Muni yields drop as tax reform concerns spur demand

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Municipal bonds strengthened Monday amid concern that the tax reform proposal being hammered out in Washington will crimp supply by eliminating private activity bonds and advance refundings.

“The muni market is typically slow and late to responding and reacting to certain events and I think what you are seeing today echoes that sentiment,” said one New York trader. “This debate has created even stronger demand (it was already strong to begin with) for high-tax states like New York, California and Illinois.”

The trader said if backlash over the bill leads to a compromise on the bill, the restrictions on PABS and advance refundings may give way to other steps to offset the loss of revenue from tax cuts, such as a more stringent cap on the deduction for state and local taxes for the upper tier income brackets.

“This would be fewer bonds from the bigger names, essentially with everyone still trying to get a smaller amount of paper,” the trader said. “My gut is telling me that the bill won’t pass as is, but only time will tell. It will be interesting to see how new issues price this week, since we have yet to see deals price after the news came out.”

AP-MBIS 10-year muni at 2.289%, 30-year at 2.834%
The Associated Press-MBIS municipal non-callable 5% GO benchmark scale was stronger on trading at the market close on Monday.

The 10-year muni benchmark yield fell to 2.289% from 2.304% from the final read on Friday, according to Municipal Bond Information Services, a national consortium of municipal interdealer brokers. The AP-MBIS 30-year benchmark muni yield declined to 2.834% from 2.858%.

The AP-MBIS benchmark index is a yield curve built on market data aggregated from MBIS member firms and is updated hourly on the Bond Buyer Data Workstation.

Secondary market
Top-shelf municipal bonds were stronger at Monday’s close. The yield on the 10-year benchmark muni general obligation was three basis points lower to 1.96% from 1.99% on Friday, while the 30-year GO yield was seven basis points lower to 2.68% from 2.75%, according to a final read of Municipal Market Data's triple-A scale.

U.S. Treasuries were stronger at the market close on Monday. The yield on the two-year Treasury dipped to 1.61% from 1.62%, the 10-year Treasury yield dropped to 2.32% from 2.33% and yield on the 30-year Treasury dipped to 2.79% from 2.81%.

On Monday, the 10-year muni-to-Treasury ratio was calculated at 82.5% compared with 84.9% on Friday, while the 30-year muni-to-Treasury ratio stood at 94.8% versus 97.4%, according to MMD.

Previous week's top underwriters
The top municipal bond underwriters of last week included Bank of America Merrill Lynch, JPMorgan Securities, Wells Fargo, Morgan Stanley and Citigroup, according to Thomson Reuters data.

In the week of Oct. 28 to Nov. 4, BAML underwrote $1.35 billion, JPMorgan $902 million, Wells Fargo $757 million, Morgan Stanley $631 million, and Citi $505 million.

Prior week's actively traded issues
Revenue bonds comprised 55.47% of new issuance in the week ended Nov. 3, down from 55.80% in the previous week, according to Markit. General obligation bonds made up 38.96% of total issuance, up from 38.58%, while taxable bonds accounted for 5.57%, down from 5.62%.

Some of the most actively traded bonds were from Massachusetts, Tennessee and Puerto Rico issuers.

In the GO bond sector, the Massachusetts 3s 2033 were traded 54 times. In the revenue bond sector, the Tennessee Energy Acquisition Corp. 4s of 2048 were traded 39 times. And in the taxable bond sector, Puerto Rico Commonwealth Government Development Bank 5s of 2023 were traded 30 times.

Primary market
Ipreo estimates volume will rise to $8.99 billion from the revised total of $5.34 billion sold in the past week, according to updated figures from Thomson Reuters. The calendar for the week ahead is composed of $6.62 billion of negotiated deals and $2.37 billion in competitive sales.

The action will get rolling on Tuesday, when Goldman Sachs is scheduled to price the largest negotiated deal of the week — Salt River Project’s $736 million of agricultural improvement and power district electric system revenue bonds on Tuesday. The deal is rated Aa1 by Moody Investors Service and AA by S&P Global Ratings.

Citi is scheduled to price Broward County, Fla.’s $307 million of airport system revenue bonds. The deal is rated A1 by Moody’s and A-plus by S&P.

JPMorgan is slated to price the Board of Regents of the University of Texas’ $300 million of system permanent fund taxable bonds. The deal carries top ratings of triple-A by Moody’s, S&P and Fitch Ratings.

In the competitive arena, the Virginia College Building Authority is on the docket to sell a total of $136.245 million of educational facilities revenue public higher education financing program and taxable bonds in two separate sales on Tuesday. The deals are rated Aa1 by Moody’s, AA by S&P and AA-plus by Fitch.

The overall deal of the week is scheduled to hit on Wednesday, when Pennsylvania sells $973.99 million of general obligation refunding bonds competitively. The deal is rated Aa3 by Moody’s, A-plus by S&P and AA-minus by Fitch.

Data appearing in this article from Municipal Bond Information Services, including the AP-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 Tax reform Secondary bond market Commonwealth of Massachusetts Tennessee Energy Acquisition Corporation Government Development Bank for Puerto Rico Salt River Project Agricultural Improvement & Power District Broward County The University of Texas Board of Regents Virginia College Building Authority Commonwealth of Pennsylvania