S.F. Airport deal hits some turbulence; CUSIP requests signal muni slowdown

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Bond buyers gave the big San Francisco airport deal a mixed reception on Thursday as municipal bonds were mostly stronger in secondary trading.

"Technicals are in favor of munis, but buyers are still cautious," said one trader. "The long-end has value, but corporate market disruption is probably causing a spillover effect."

Separately, CUSIP Global Services said requests for municipal identified dropped in December, indicating a possible near-term slowdown in issuance.

Primary market
On Thursday, JPMorgan Securities priced and repriced the city and county of San Francisco Airport Commission’s $1.65 billion of tax-exempt and taxable revenue and revenue refunding bonds.

The deal, which consists of bonds subject to the alternative minimum tax and non-AMT bonds, is rated A1 by Moody’s Investors Service and A-plus by S&P Global Ratings and Fitch Ratings.

Demand was seen for the non-AMT portion of the deal, according to some traders.

While there were unsold balances on the AMT bonds, the non-AMT demand for the 2023-2035 serials was the heaviest, according to a New York municipal manager.

Bonds with a 5% coupon were cut the most on the short end at seven basis points in 2023 to 1.59% and the least on the long end at two basis points in 2035 to 2.93% from the original pricing. Only one AMT maturity in 2049 with a 4% coupon had enough demand to see prices bumped by three basis points to 3.67% from the original scale, the manager said.

"The AMTs were in the +60 basis point range, but in general the deal was not that well subscribed at just a bit over one times," said one source who did not participate in the deal.

Barclays priced San Antonio, Texas’ $166.045 million of Series 2019A water system variable rate junior lien revenue bonds with no reserve funds.

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

Piper Jaffray priced the Illinois Finance Authority’s $130.205 million of Series 2019 revenue bonds for Memorial Health System.

The deal is rated A1 by Moody’s and AA-minus by S&P.

Bond sales

Click here for the San Francisco Airport Commission pricing

Click here for the Finance Authority sale

Click here for the San Antonio pricing

Bond Buyer 30-day visible supply at $7.47B
The Bond Buyer's 30-day visible supply calendar decreased $2.11 billion to $7.47 billion for Thursday. The total is comprised of $2.98 billion of competitive sales and $4.49 billion of negotiated deals.

CUSIP requests decline
Municipal CUSIP requests declined in December, according to a report released Thursday by CUSIP Global Services.

The aggregate total of all municipal securities, which includes municipal bonds, long-term and short-term notes, and commercial paper, fell 23.8% decrease from November.

There were a total of 1,152 new municipal requests in December. On a year-over-year basis, total municipal identifier request volume is down 12.7% through November, reflecting a significant slowdown in request volume in the first quarter of 2018.

Among top state issuers, CUSIPs for scheduled public finance offerings from Texas, New York, and California were the most active in November.

Muni money market funds flow in
Tax-free municipal money market fund assets increased $1.59 billion, raising their total net assets to $146.53 billion in the week ended Jan. 7, according to the Money Fund Report, a service of iMoneyNet.com.
The average seven-day simple yield for the 190 tax-free and municipal money-market funds dropped to 1.19% from 1.28% last week.

Taxable money-fund assets gained $34.03 billion in the week ended Jan. 8, bringing total net assets to $2.883 trillion.

The average, seven-day simple yield for the 805 taxable reporting funds rose to 2.07% from 2.04% last week.

Overall, the combined total net assets of the 995 reporting money funds gained $35.62 billion to $3.067 trillion in the week ended Jan. 8.

Secondary market
Municipal bonds were mostly stronger on Thursday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell as much as three basis points in the one- to 13-year and 16- to 27-year maturities, rose less than a basis point in the 14-year and 28- to 30-year maturities and were unchanged in the 15-year maturity.

High-grade munis were also mostly stronger, with yields calculated on MBIS' AAA scale falling as much as two basis points in the five- to 29-year maturities, rising as much as two basis points in the one- to four-year maturities and remaining unchanged in the 30-year maturity.

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 30-year muni maturity remaining unchanged.

“The broader muni curve is unchanged today along with the high yield and tobacco sectors,” ICE Data Services said in a Thursday market comment. “Taxables are as much as 1.3 basis points lower in yield in the three-year, with the six-month and 30-year maturities yielding 0.8 basis point more.”

Treasury bonds were mixed amid stock market volatility. The Treasury 30-year was yielding 3.045%, the 10-year yield stood at 2.728%, the five-year was at 2.559%, the two-year was at 2.573% while the Treasury three-month bill stood at 2.430%.

On Thursday, the 10-year muni-to-Treasury ratio was calculated at 82.0% while the 30-year muni-to-Treasury ratio stood at 99.9%, 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 46,849 trades on Wednesday on volume of $46.85 billion.

