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The municipal bond market is mostly breathing a sigh of relief after it has had time to digest the possible effects of new U.S. tax legislation, according to a report from Nuveen.
As debates raged in the House of Representatives and the Senate, investors focused on possible changes to the tax treatment of some municipal bonds.
“Early in the process, there were serious concerns that tax law changes would have a drastic (and negative) effect on municipal bond supply,” John Miller, head of municipals at Nuveen, writes in the report. “Fortunately, however, municipal bonds were largely spared serious pain.”
Nuveen said the main takeaway is the changes apply only to newly issued municipal bonds, not existing paper.
Probably the best news from a municipal bond perspective was the sparing of private activity bonds, Miller wrote. The original House version of the bill would have eliminated the tax-exemption for PABs, which are used to fund hospitals, nursing homes, charter schools and universities.
“The final bill retains PABs’ tax-exempt status. Given that these bonds make up between 20% and 30% of the total municipal market, this is a welcome development for investors,” Miller wrote.
However, new issuance of advance refunding bonds will no longer be tax-exempt.
“We do not expect these tax changes to have a significant impact on infrastructure spending, but issuers of these bonds will likely lose some funding flexibility,” Nuveen said. The lack of these types of bonds will reduce supply going forward, which could result in positive market technical conditions for existing bonds, the report said.
And changes to state and local tax deductibility could make municipal bonds more attractive, the report said. The bill caps the SALT deductibility at $10,000 for those who itemize their taxes. While the legislation could increase the combined federal, state and local tax burden on certain individuals. The changes to the deductibility of state and local taxes likely increases the demand for tax-exempt munis, particularly in states with high income and/or property taxes, Nuveen said.
“On balance, we expect reduced supply in 2018 because of an onslaught of issuance in late 2017 that occurred before we had clarity on any tax changes, as well as from the elimination of tax-exempt advance refunding bonds going forward,” Nuveen said. “We expect this reduction in supply to be positive for performance of the municipal market.”
Topping next week’s calendar is a $1.39 billion tobacco bond deal from the Pennsylvania Commonwealth Financing Authority. Jefferies is set to price the bonds on Wednesday.
The deal is rated A1 by Moody’s Investors Service, A by S&P Global Ratings and A-plus by Fitch Ratings.
Also on tap, Bank of America Merrill Lynch is set to price the state of Hawaii's $775 million of Series 2018 FT general obligation bonds and Series 2018 FU and FV taxable GOs on Tuesday.
The deal is rated Aa1 by Moody's, AA-plus by S&P and AA by Fitch.
And Wells Fargo Securities is expected the Hampton Roads Transportation Accountability Commission's $500 million of Series 2018A senior lien revenue bonds on Tuesday.
The deal is rated AA by S&P and AA-plus by Fitch.
There are no competitive sales of $100 million or above slated for next week.
Bond Buyer 30-day visible supply at $7.12B
The Bond Buyer's 30-day visible supply calendar increased $415.7 million to $7.12 billion on Friday. The total is comprised of $903.1 million of competitive sales and $6.22 billion of negotiated deals.
Week's actively traded issues
Some of the most actively traded bonds by type in the week ended Jan. 26 were from California, Illinois and New York & New Jersey issuers, according to Markit.
In the GO bond sector, the Los Angeles Unified School District, 5s of 2024 traded 33 times. In the revenue bond sector, the Chicago Sales Tax Securitization Corp., 3.82s of 2048 traded 53 times. And in the taxable bond sector, the Port Authority of New York & New Jersey 2.114s of 2018 traded 16 times.
Week's actively quoted issues
Puerto Rico and California names were among the most actively quoted bonds in the week ended Jan. 26, according to Markit.
On the bid side, Puerto Rico Sales Tax Financing Corp. revenue 6s of 2042 were quoted by 36 unique dealers. On the ask side, the California GO 5s of 2026 were quoted by 180 dealers. And among two-sided quotes, the California taxable 7.55s of 2039 were quoted by 31 unique dealers.
MSRB: Previous session's activity
The Municipal Securities Rulemaking Board reported 45,899 trades on Thursday on volume of $14.31 billion.
California, New York and Texas were the three states with the most trades on Tuesday, with the Golden State taking 14.435% of the market, the Empire State taking 10.12% and the Lone Star State taking 7.868%.
Lipper: Muni bond funds saw inflows
Investors in municipal bond funds again put cash into the funds in the latest week, according to Lipper data released on Thursday.
The weekly reporters saw $781.160 million of inflows in the week of Jan. 24, after inflows of $1.18 billion in the previous week.
Exchange traded funds reported outflows of $17.950 million, after inflows of $118.046 million in the previous week. Ex-ETFs, muni funds saw $799.110 million of inflows, after inflows of $1.06 billion in the previous week.
The four-week moving average was positive at $744.164 million, after being in the green at $503.830 million in the previous week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.
Long-term muni bond funds had inflows of $772.983 million in the latest week after inflows of $1.099 billion in the previous week. Intermediate-term funds had inflows of $329.453 million after inflows of $178.692 million in the prior week.
National funds had inflows of $776.001 million after inflows of $1.14 billion in the previous week.
High-yield muni funds reported inflows of $32.551 million in the latest week, after inflows of $206.925 million the previous week.
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.