Retail waiting for higher rates

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Retail municipal bond buyers were staying on the sidelines Wednesday as continuing market volatility curbed their enthusiasm for bonds now even as the vision of higher rates whetted their appetite for future volume.

Institutions were circulating bid-wanted lists to sellers and offerings lists to buyers were making the rounds among the desks. But there seemed to be little impetus to get trades done.

Retail investors’ demand for higher rates in the near future is keeping them out of the market now, according to market sources, who cited mom and pop's growing impatience with the current levels as contributing to the lull in trading activity this week.

The mood in the municipal market on Wednesday afternoon was “very, very quiet,” said a New Jersey trading, who added that a general lack of trading following what he called “a wacky couple of days with the movement in equities.”

“There is very little retail participation in this market right now,” he said. “We didn’t see a lot of trading. The problem we have is retail thinks interest rates are going higher and we’re seeing a lot of our people sitting on sidelines waiting,” he explained. “Clients are tired of seeing 3% yields and people are waiting for 4%.”

One New York trader said that the biggest thing he noticed about the market on Wednesday was that the market was not giving back any of the gains of the previous day, despite a lower Treasury market.

"Going into yesterday, I had a feeling munis were going to benefit from similar flight-to-quality that we had seen into Treasuries late Monday as equities were selling off," the trader said on Wednesday. "In times of higher volatility and diminished liquidity money tends to shift to safety and quality. Munis having cheapened over the past few weeks were the perfect beneficiary of the flight-to-quality."

A Mid-Atlantic trader said that there seemed to still be a fear that some traditional holders of munis -- insurance companies and banks -- who collectively hold about 40% of the market, may be sellers.

"Muni prices are weaker this year on that concern," he said.

The New Jersey trader said 2017 was almost exclusively an institutional market where new issues were structured for mutual bond funds with the 5%-plus coupons they prefer.

“In 2018, this market is going to look to reconnect with retail, and on the muni side that means we need higher interest rates,” he said. “In 2018, munis are going to need retail and it’s going to be tougher in the institutional market.”

Due to tax reform and the lowering of corporate rates, a lot of the large, traditional institutional buyers of municipal securities, such as banks and property and casualty companies, may be absent, the trader said.

“We’re cheering for higher interest rates,” the trader said “I think we need them and it will mean more business.”

Primary market
Goldman Sachs priced Harris County, Texas’ $567.2 million of Series 2018A senior lien toll road revenue refunding bonds on Wednesday.

The issue was priced to yield from 1.45% with a 5% coupon in 2019 to 3.41% with a 4% coupon in 2038. A 2043 term bond was priced as 5s to yield 3.17% while a 2048 term was priced as 4s to yield 3.62%.

The deal is rated Aa2 by Moody’s and AA by Fitch.

Morgan Stanley priced the Los Angeles Department of Water and Power’s $231 million of Series 2018A water system revenue bonds for retail investors on Wednesday ahead of the institutional pricing on Thursday.

The issue was priced as 5s to yield from 1.83% in 2023 to 2.98% in 2039. Yields on the serial scale ranged from seven basis points below the comparable MMD triple-A security to 15 basis above the MMD read.

A 2043 term bond was priced as 5s to yield 3.02%, about 15 basis points above the MMD scale, and a 2048 term was priced as 5s about 15 basis points above the comparable MMD maturity.

The deal is rated Aa2 by Moody’s Investors Service, AA-plus by S&P Global Ratings and AA by Fitch Ratings.

Since 2008, LADWP has sold about $13 billion of debt, with the most issuance occurring in 2010 when it offered $2.06 billion of bonds. It sold the least amount of bonds in that time frame in 2008, when it sold $550 million of debt.
Raymond James & Associates priced the Sherman Independent School District, Texas’ $121.46 million of Series 2018A unlimited tax school building bonds.

The issue was priced to yield from 2% with a 3% coupon in 2023 to 3.10% with a 5% coupon in 2041; a 2045 term bond was priced as 5s to yield 3.14%.

The deal, which is insured by the Permanent School Fund guarantee program, is rated triple-A by Moody’s and S&P.

Bank of America Merrill Lynch received the official award on the Connecticut Housing Finance Authority’s $118.1 million of Series 2018A housing mortgage finance program bonds. The deal is rated triple-A by Moody’s and S&P.

In the competitive arena, the University System of Maryland sold $115 million of Series 2018A auxiliary facility and tuition revenue bonds.

UBS Financial won the bonds with a true interest cost of 3.0557%. The issue was priced to yield from 1.40% with a 3% coupon in 2019 to 3.444% with a 3.375% coupon in 2038.

The deal is rated Aa1 by Moody’s and AA-plus by S&P and Fitch.

The city and county of Denver sold $97 million of Series 2018 wastewater enterprise revenue bonds.

Citigroup won the bonds with a TIC of 3.3418%. The deal is rated Aa1 by Moody’s and AAA by S&P.

Previous session's activity
The Municipal Securities Rulemaking Board reported 43,821 trades on Tuesday on volume of $10.27 billion. California, Texas and New York were the three states with the most trades on Tuesday, with the Golden State taking 12.764% of the market, the Empire State taking 12.026% and the Lone Star State taking 9.893%.

Janney looks at ratios
On Wednesday, the 10-year muni-to-Treasury ratio was calculated at 84.0% compared with 85.6% on Tuesday, while the 30-year muni-to-Treasury ratio stood at 94.3% versus 96.0%, according to MMD.

In its latest market commentary publish on Wednesday, Janney takes a look at municipal to Treasury ratios and finds they can be a useful relative value indicator, measuring high-grade tax free bond yields against Treasury yields.

Alan Schankel, managing director at Janney, explains that if a 37% federal bracket investor (40.8% including 3.8% Medicare Investment Tax) can earn a 3.00% tax free yield when Treasuries yield 4.00% (3% divided by 4% = 75% ratio), the investors will come out ahead on an after tax basis since the 4.00% corporate yield drops to 2.37% after federal income taxes are considered.

Janney says that in recent months, muni to Treasury ratios have been volatile, with the 10-year rising to 94% just after Thanksgiving as worries about December supply led to municipal underperformance. After dropping in December and into early January, ratios have now moved higher again.

“For most investors, the choice is rarely between a AAA municipal bond and a same maturity U.S. Treasury bond,” Schankel says. “A more realistic ratio is derived by comparing an A-rated tax free yield to an A-rated corporate bond yield (10-year maturities), which is reflected in the graph to the right along with ratios substituting the taxable equivalent yield (TEY - the yield need on a taxable bond to equal a given tax fee yield after taxes are considered) in place of the tax free rate. On an after tax basis, 32% and 37% bracket investors can lock in yields that are 130% and 140% of same maturity corporate bonds.”

Treasury sells $24B 10-year notes
The Treasury Department auctioned $24 billion of 10-year notes with a 2 3/4% coupon at a 2.811% high yield, a price of 99.471446.

The bid-to-cover ratio was 2.34. The median yield was 2.750%. The low yield was 2.660%.

Tenders at the high yield were allotted 5.76%. All competitive tenders at lower yields were accepted in full.

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 Los Angeles Department of Water & Power Harris County