Municipal supply keeps on coming as yields turn higher

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Municipal bond buyers saw more supply hit the market on Wednesday as the negotiated sector came to life even as the competitive arena faded. Municipals were weaker in the secondary and benchmarks went through a small correction Wednesday.

"We see the municipal market as feeling 'heavy' and in retreat at the moment," said Michael Pietronico, CEO at Miller Tabak Asset Management. "We think traders should be sellers and investors with a longer-term horizon, buyers. The very short end of the market has corrected nicely and represents fair value now in our view."

“Muni yields continue to move higher. The long end of the ICE muni yield curve moved above 2% for the first time in just over a month; rates are up two to three basis points across the curve,” ICE Data Services said in a Wednesday market comment. “High-yield and tobaccos are moving in sympathy by rising two basis points. Taxable yields are up two to three basis points for the longer end of the curve, while the shorter end is down by one to two basis points.”

Primary market
Citigroup priced and repriced the Los Angeles Department of Water and Power’s (NR/AA/AA) $325 million of Series 2019C power system revenue bonds for institutions after a one-day retail order period.

The deal was priced for institutions with a short yield of 0.99% with a 5% coupon in 2025 and a long yield of 2.19% with a 5% coupon in 2049.

RBC Capital Markets priced Broward County, Florida’s (A1/A/NR) $490.67 million of Series 2019 port facilities revenue bonds.
Raymond James & Associates priced the Jefferson Sales Tax District Parish of Jefferson, Louisiana’s (AGM: A1/AA/NR) $280 million of Series 2019A special sales tax revenue refunding bonds and Series 2019B special sales tax revenue bonds.

Barclays Capital priced the New York City Housing Development Corp.’s (Aa2/AA+/NR) $214.345 million of multi-family housing revenue bonds.

RBC priced the Philadelphia Authority for Industrial Development, Pennsylvania’s (A1/A/A-) $147.685 million of Series 2019 lease revenue refunding bonds.

Raymond James priced the Santa Monica-Malibu Unified School District, California’s (Aaa/AA+/NR) $110 million of Election of 2018 Series A general obligation bonds for the School Facilities Improvement District No. 1 of Santa Monica Schools in Los Angeles County and $35 million for Malibu Schools.

After Tuesday’s feast of bond sales in the competitive arena, it was much quieter as there were no offerings of $100 million or over on that calendar for the rest of the week.

Wednesday’s bond sales

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ICI: Muni funds see $1.22B inflow
Long-term municipal bond funds and exchange-traded funds saw a combined inflow of $1.218 billion in the week ended Sept. 4, the Investment Company Institute reported on Wednesday. It was the 36th straight week of inflows into the tax-exempt mutual funds and followed a revised inflow of $1.959 billion in the previous week.
Long-term muni funds alone saw an inflow of $1.340 billion after a revised inflow of $1.632 billion in the previous week; ETF muni funds alone saw an outflow of $122 million after an inflow of $327 million in the prior week.

Taxable bond funds saw combined inflows of $5.709 billion in the latest reporting week after revised inflows of $5.993 billion in the previous week.

ICI said the total combined estimated inflows from all long-term mutual funds and ETFs were $2.598 billion after revised outflows of $1.220 billion in the prior week. Equity funds were the biggest losers of the week, seeing $4.104 billion of outflows.

Secondary market
Munis were mixed on the MBIS benchmark scale, with yields rising by five basis points in the 10-year maturity and falling less than a basis point in the 30-year maturity. High-grades were weaker, with MBIS’ AAA scale showing yields rising by three basis points in the 10-year maturity and by two basis points in the 30-year maturity.

On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year muni GO rose by five basis points to 1.41% while the 30-year muni rose five basis points to 2.02%.

The 10-year muni-to-Treasury ratio was calculated at 81.4% while the 30-year muni-to-Treasury ratio stood at 91.4%, according to MMD.

