First dibs: Retail gets its chance to buy NYC's $1B of BARBs

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Retail buyers got first dibs on New York City Transitional Finance Authority’s $1 billion of building aid revenue bonds that hit a supply starved municipal bond market on Monday.

Jefferies priced the TFA’s tax-exempt fixed rate bonds on the first day of a two-day retail order period before institutional pricing on Wednesday.

The TFA also intends to competitively sell $73 million of taxable fixed-rate bonds on Wednesday.

Sources said the deal was warmly received by buyers, with many maturities already sold out.

Proceeds from the BARB sales will be used to fund education capital projects and refund outstanding bonds.

Municipal bond buyers will welcome about $6.1 billion of new supply this week, comprised of $3.57 billion of negotiated deals and $2.49 billion of competitive sales. Average weekly volume so far this year has been around $4 billion. This week;s supply is on par with last year’s average weekly supply.

While demand for short-term paper is strong, the market overall is drowning in an overload of secondary market supply, as evidenced by $1 billion in bid wanted lists daily, according to Peter Block, managing director of credit strategy at Ramirez & Co.

"Muni demand generally remains strong due to out-performance in short-duration and the tax-exempt nature of the product, especially specialty retail demand, given the now limited deductibility of [state and local taxes] and despite fair-to-rich valuations for short paper," Block said in a weekly municipal report.

High tax states, like New York and California, with negative net supply demonstrate this behavior, as general market issuers in both of these states are fairly well bid, particularly inside 10 years, Block noted.

However, with so much secondary market volume clogging the market, municipals will "struggle to find a footing until the logjam is cleared, which likely means, in this case, that munis 10 years and out need to get cheaper before getting stronger," he added.

"The muni market overall appears stuck in a rut," he said. "We are now 10 weeks into 2018 and the market remains plagued by secondary market oversupply, partially from the Dec. 2017 deluge, but also from accounts liquidating and/or repositioning portfolios to a shorter duration posture from longer durations.

"Lack of investor sponsorship for maturities 10 years and out is contributing to the low turnover and dealers are still heavy with inventory, and are therefore generally reluctant to buy offerings maturing beyond 10 years," Block said.

Investor preference for shorter duration is rational, Block said, given concern over higher and faster inflation growth and adverse effects of a resulting steeper yield curve.

And more New York supply is on the way. On Tuesday, the Dormitory Authority of the State of New York will sell about $1.3 billion of bonds in five competitive sales.

Monday’s bond sale

Prior week's top underwriters
The top municipal bond underwriters of last week included Bank of America Merrill Lynch, Morgan Stanley, Citigroup, JPMorgan Securities and Jefferies, according to Thomson Reuters data.

In the week of March 4 to March 10, BAML underwrote $2.47 billion, Morgan Stanley $1.99 billion, Citi $1.22 billion, JPMorgan $418.1 million and Jefferies $372.9 million.
Previous session's activity
The Municipal Securities Rulemaking Board reported 38,056 trades on Friday on volume of $10.57 billion.

California, Texas and New York were the states with the most trades, with the Golden State taking 17.687% of the market, the Empire State taking 11.405% and the Lone Star State taking 10.383%.

Prior week's actively traded issues
Revenue bonds comprised 57.88% of new issuance in the week ended March 9, down from 58.35% in the previous week, according to Markit. General obligation bonds made up 36.72% of total issuance, up from 36.37%, while taxable bonds accounted for 5.40%, up from 5.28% a week earlier.
Some of the most actively traded bonds by type were from California and Oklahoma issuers.

In the GO bond sector, the California 3.625s of 2047 traded 145 times. In the revenue bond sector, the Oklahoma Development Financing Authority 5.5s of 2057 traded 64 times. And in the taxable bond sector, the Oklahoma DFA 5.45s of 2028 traded 70 times.

BAML: YTD muni issuance down 33.1%
Municipal bond issuance for the year-to-date totals $48 billion, down 33.1% from the same period last year, according to a report released Monday by the Bank of America Merrill Lynch.

For the year-to-date as of March 8, 23.7% of the total issuance has been related to refundings versus 52.2% in the same period in 2017, BAML Municipal Research Strategist Sophie Yan wrote in the report.

The ICE BAML U.S. Municipal Securities Index returned -1.381% for the year to date, outperforming both the ICE BAML Treasury Master Index and the ICE BAML U.S. Corporate Index which had total return of -2.047% and -2.560%, respectively.

The best year-to-date performance in munis is in the one- to three-year maturities and in the BBB-rated sector.

Treasury to sell $65B of 4-week bills
The Treasury Department said it will sell $65 billion of four-week discount bills Tuesday. There are currently $133.998 billion of four-week bills outstanding.

Treasury details Monday’s auctions
The Treasury Department auctioned $21 billion of 9-year 11-month notes with a 2 3/4% coupon at a 2.889% high yield, a price of 98.805633. The bid-to-cover ratio was 2.50. Tenders at the high yield were allotted 43.16%. All competitive tenders at lower yields were accepted in full. The median yield was 2.850%. The low yield was 2.781%.

Treasury also auctioned $28 billion of three-year notes with a 2 3/8% coupon at a 2.436% high yield, a price of 99.824555. The bid-to-cover ratio was 2.94. Tenders at the high yield were allotted 17.35%. All competitive tenders at lower yields were accepted in full. The median yield was 2.400%. The low yield was 2.320%.

Tender rates for the Treasury's latest 91-day and 182-day discount bills were higher, as the three-months incurred a 1.670% high rate, up from 1.660% the prior week, and the six-months incurred a 1.850% high rate, up from 1.830% the week before. Coupon equivalents were 1.700% and 1.893%, respectively. The price for the 91s was 99.577861 and that for the 182s was 99.064722.

The median bid on the 91s was 1.640%. The low bid was 1.620%. Tenders at the high rate were allotted 90.27%. The bid-to-cover ratio was 3.13.

The median bid for the 182s was 1.830%. The low bid was 1.800%. Tenders at the high rate were allotted 4.26%. The bid-to-cover ratio was 3.67.

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 Vanessa Kim at 212-803-8474 for more information.

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Primary bond market Secondary bond market State of California State of Texas State of New York New York State Dormitory Authority New York City Transitional Finance Authority