This week’s trading volume indicates there will be robust demand for municipal bonds as the fourth quarter approaches, according to Morgan Stanley Wealth Management.
Not only are this week’s trades above this year’s average but the volume is also above long-term historical averages as well, MSWM’s Executive Director Matthew Gastall and Vice President Monica Guerra said in an interview Thursday.
“From a trading perspective it has been a healthy return-from-summer week for the market,” said Gastall, noting that both par value and total number of municipal trades have surpassed yearly and historical averages.
On Wednesday, the total par value traded was $12.3 billion, versus the $11.5 billion year to date daily average for 2018, and the $10.9 billion long-term historical average dating back to Jan. 1, 2010, Gastall said, citing Bloomberg and Municipal Securities Rulemaking Board data.
Meanwhile, there was just over 42,000 trading transactions on Wednesday, according to Gastall, who said that figure was above this year’s approximate 40,000 daily average, and above the approximately 39,000 long-term daily average over the same nine-year time period.
“The market really has benefited from healthy reinvestment demand and healthy trading flows, all while chasing lower supply,” and amid mostly benign credit conditions, Gastall added.
Lower duration, high-quality short maturities are what Gastall and Guerra recommend for the best value in the current market due to the current flat yield curve amid future rate hike expectations.
“We are keeping an eye on the short end of the curve,” Gastall said, noting that a potential continued flattening of the curve could see yields rise, but investors should be wary of seeking the appropriate entry point given the lack of compensation for added risk in the current market.
He said the 10- to 11-year slope of the yield curve is currently where municipals “make more sense” for investors in higher tax brackets.
While there has been some steepening, there is a “marginal” amount of compensation for taking risks in the intermediate and long end of the municipal yield curve or in the lower-quality credit spectrum, he noted.
Meanwhile, the market is also paying close attention to and looking for direction from what the Federal Open Market Committee will do at its next meeting Sept. 25 and Sept. 26, Gastall noted.
The pipeline of new issuance “appears to be healthy,” Gastall said, judging by the 30-day visible supply of approximately $7.76 billion combined as of Thursday.
“We are focusing on watching the Fed and influxes of supply,” he added.
He said he remains short-term focused due to the many catalysts for potential fixed income weakness and rising rates led by inflationary and economic impacts, mid-term elections, and the possibility of an infrastructure package to promote economic stimulus -- and any potential Federal borrowing to pay for that stimulus.
Guerra noted the presence of some infrastructure deals in this week’s market, but said although those are not tied to the Trump administration’s intended infrastructure efforts, she expects an increase in issuance in the form of P3s and private activity bonds should the White House act on its plan in the near future.
“We are watching rates right now, as well as any credit and spread widening,” he explained.
“The possibility of trade tensions and the mid-terms could cause some strength, so specifically we are cautious on the short end with the Fed Funds rate hikes and the possibility of an increase in issuance as we get into the fall,” he explained.
Gastall said the Treasury market is also on his radar screen.
“If Treasury yields rise, it’s hard to imagine we will stay put and get richer – especially on short end,” he said.
Las Vegas Convention deal sells
Municipal bonds were mixed around unchanged on Thursday as a big sale out of Nevada hit the screens.
Primary market
RBC Capital Markets priced the Las Vegas Convention and Visitors Authority’s $500 million of Series 2018B convention center expansion revenue bonds.
Bond proceeds will fund some of the authority's phase two expansion project aimed at adding 1.4 million square feet to America's busiest convention center. The project is expected to be completed by 2021. A phase three project is also being planned.
JNA Consulting Group and Montague DeRose are co-financial advisors while Stradling is bond counsel. The deal is rated Aa3 by Moody’s Investors Service and A-plus by S&P Global Ratings.
RBC also received the official award on the Poudre School District R-1 of Larimer County Colo.’s $375 million of Series 2018 general obligation bonds.
The deal is backed by the Colorado state intercept program and rated Aa2 by Moody’s and AA-plus by Fitch Ratings.
JPMorgan priced the
In the competitive arena, the Fort Mill School District No. 4 of York County, S.C., sold $100 million of Series 2018B GOs. Proceeds will be used to defray the costs of capital improvements to school district facilities.