Treasuries were mixed as stock prices traded higher. The Treasury three-month was yielding 1.674%, the two-year was yielding 1.674%, the five-year was yielding 1.592%, the 10-year was yielding 1.736% and the 30-year was yielding 2.211%.
Previous session's activity
The MSRB reported 32,038 trades Tuesday on volume of $10.78 billion. The 30-day average trade summary showed on a par amount basis of $11.25 million that customers bought $5.98 million, customers sold $3.28 million and interdealer trades totaled $1.99 million.

California, New York and Texas were most traded, with the Golden State taking 15.736% of the market, the Lone Star State taking 11.155% and the Empire State taking 10.013%.

The most actively traded security was the Buckeye Tobacco Settlement Financing Authority, Ohio’s 2007 A2 turbo sinking fund 5.875s of 2047, which traded 12 times on volume of $40.66 million. The 5.875s of 2047, originally priced at 97.082, were trading Tuesday at a high price of 101.25 cents on the dollar, unchanged from Monday but up from 98.60 last Friday.

Lipton: Munis still look great
For much of this year, munis have moved in sync with Treasury securities, yet unique market technicals have added directional support and guidance and can be largely responsible for year-to-date performance, according to Jeffrey Lipton, managing director and head of municipal research and strategy at Oppenheimer & Co. Inc.

"The U.S. economy stands in better shape relative to the global backdrop, but signs of sustained weakness would likely compel our Fed to engineer a longer-term cycle adjustment, and motivate investors to seek out haven assets," Lipton said. "We would expect the haven bias to remain as part of the investment narrative through year-end. This dynamic should support muni performance even with easing technicals."

Lipton also said that the performance of taxable munis is a direct result of a significant amount of negative yielding global debt that now incentivizes foreign buyers to look at the quality and diversity of the U.S. municipal bond market.

"However, not all structures and credits work for this investor class, which may have specific duration needs and is typically looking for scalable, liquid, high-quality credits," he said. "The appeal of taxable munis has extended to foreign buyers who are not seeking tax-efficiency, yet who are strategizing to boost investment performance with a view to investing in U.S. infrastructure. Less restrictive capital set-aside requirements for foreign insurance companies when purchasing infrastructure debt adds further support."

He said that future 2019 muni performance will likely show correlation with the patterns associated with the risk-on/risk-off trade.

"Although the effects of the 2017 Tax Cuts and Jobs Act have impacted institutional demand for tax exemption given the lower corporate tax rate of 21%, retail support has continued unabated as illustrated by [36] consecutive weeks of positive municipal bond mutual fund flows," Lipton said. "We have been questioning the sustainability of this trajectory and if sentiment shifts with a technical reversal, we could at the very least see an extended slowdown in the pace of inflows, and if there is a sustained shift from the first eight months of the year, we may even see a period of cash outflows."

In addition, Lipton noted that retail investors should maintain interest given sparse issuance year-to-date, ample deployable cash, and growing expectations for even lower rates.

"We could expect to see a return to cheaper ratios, but such a trajectory could be tempered by an emergence of outsized demand for product, and we do think that munis are still capable of outperformance, but this window may not be as wide now."

In more recent weeks, the muni market has witnessed a supply build, largely reflecting a degree of issuer capitulation that today’s currently low financing terms are too good to pass on, and recognition that June and July were light issuance months, Lipton added.

"For certain issuers, sufficient cost savings are now able to be captured on refinancing deals that had previously been waiting in the wings," he said. "Issuers are also aware that 2019 is quickly coming to a close and there may be a need to tap into remaining bonding capacity for essential purpose infrastructure program needs."

Treasury sells $24B notes
The Treasury Department auctioned $24 billion of 9-year 11-month notes with a 1 5/8% coupon at a 1.739% high yield, a price of 98.965031. The bid-to-cover ratio was 2.46.

Tenders at the high yield were allotted 46.67%. All competitive tenders at lower yields were accepted in full. The median yield was 1.700%. The low yield was 0.880%.

Gary E. Siegel contributed to this report.

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.

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Primary bond market Secondary bond market Municipal bond funds Los Angeles Department of Water & Power State of California State of Texas State of New York New York City Housing Development Corporation Broward County Philadelphia Authority for Industrial Development
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