Municipal market volume may improve this week from last, though municipal experts say issuance continues to be thin for this time of the year as the spring reinvestment season approaches.
“ 'Where’s the supply?’ is the million dollar question,” said Jay Alpert, executive vice president of trading, sales, and underwriting at M.R. Beal & Co. “It’s gotten to be more than a simple question – it’s becoming a major mystery,” he said. “The absence of significant new-issue supply has permeated the entire dealer community.”
Traders point to a combination of factors – from market technicals to potential volatility ahead of the expiration of the U.S. debt ceiling this month -- as the culprit for the lower-than-usual supply.
While Ipreo LLC and The Bond Buyer’s $6.44 billion projected volume is higher than last week’s actual issuance of $5.23 billion as provided by Thomson Reuters, it pales in comparison to the week of April 8, when one-week volume hovered close to $8 billion.
As of last Thursday, The Bond Buyer’s 30-day visible supply was $7.2 billion. Negotiated volume rose by $2 billion from the prior week to $5.46 billion, while competitive volume fell $280 million to $1.73 billion.
Volume surged 53.2% in January to $26.72 billion in 884 issues from $17.43 billion in 723 issues in January 2012. Volume dropped 8.2% in March to $31.89 billion in 974 issues from $34.74 billion in 1,257 issues the prior March. April volume rose 5% to $36.76 billion among 1,156 issues, versus $34.72 billion among 1,227 deals last April.
Traders said lower issuance will continue to be an obstacle for investors in the spring rollover season, when they typically receive a flood of proceeds on June 1 and July 1 from called and maturing bonds, and seek to spend that cash in the tax-exempt market.
Issuers are missing a window of opportunity as well, they said.
“This is the most opportunistic interest-rate environment for issuers to do what they inevitably will have to do -- issue tax-exempt bonds,” Alpert said. “We have the capacity to do more, even given a little bit higher rates, which would still be to the advantage of issuers.”
The benchmark triple-A general obligation scale in 2043 fell two basis points Thursday to 2.87%. It was up five basis points from the previous Friday, according to Municipal Market Data. A year ago, the 30-year GO ended at a 3.08%.
Despite the lower yields year over year, other current market technicals are creating issuance problems, traders said.
“Unfortunately, while there is underlying demand for the tax-exempt product, absolute yields have assuaged the buying inertia,” Alpert said. “Munis will continue to underperform one day and over-perform the next, treading yield until the mystery of supply is resolved in the form of moderate to heavy forward supply.”
At the same time, the relative attractiveness of municipals could be a deterrent for some issuers.
“The [relative] cheapness is preventing a lot of advance refunding, which should get done, from being done,” said John Mousseau, portfolio manager at Cumberland Advisors in Vineland, N.J. added. “We are on a treadmill getting a very poor workout,” he said.
John Hallacy, director of municipal research for Bank of America Merrill Lynch, said issuers may be avoiding the market because of the potential for volatility and rate movements as the U.S. government’s May 19 debt ceiling deadline approaches.
“There is some expectation there could be measures taken to prevent any crisis until September, but there still is the uncertainty,” he said. At the same time, the deadline expiration could spawn a surge in issuance, Hallacy said. “The rollovers in June and July are large and would be expected to grow volume,” he said.
Although deals planned for this week are smaller than the billion-dollar transactions that surfaced last month, issues including a $366 million joint airport revenue improvement offering from Dallas-Fort Worth, Texas, should still find buyers as the market seeks supply and direction, Mousseau said.
The deal, which is being sold behalf of the Dallas-Fort Worth International Airport, is expected to be priced by Morgan Stanley & Co. on Thursday. The bonds, which are not subject to the alternative minimum tax, are rated A2 by Moody’s Investors Service, A-plus by Standard & Poor’s, and A by Fitch Ratings.
While there is demand for the debt, some investors may be distracted by sticker shock from other recent deals.
“Tax-free munis are cheap on a relative basis, but not as cheap as they were a year ago,” Mousseau said. “Nominally, they are expensive.”
Still, issuers in California, New Jersey, and Washington will head to market with deals.
Los Angeles will issue wastewater system subordinate revenue bonds in a $344.37 million deal slated for Tuesday in a negotiated deal led by Bank of America Merrill. The bonds are rated Aa3 by Moody’s and AA by the two other major rating agencies.
The Coast Community College District in Orange County, Calif., will sell $314.79 million of tax-exempt and taxable, new-money GO bonds as well as tax-exempt and taxable GO refunding bonds in deal led by RBC Capital Markets planned for Tuesday. The bonds are rated Aa1 by Moody’s and AA-minus by Standard & Poor’s.
San Jose Financing Authority plans to issue $311.70 million of lease revenue refunding bonds on behalf of a civic center project, with Bank of America Merrill giving retail investors first-crack at the bonds on Tuesday, followed by an ¬institutional pricing on Wednesday. The bonds are expected to be rated Aa3 by Moody’s and AA by Standard & Poor’s and Fitch.
Elsewhere in the Far West region, Citi will price $285 million of electric system revenue bonds on Tuesday from Tacoma, Wash. The deal is comprised of $200 million of tax-exempt debt and $85 million of taxable debt – both of which are expected to be rated Aa3 by Moody’s, AA by Standard & Poor’s, and AA-minus by Fitch. The structure will be finalized on Monday.
