Taxables' tear continues; Secondary sells off
The rampant muni issuance continues even in a holiday-shortened week, as the primary market is expected to see $12.4 billion of issuance, with the calendar made up of mostly taxable deals. Meanwhile, the backdrop for the end of a volatile week on Friday had the secondary getting whacked, with AAA benchmarks showing cuts of up to eight basis points on MMD and as much as six basis points on the BVAL scale.
Once again, taxables rule the roost as they make up nine or almost one-third of the $100 million or larger scheduled deals. Taxables also make up three of the top five largest negotiated deals and the two biggest competitive sales.
At this point, the surge in taxable issuance is no surprise and we know the main catalyst — with the new tax legislation, issuers are no longer allowed to issuance advance refundings on tax-exempt debt, but they found a work around and are now issuing taxable to advance refund tax-exempt debt.
“I believe the trend in taxable issuance will stay with us for the next few months, especially as demand in credit continues to drive tight credit spreads,” said one Texas trader. “Right now the economics favor continued refunding of tax-exempt with taxable. Demand from smaller banks to larger-tier one clients suggests buyer demand is broadening for taxable munis.”
So for how long will this “fad” last?
“Bottom line is as long as the economics work the ‘fad’ will continue,” he said. “The risk to this trend is big shift to much wider spreads, which more than likely will be driven from corporate spreads ultimately eroding saving. The other risk is a significant rise in Treasury rates.”
The muni market is expected to see $12.37 billion of new paper for the holiday-shortened week, nearly double from the revised total of $6.75 billion this past week. The calendar consists of $9.67 billion of negotiated deals and $2.70 billion of competitive sales. There are 30 deals scheduled $100 million or larger, with seven of those coming being competitive deals.
The last time we had an expected higher issuance was 10 weeks ago, when expected volume was $12.63 billion the week of Aug. 5. It is a little abnormal to have so much issuance during a holiday-shortened week, since the market will be closed in observance of Columbus Day.
However, the last time there was a holiday shortened week (Labor Day) the estimated wasn’t anything to scoff at, at $7.61 billion — more than the yearly weekly average of $5.8 billion.
“The bigger volume during the holiday week is definitely a surprise, however, with the amount of taxable issuance in the calendar I’m not shocked,” the trader said. “Bankers will be trying to get as much of this business in as possible before year end. We have about two months left before books begin to close and buyers lock in their years. If the refunding component didn’t line up the calendar would be very manageable with tax-exempt issuance, more in line with the year's weekly average.”
Goldman Sachs is expected to price the New York State Thruway Authority’s (A2/A-/NR) $1.689 billion of general revenue junior indebtedness obligations on Thursday after a one-day retail order period.
Citi is slated to price the Thruway’s (A1/A/NR) $950 million of general revenue taxable bonds on Wednesday. The deal is expected to mature serially from 2024 through 2035 and include a term bond in 2042.
Morgan Stanley is scheduled to run the books on Ascension Health’s (Aa2/AA+/AA+) $714.08 million of taxable corporate CUSIPS on Wednesday.
The largest municipal bond issuer so far this year, will be adding to its volume. California is set to sell a combined $1.14 billion in two separate competitive sales on Wednesday. There is a $680.59 million of various purpose general obligation taxable bonds and $459.975 million of various purpose GO taxable refunding bonds.
Traders were taking note, as California bonds were among the most actively quoted in the week ended Oct. 11, according to IHS Markit.
On the bid side, the State of California, taxable 7.55s of 2039 were quoted by 19 unique dealers. On the ask side, the Los Angeles County Metropolitan Transportation Authority revenue 5s of 2044 were quoted by 125 dealers. Among two-sided quotes, the State of California taxables 7.5s of 2034 were quoted by 11 dealers.
Lipper sees billion-dollar inflow
For 40 weeks in a row investors have poured cash into municipal bond funds, according to the latest data released by Refinitiv Lipper on Thursday.
Tax-exempt mutual funds that report weekly received $1.385 million of inflows in the week ended Oct. 9 after inflows of $883.952 billion in the previous week. This marks the seventh time in the past 12 weeks inflows have exceed $1 billion.
Exchange-traded muni funds reported inflows of $242.819 million after outflows of $21.505 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.142 billion after inflows of $905.456 billion in the previous week.
The four-week moving average remained positive and moved higher than $1 billion for the first time since Sept. 11 to $1.029 billion, after being in the green at $915.232 billion in the previous week.
Long-term muni bond funds had inflows of $1.002 billion in the latest week after inflows of $558.384 million in the previous week. Intermediate-term funds had inflows of $258.992 million after inflows of $228.241 million in the prior week.
National funds had inflows of $1.120 billion after inflows of $767.441 billion in the previous week. High-yield muni funds reported inflows of $527.764 million in the latest week, after inflows of $209.214 million the previous week.
Munis were weaker on the MBIS benchmark scale, with yields rising by two basis points in the 10-year maturity and by three basis points in the 30-year maturity. High-grades were also weaker, with yields on MBIS AAA scale increasing by two basis points in both the 10- and 30-year maturities.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on both the 10- and 30-year GOs rose by eight basis points to 1.40% and 2.00%, respectively.
The 10-year muni-to-Treasury ratio was calculated at 80.0% while the 30-year muni-to-Treasury ratio stood at 90.5%, according to MMD.
Stocks were in the green as Treasuries were mostly higher. The Treasury three-month was yielding 1.674%, the two-year was yielding 1.618%, the five-year was yielding 1.582%, the 10-year was yielding 1.754% and the 30-year was yielding 2.216%.
"The ICE muni yield curve is three to seven basis points higher in sympathy with Treasuries," ICE Data Services said in a Friday market comment. "The high-yield sector is up three basis points and tobaccos are up as much as four basis points. Taxables are as much as nine basis points higher. Puerto Rico is lower with the 8% GO bellwether down 5/8 point."
Volatility in municipal performance directed the market on Friday ahead of a substantial week of new issuance on tap next week.
“After underperforming for the past few weeks, munis were very strong this week, with ratios tightening significantly, especially in the five-year area of the curve,” said Dan Urbanowicz of Ziegler Capital Markets.
That outperformance waned Friday, however, with hopes of a trade deal and a large institutional bids wanted list setting the tone for large cuts to the scale, outpacing the selloff in Treasuries, he said Friday afternoon.
“Investors seem to be taking a pause and looking ahead to a large new issue calendar next week, a rarity for a holiday shortened week, as well as elevated supply to close out the year.”
Week's actively traded issues
Some of the most actively traded munis by type in the week were from New York, Ohio and District of Columbia issuers.
In the GO bond sector, the New York City 4s of 2044 traded 42 times. In the revenue bond sector, the Hamilton County Hospital Facilities Authority, Ohio, 5s of 2049 traded 33 times. In the taxable bond sector, the District of Columbia Water and Sewer Authority 3.207s of 2048 traded 43 times.
Previous session's activity
The MSRB reported 30,665 trades Thursday on volume of $12.449 billion. The 30-day average trade summary showed on a par amount basis of $11.20 million that customers bought $6.05 million, customers sold $3.25 million and interdealer trades totaled $1.89 million.
California, New York and Texas were most traded, with the Golden State taking 15.134% of the market, the Empire State taking 13.365% and Lone Star State taking 10.637%.
The most actively traded security was the Metropolitan Transportation Authority, revenue bond anticipation notes, 4s of 2020, which traded 38 times on volume of $53.96 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. Click here for a brief tour of the Workstation.