JPMorgan won the bonds with a true interest cost of 3.6259%. The sale had been delayed from Tuesday.
The financial advisor is Compass Municipal Advisors; the bond counsel is Haynsworth Sinkler. Based on the state’s statutory enhancement program and intercept provisions, the deal is rated Aa1 by Moody’s and AA by S&P.
Thursday’s bond sales
Nevada
South Carolina
Michigan
Colorado
Bond Buyer 30-day visible supply at $7.77B
The Bond Buyer's 30-day visible supply calendar decreased $1.92 billion to $7.77 billion for Wednesday. The total is comprised of $2.52 billion of competitive sales and $5.25 billion of negotiated deals.
Money market funds see inflows again
Tax-free municipal money market fund assets increased $392 million, raising their total net assets to $130.83 billion in the week ended Sept. 10, according to the Money Fund Report, a service of iMoneyNet.com.
The modest inflow is a slight increase from last week’s $313.6 million and makes it four straight weeks of inflows, after seeing back-to-back billion-dollar outflows.
The average, seven-day simple yield for the 199 tax-free reporting funds dropped to 1.03% from 1.08%.
Taxable money-fund assets increased by $16.29 billion in the week ended Sept. 11, bringing its total net assets to $2.725 trillion. The average, seven-day simple yield for the 831 taxable reporting funds rose to 1.62% from 1.60% last week.
Overall, the combined total net assets of the 1,030 reporting money funds increased by $16.69 billion to $2.856 trillion in the week ended Sept.11.
Secondary market
Municipal bonds were mixed on Thursday, according to a late read of the MBIS benchmark scale. Benchmark muni yields rose less than one basis point in the one- to seven-year, 14- to 27-year and 30-year maturities, fell less than a basis point in the eight- to 13-year maturities and remained unchanged in the 28- and 29-year maturities.
High-grade munis were also mixed, with yields calculated on MBIS' AAA scale rising less than one basis point in the one- to six-year and 17- to 30-year maturities, falling less than a basis point in the seven- to 13-year maturities and remaining unchanged in the 14- to 16-year maturities.
Municipals were steady on Municipal Market Data’s AAA benchmark scale, which showed the yield on both the 10-year muni general obligation and the yield on 30-year muni maturity remaining unchanged.
Treasury bonds were stronger as stock prices traded higher.
On Thursday, the 10-year muni-to-Treasury ratio was calculated at 85.3% while the 30-year muni-to-Treasury ratio stood at 101.3%, 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 40,516 trades on Tuesday on volume of $9.82 billion.
California, Texas and New York were the municipalities with the most trades, with Golden State taking 14.352% of the market, the Lone Star State taking 13.435% and the Empire State taking 11.478%.
ICI: Long-term muni funds saw $4M inflow
Long-term tax-exempt municipal bond funds saw an inflow of $4 million in the week ended Sept. 5, the Investment Company Institute reported.
This followed an inflow of $273 million into the tax-exempt mutual funds in the week ended Aug. 29 and inflows of $531 million, $662 million, $723 million, $163 million, $600 million, $1.765 billion, $1.028 billion, $356 million and $525 million in the nine prior weeks.
Taxable bond funds saw an estimated inflow of $3.524 billion in the latest reporting week, after seeing an inflow of $4.141 billion in the previous week.
ICI said the total estimated outflows to long-term mutual funds and exchange-traded funds were $4.184 billion for the week ended Sept. 5 after inflows of $2.071 billion in the prior week.
Treasury announces auction details
The Treasury department on Thursday announced details of its upcoming auctions:
- $23 billion of nine-year 10-month 3/4% TIPs selling on Sept. 20;
- $42 billion of 182-day bills selling on Sept. 17; and
- $48 billion of 91-day bills selling on Sept. 17.
Treasury sells $15B re-opened 30-year bonds
The Treasury Department Thursday auctioned $15 billion of 29-year 11-month bonds with a 3% coupon at a 3.088% high yield, a price of 98.286448. The bid-to-cover ratio was 2.34.
Tenders at the high yield were allotted 79.43%. The median yield was 3.050%. The low yield was 2.688%.
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.
