $10.19 billion.

New York, California and Texas were the municipalities with the most trades, with the Empire State taking 15.616% of the market, the Golden State taking 13.207%, and the Lone Star State taking 11.588%.

Prior week's actively traded issues
Revenue bonds comprised 57.70% of total new issuance in the week ended Oct. 19, up from 56.97% in the prior week, according to Markit. General obligation bonds made up 37.44%, down from 37.83% while taxable bonds accounted for 4.86%, down from 5.20%.

Some of the most actively traded munis by type in the week were from New York, Utah and Puerto Rico issuers.

In the GO bond sector, the New York City zeros of 2042 traded 24 times. In the revenue bond sector, the Salt Lake City Airport 5s of 2048 traded 64 times. And in the taxable bond sector, the Puerto Rico Government Development Bank 5s of 2023 traded 11 times.
Sound Strategies
Despite recent volatility, there will be opportunities for value in the municipal bond market fueled by a combination of this year’s equity market performance, recent interest rate weakness, seasonally low bond redemptions, and the likelihood of healthy autumn supply throughout the coming months, according to Morgan Stanley Wealth Management analysts Matthew Gastall and Monica Guerra.

“Aside from recent interest rate volatility, it’s now important to stress that primary market supply should remain healthy until the holidays, while redemption-driven reinvestment demand may wane — albeit modestly,” the analysts wrote in an Oct. 18 monthly municipal report.

“This year’s tax-loss swap season may also be a busy one due to recent interest rate movements and select equity market gains,” Gastall, executive director, and Guerra, vice president, added.

In light of the future dynamics, the analysts suggest investors focus on three objectives including continuing to closely monitor Treasuries for guidance; watching for periods of interest rate stability, then cautiously and gradually considering entry points and early tax-loss swaps; and maintaining a household focus on front-end, high-quality securities -- both taxable and tax-exempts.

They stressed the importance of monitoring Treasuries.

“Whether such a practice seems relevant or not, tax-exempt investors must more closely observe macroeconomic developments throughout the global climate to evaluate the now heightened sensitivity of their own asset class,” they wrote.

“This continues to be especially important on the short end of the yield curve where relative-value ratios trade either at, or below, their long-term historical averages.”

Investors considering entry points should be aware seven-year yields are hovering near seven-year highs, and the analysts said it may be a good opportunity to gradually add some exposure — preferably during periods when new-issue volume creates pockets of under-performance. “However, investors should also seek to maintain the appropriate exposures to cash due to the possibility of future fixed income weakness,” Gastall and Guerra warned.

Tax loss swaps are also a possibility for suitable investors can hedge select equity market gains to bolster their portfolios.

“Tight credit spreads and a flatter yield curve further enable household participants to increase credit quality and even shorten final maturities,” they wrote. “Such exercises may prove beneficial if recent interest rate weakness is indicative of a broader trend and/or credit spreads eventually widen if economic progress is currently peaking.”

“We believe household investors should focus on high-quality, front-end securities while current levels of additional risk compensation are low,” the analysts wrote, noting that municipal credit spreads and the yield curve currently hover near their tightest and flattest levels, respectively, in 10 years.

“This suggests that investors are earning less for risk-taking, and may also encounter price depreciation if the economy is in a late cycle and/or interest rates continue to rise,” they wrote.
Interim price fluctuations for bonds with shorter maturities caused by transitioning Fed rate hike expectations are often of lesser importance to buy-and-hold investors seeking earlier redemption dates, they pointed out.

Another strategy the analysts recommend is blending high-quality taxable counterparts on the very short end of the curve where yields have risen in Treasuries more than in municipals. High quality securities — diversified throughout different sectors — with above-market coupons and final maturities laddered under 11 years can help investors achieve this strategy, the analysts noted.

“We believe this approach provides a comfortable intermediary for household investors to earn yield without taking excessive risk,” they wrote. “The most recent interest rate movement is undoubtedly significant and deserves our full attention; however, the confluence of a number of important dynamics may also provide us with a period to complete some helpful work.”

As municipals have outperformed U.S. Treasuries throughout the last 19 months, that has suggested that tax exempts have had little choice but to follow the lead of any broader fixed income weakness, according to Gastall and Guerra.

“This dynamic is particularly relevant when the state and local government arena breaches thresholds where crossover investors shift their focus away from tax-exempt securities and toward taxable ones -- a vital connection that has helped to restore dislocations between the two markets for decades,” they wrote.

Catalysts that may have caused interest rates to rise include healthy economic progress, sticky but shifting inflationary expectations, transitioning monetary policy, favorable trade developments, among others.

Both the positive and negative repercussions of any future stimulus efforts, such as a federal infrastructure package or “Tax Reform 2.0,” they predicted, may also provide impetus for interest rates to rise. “Stimulus can incite a risk on sentiment where inflationary expectations accelerate due to the possibility of economic progress, while the financing methods of such initiatives can turn investors away from USTs due to Federal borrowing/creditworthiness concerns,” they wrote.

“Many of the catalysts have been, and continue to be, quite prevalent in the current environment,” they added.

The preservation of the municipal bond tax-exemption during tax reform, low new-issue supply, healthy reinvestment demand, manageable personal income tax reductions, benign credit conditions, a flatter yield curve, and many other factors have all added to the “blue sky” environment of out-performance that municipals have experienced over the last 19 months, they noted.

Treasury to sell $40B 4-week bills
The Treasury Department said it will sell $40 billion of four-week discount bills Tuesday. There are currently $93.002 billion of four-week bills outstanding.

Treasury also said it will sell $25 billion of eight-week bills Tuesday.

Treasury auctions discount rate bills
Tender rates for Treasury's latest 91-day and 182-day discount bills were higher, as the $45 billion of three-months incurred a 2.300% high rate, up from 2. 270% the prior week, and the $39 billion of six-months incurred a 2.425% high rate, up from 2.415% the week before.

Coupon equivalents were 2.346% and 2.489%, respectively. The price for the 91s was 99.418611 and that for the 182s was 98.774028.

The median bid on the 91s was 2.280%. The low bid was 2.245%.

Tenders at the high rate were allotted 11.28%. The bid-to-cover ratio was 3.06.

The median bid for the 182s was 2.405%. The low bid was 2.380%.

Tenders at the high rate were allotted 50.52%. The bid-to-cover ratio was 3.13.

Gary Siegel contributed to this report.

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 Ziad Saba at 212-803-6079 for more information.

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Primary bond market Secondary bond market Tarrant County Cultural Education Facilities Finance Corp., TX Clark County Nevada State of Ohio State of Texas State of California State of New York City of New York, NY City of Salt Lake City, UT Government Development Bank for Puerto Rico
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