Supply-hungry municipal bond market gets first taste of week's new deals

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Municipal bond buyers are getting what they need this week — more supply. And action kicked off the week early as two big deals hit the screens on Monday.

Primary market
The Regents of the University of California is bringing four sales to market this week totaling $2.06 billion.

On Monday, Bank of America Merrill Lynch priced the $945.62 million of Series 2018AZ general revenue bonds for retail investors ahead of the institutional pricing on Tuesday.

On Tuesday, BAML will price the $739 million of Series 20180 limited project revenue bonds after a one-day retail order period.

On Wednesday, BAML is expected to price the Cal Regents’ $283 million of Series 2018BA taxable general revenue bonds and $95 million of Series 2018P taxable limited project revenue bonds.

The Series AZ bonds and Series BA taxables are rated Aa2 by Moody’s Investors Service and AA by S&P Global Ratings and Fitch Ratings while the Series 0 bonds and Series P taxables are rated Aa3 by Moody’s and AA-minus by S&P and Fitch.

West Virginia is coming to market this week with about $740 million in two deals, one negotiated and one competitive.

On Monday, BAML priced the state’s $254 million of Series 2018A general obligation state road bonds for retail investors.

On Wednesday, the state will competitively sell $488.21 million of Series 2018B GO state road bonds.

The deals are rated Aa2 by Moody’s, AA-minus by S&P and AA by Fitch.

Monday’s bond sales
Click here for the Regents’ $945M deal

West Virginia:
Click here for the state sale

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

In the week of May 13 to May 19, BAML underwrote $3.1 billion, Morgan Stanley $1.1 billion, JPMorgan $872.6 million, Goldman Sachs $863.5 million and RBC $572.3 million.
Secondary market
Municipal bonds were mixed on Monday, according to a late read of the MBIS benchmark scale.

Benchmark muni yields rose less than a basis point in the one- to six-year and 16- to 30-year maturities, fell less than one basis point in the 11- to 13-year maturities and were unchanged in the seven-year and 14- and 15-year maturities.

High-grade munis were also mixed, with yields calculated on MBIS’ AAA scale rising less than a basis point in the one- to five year and 12- to 30-year maturities, falling less than a basis point in the seven- to 10-year maturities and remaining unchanged in the six-year and seven-year maturities.

Traders called Monday a lackluster day with very little activity in the secondary market. In addition to the typical Monday blahs, they said, the market was extra quiet ahead of the long Memorial Day holiday weekend.

“It’s very quiet; no matter who you ask: brokers, salesman, traders — there’s next to nothing going on,” a Chicago trader said Monday afternoon.

He described the secondary market as steady, with some activity on a high-grade block of $1 million-plus of Virginia general obligation bonds due in 2024. “The scale is kind of right on — even though munis are a touch rich to me,” he explained. “But, I just think there’s so little going, there’s not much to drive [the market].”

He said the holiday-shortened week always helps slow down activity. “That being said, if anything I would expect business being done tomorrow or Wednesday,” he added.

A Texas trader agreed, calling the municipal market “boring” on a Monday in a pre-holiday week, and described the secondary market as “flat.”

“It will probably pick up tomorrow,” with some new deals priced, and then fade away before Friday, he said. “I would expect the activity levels will fall off sharply come Thursday.”

In the meantime, he said the traders and analysts at his firm was using the day to concentrate on other portions of the business, such as credit research, rather than daily trading.

According to Municipal Market Data’s AAA benchmark scale, Municipals were unchanged with yields steady in the 10-year general obligation muni and flat in the 30-year muni maturity.

Treasury bonds were a bit weaker as stocks were trading higher.

On Monday, the 10-year muni-to-Treasury ratio was calculated at 83.3% while the 30-year muni-to-Treasury ratio stood at 95.8%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasuries with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasuries; if it is below 100%, munis are yielding less.

On Friday, municipal experts said investors would be attentive this week for the larger new issues due to the relative cheapness that has surfaced on the heels of increasing Treasury yields.

"Munis have been a champ and long ratios are down five to six percentage points on the long end," John Mousseau, managing director at Cumberland Advisors, said on Friday afternoon. "This is a function of relative supply, plus the absurd level of cheapness of munis to Treasuries."

The municipal market appears to have handled the larger supply week reasonably well, noted Peter Delahunt, managing director of municipals at Raymond James & Associates. "There are some balances from negotiated deals in the belly, where P&C’s have historically shown stronger demand, which is a bit of concern," he said Friday afternoon.

"Otherwise long and short demand proves to be sufficient," he added. "Retail and the retail surrogates have more reason to be involved with the recent pickup in rates, especially on a tax equivalent basis; and considering the anxiety that has taken the bloom off the rose of the equity market."

Previous session's activity
The Municipal Securities Rulemaking Board reported 34,491 trades on Friday on volume of $9.71 billion.

Prior week's actively traded issues
Revenue bonds comprised 55.84% of new issuance in the week ended May 18, down from 56.11% in the previous week, according to Markit. General obligation bonds made up 38.22% of total issuance, up from 38.12%, while taxable bonds accounted for 5.94%, up from 5.77% a week earlier.
Some of the most actively traded bonds by type in the week were from Puerto Rico and Texas issuers.

In the GO bond sector, the Puerto Rico Commonwealth 8s of 2035 traded 64 times. In the revenue bond sector, the Grand Parkway Transportation Corp. in Texas 5s of 2048 traded 45 times. And in the taxable bond sector, the Puerto Rico Sales Tax Financing Corp. 6.05s of 2036 traded 22 times.

Treasury auctions discount bills
Tender rates for the Treasury Department's latest 91-day and 182-day discount bills moved higher, as the $48 billion of three-months incurred a 1.895% high rate, up from 1.890% the prior week, and the $42 billion of six-months incurred a 2.080% high rate, up from 2.035% the week before.

Coupon equivalents were 1.931% and 2.131%, respectively. The price for the 91s was 99.520986 and that for the 182s was 98.942667.

The median bid on the 91s was 1.870%. The low bid was 1.840%. Tenders at the high rate were allotted 98.95%. The bid-to-cover ratio was 3.10.

The median bid for the 182s was 2.050%. The low bid was 2.030%. Tenders at the high rate were allotted 28.75%. The bid-to-cover ratio was 3.16.

Treasury to sell $45B 4-week bills
The Treasury Department said it will sell $45 billion of four-week discount bills Tuesday. There are currently $110 billion of four-week bills outstanding.

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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