California, New York and Texas were the municipalities with the most trades, with the Golden State taking 14.828% of the market, the Empire State taking 12.981% and the Lone Star State taking 9.618%.

Muni weakness and mixed demand ahead
The political environment and Federal Reserve Board uncertainty, will lead to volatility in 2019, according to a report by Court Street Group Research.

Sharply divided and constantly changing views on the potential for a recession should lead to “rapidly changing perceptions regarding the outlook for Fed policy,” according to managing partner George Friedlander.

Other sources for volatility include potential pressures on municipal credits after a strong period in 2018, capped off by much stronger state budget trends, Friedlander noted in a Jan. 8 municipal perspective report.

According to the National Association of State Budget Officers, total state spending rose in fiscal 2018, exceeding $2 trillion for the first time, but in both fiscal 2018 and fiscal 2017, spending growth was below the 32-year NASBO survey historical average — not adjusted for inflation, Friedlander pointed out.

Meanwhile, state tax collections accelerated in fiscal 2018, increasing 6.2% compared to 2.5% growth in fiscal 2017, he wrote.

Friedlander added that transportation, Medicaid, and K-12 education all experienced strong spending growth from state funds in fiscal 2018, as did deposits to rainy day funds, which he referred to as good news for credit.

“Last year, states put a lot of their surplus into rainy day funds, which boosted those totals from 5.3% of general fund spending to 6.4%,” he said. Some one-time increases in revenues came from the acceleration of taxable revenue into 2017 by some individuals, according to Friedlander.

That, he noted, was a response to the then-impending “sharp reduction in deductibility of state and local taxes.”

Several sources of renewed pressure will surface, he reported. “Given a somewhat weaker economy, it seems unlikely that states will experience the dramatic increases in revenues that occurred in FY 2018.”

“We expect that, given the painful drop in the equity markets, with the Dow down about 7.4%, pension fund experiences are likely to come under some pressure,” Friedlander said in the report.

He also predicted the market could be in the early stages a transition toward broader differences in relative credit strength.

The forecast is supported by the fact that more communities are damaged by climate change both in terms of climate events and in terms of revenue generation as property values in affected communities weaken, according to Friedlander.

In addition, economic activity by large tech-based companies continues to be concentrated in technologically attractive communities, he added.

Although Friedlander is watching credit differentiation, he doesn’t expect it will occur quickly.

Meanwhile, elsewhere in the municipal market, Friedlander forecasts that demand will remain mixed in 2019.

“Demand by banks for municipals turned sharply negative in 2018 as their tax rate was cut to 21%, and as the cost of funding through consumers increased sharply,” Friedlander explained.

Going forward, he believes property and casualty and life insurance holdings “will likely increase only modestly, after a stronger 2018.”

“Direct retail remains mixed — mostly through separately managed accounts, with a 10-year maximum maturity, and we still wait for fund flows to continually turn positive after spending all of the fourth quarter of 2018 in negative territory,” Friedlander wrote.

He said he remains wary of mixed demand throughout this year — especially on the heels of collapsing supply in 2018.

“We expect new-money issuance to increase at least moderately during 2019 as state and local governments address infrastructure, and, by the third or fourth quarter, we expect to see a rebound in current refundings, after that sector remained extremely quiet during 2018,” Friedlander predicted.

A 10% increase in total issuance to $378 billion from $338 billion is expected.

Net supply will remain sharply negative at $50-plus billion, according to Friedlander.

“The impetus behind retail demand will remain mixed, with the yield curve having flattened so dramatically,” he wrote. “More current refundings would reflect more supply on the longer intermediate range, beyond the scope of SMAs,” he continued. “The relative good news for demand is the weakness of the stock market, which could push more investors over to fixed income and munis.”

Municipals could weaken a bit — especially if Treasury rates were to rebound — given the widespread economic and political uncertainty, more supply, and the flatter yield curve, Friedlander noted.

“Nevertheless, the magnitude of any yield increase is likely to be modest, with net supply still coming in at around minus $50 billion,” he added.

Treasury sales announced
The Treasury Department announced these auctions:

  • $13 billion 10-year TIPs selling on Jan. 17;
  • $36 billion 182-day bills selling on Jan. 14;
  • $39 billion 91-day bills selling on Jan. 14.

Treasury auctions bills
The Treasury Department Thursday auctioned $40 billion of four-week bills at a 2.380% high yield, a price of 99.814889. The coupon equivalent was 2.418%. The bid-to-cover ratio was 3.07. Tenders at the high rate were allotted 41.20%. The median rate was 2.360%. The low rate was 2.330%.

Treasury also auctioned $30 billion of eight-week bills at a 2.390% high yield, a price of 99.628222. The coupon equivalent was 2.432%. The bid-to-cover ratio was 3.25. Tenders at the high rate were allotted 90.62%. The median rate was 2.370%. The low rate was 2.340%.

Gary E. 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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