Taxables are 'slam dunks,' currently make up 36% of 30-day calendar
The municipal market is taking down new-issuance with ease while taxable bonds continue to be a growing portion of the calendar. With rates low and demand significantly outpacing supply, some see a market in uncharted territory.
“This is truly a golden age for our market,” said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management. “There is no better time than now to issue long-term debt, both in terms of the current rates and the out-of world-demand — it’s a perfect storm for munis right now.”
This past week once again saw negotiated deals oversubscribed for, with bumps in yields after repricing and taxable issuance continue to dominate.
“Demand was really strong all the way across the board,” Heckman said. “At these new, lower levels, there may be some hesitancy to buy long but we think it is the most attractive part of the curve — the short-end right now has no value and is ridiculously expensive.”
Heckman added that the market has been and will continue to be under-supplied, even though he senses there will be an uptick in issuance at these new lower rates and yields, but it still won’t be enough.
Eric Kazatsky, municipal strategist at Bloomberg Intelligence, noted that the market would need to produce at least $460 billion of supply annually just to satiate demand.
IHS Ipreo estimates next week’s volume at $8.33 billion, up from this past week’s revised total of $6.51 billion. The calendar for the upcoming week is made up of $6.20 billion of negotiated deals and $2.13 billion of competitive sales.
There are 17 scheduled deals $100 million or larger, with three of them competitive. There are two deals that exceed $1 billion in par amounts.
“Things will go very well next week, as there is growing appetite for taxable munis,” Heckman said. “Spreads are tight and crossover buyers can pick up spread and quality at the same time.”
Heckman sees more taxable issuance in the coming weeks.
“Taxables are a slam dunk on a relative basis,” Heckman said.
Kazatsky noted that in 2019 taxables made up 18% of all issuance. That figure has doubled the percentage for this year with no real plans to slow when looking at issuance over the next 30 days.
Another factor that could also impact supply this year is the amount of callable Build America Bonds that are outstanding.
“Out of the total $143 billion of Build America Bonds that are outstanding, almost 20% become currently callable in 2020,” Kazatsky said. “The ability of issuers to currently call these BABs could add an additional $27 billion of supply to the market this year, however that would mean giving up the federal subsidy, which has been on the decline."
He added that the leaders in 2020 callable BABs outstanding are the usual suspects when it comes to munis — California with $3.5 billion, New York with $3.1 billion and Texas with $2.7 billion.
“While the knee jerk move may be to want to take these bonds out with exempts, if at all, large issuers may realize that some buyer fatigue may be present in the exempt market and opt for the taxable option to maximize market depth and appetite. “
Kazatsky also said tax-exempt buyers may find pickings even slimmer this year, as the cost to issue alternative taxable debt has cheapened further thanks to a 20-basis point rally to start 2020.
“The pace of issuance has almost doubled from 2019 for taxable munis, which are slated to steal even more market share, as they comprise 36% of the upcoming muni calendar.”
Grand Parkway Transportation Corporation, Texas is set to bring $1.51 billion of tax-exempt and taxable bonds on Tuesday.
Goldman will run the books on the first tier toll revenue refunding tax-exempt series 2020C portion, while Bank of America Securities is expected to $45.38 million of first tier toll revenue refunding taxable bonds series 2020A and the subordinate tier toll revenue refunding taxable bonds series 2020B. The deal is expected to come to market on Tuesday. The first tier bonds carry ratings of A2 by Moody’s Investors Service, while the taxable subordinate bonds are rated Aa1 by Moody’s and AA by Fitch.
Citi is scheduled to price New York City’s (Aa1/AA/AA/NR) $1.09 billion of general obligation bonds on Wednesday.
Wells Fargo is slated to price Utah’s (Aaa/AAA/AAA/NR) $449.625 million of GO bonds on Tuesday.
In the competitive arena, Washington State (Aaa/AA+/AA+) is scheduled to sell a total of $740.15 million in two separate sal. The sales will consist of $619.73 million of various purpose GO bonds and $120.420 million of motor vehicle fuel tax and vehicle related fees GO bonds.
Lipper reports 57th week of inflows
For the 57th straight week, investors poured cash into the municipal market continuing the streak as the money flowing into cash-exempt mutual funds seems to be neverending.
In the week ended Feb. 5, weekly reporting tax-exempt mutual funds added $1.631 billion of inflows, after inflows of $1.825 billion in the previous week, according to data released by Refinitiv Lipper late on Thursday.
Exchange-traded muni funds reported inflows of $139.119 million, after inflows of $82.548 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.492 billion after inflows of $1.742 billion in the prior week.
The four-week moving average remained positive at $1.949 billion, after being in the green at $2.263 billion in the previous week.
Long-term muni bond funds had inflows of $1.121 billion in the latest week after inflows of 1.438 billion in the previous week. Intermediate-term funds had inflows of $172.314 million after inflows of $289.330 million in the prior week.
National funds had inflows of $1.459 billion after inflows of $1.591 billion while high-yield muni funds reported inflows of $713.091 million in the latest week, after inflows of $656.406 million the previous week.
Munis were stronger Friday on the MBIS benchmark scale, with yields lowering by one basis point in the 10-year maturity and by less than a basis point in the 30-year maturity. High-grades were also stronger, with yields on MBIS AAA scale decreasing two basis points in the 10-year and by one basis point in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on both the 10-year GO and 30-year GO were three basis points lower to 1.18% and 1.83%, respectively.
The 10-year muni-to-Treasury ratio was calculated at 74.6% while the 30-year muni-to-Treasury ratio stood at 89.4%, according to MMD.
Stocks slid after the jobs report as the three major indexes were down for the first time in five days. Treasuries were mostly lower.
The Dow Jones Industrial Average was down about 0.95%, the S&P 500 Index lost around 0.48% and the Nasdaq fell about 0.57%.
The 3-month Treasury was yielding 1.556%, the Treasury two-year was yielding 1.395%, the five-year was yielding 1.404%, the 10-year was yielding 1.583% and the 30-year was yielding 2.048%.
Week’s actively traded issues
Some of the most actively traded munis by type in the week ended Feb. 7 from New York, Texas and Puerto Rico issuers, according to IHS Markit.
In the GO bond sector, the New York City zeros of 2042 traded 31 times. In the revenue bond sector, the Gulf Coast Industrial Development Authority, Texas, 3s of 2041 traded 29 times. In the taxable bond sector, the GDB Debt Recovery Authority of Puerto Rico, 7.5s of 2040 traded 18 times.
Week’s actively quoted issues
Puerto Rico and New Jersey and California bonds were among the most actively quoted in the week ended Feb. 7, according to IHS Markit.
On the bid side, the Puerto Rico Sales Tax Financing Corp. revenue 5s of 2058 were quoted by 32 unique dealers. On the ask side, the Board of Education of the Borough of Rutherford County of Bergan New Jersey, GO 3s of 2041 were quoted by 364 dealers. Among two-sided quotes, the State of California, taxable 7.5s of 2034 were quoted by 15 dealers.
Previous session's activity
The MSRB reported 34,659 trades Thursday on volume of $14.24 billion. The 30-day average trade summary showed on a par amount basis of $10.94 million that customers bought $5.57 million, customers sold $3.58 million and interdealer trades totaled $1.79 million.
California, New York and Texas were most traded, with the Golden State taking 16.681% of the market, the Empire State taking 14.356% and the Lone Star State taking 14.236%.
The most actively traded security was the California State University revenue taxable, 2.975s of 2051, which traded 18 times on volume of $57.750 million.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.