The waiting game: Munis' pace slows for FOMC

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As the month of July winds down, municipal issuance will be muffled thanks to the Federal Reserve's monetary policy meeting and subsequent announcement on interest rates. And while it's normal for issuers to purposely schedule deals around the Fed, expected issuance next week is certainly respectable.

There is an estimated $4.9 billion of new issuance slated for the upcoming week, with 14 deals scheduled $100 million or larger. But while this week's calendar is underwhelming, it may be more than made up for with potentially huge sales during the first full week of August.

“The view from our CIO Sean Clark’s office is that the market had been pricing in a more aggressive pace of cuts than perhaps was prudent given the strength of the economy,” said Eric Kazatsky, portfolio manager at Clark Capital Management. “We think that the Fed will meet market expectations in next week’s meeting providing further strength to the front end of the curve. While rate cuts have been somewhat priced in, there is typically further movement when it becomes official.”

BofA Securities is scheduled to price the Texas Private Activity Bond Surface Transportation Corp.’s (Baa3/ /BBB-) $674.065 million of senior lien revenue bonds for the NTE Mobility Partners Segments 3 LLC Segment 3C Project on Tuesday.

Morgan Stanley is set to price San Francisco Bay Area Rapid Transit’s (Aaa/AAA/) $510.695 million of transit district general obligation green bonds also on Tuesday. There is also a $163.67 million taxable green bond portion that will also be priced on Tuesday.

JPMorgan Securities is expected to price Michigan Finance Authority’s $360.28 million of state aid revenue notes on Tuesday.

Wells Fargo is scheduled to price San Diego Association of Governments’ (NR/A-/NR) $331.3 million of capital grants receipts revenue green bonds for the mid-coast corridor transit project on Tuesday.

"The next two weeks will be a good test of where lower-rated credit spreads will be for the near future,” Kazatsky said, adding that during the week of Aug. 5 there will be $1.6 billion sale for CommonSpirit coming right after the NTE Mobility partners deal next week, While both are in the BBB+ camp, he said they're "obviously two different animals.” He added that CommonSpirit is interesting because it highlights consolidation in the healthcare space with the new entity issuing bonds after the combination of Catholic Health Initiatives and Dignity Health.

There has also been a lot of chatter recently about foreign money coming in to buy munis and though not a new phenomena, lower/negative global rates have certainly piqued more interest in non-U.S. Treasury fixed-income securities.

“You have additional attractiveness for munis due to their uncorrelated risk profile from equities and historically low default rates,” Kazatsky said. “Inflows into the space, domestic or otherwise, continue to make full allocations harder.”

Lipper: More inflows into muni funds
For 29 straight weeks investors have poured cash into municipal bond funds, according to data from Refinitiv Lipper. Tax-exempt mutual funds that report weekly received $1.957 billion of inflows in the week ended July 24 after inflows of $1.666 billion in the previous week.
Exchange-traded muni funds reported inflows of $256.385 million after inflows of $236.998 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.700 billion after inflows of $1.429 billion in the previous week.

The four-week moving average remained positive at $1.463 billion, after being in the green at $1.396 billion in the previous week.

What could explain these inflows?

“Obviously the reduction in SALT deductions has something to do with it, but there is also a lot of foreign money coming in because of the negative-yielding sovereigns overseas. As well, many investors are getting jittery about stocks and likely booking profits,” said Daniel Berger, senior market strategist at MMD.

“Could fund flows grow more? Don’t be surprised as these factors plus August reinvestment could continue to buoy the muni market,” Berger said.

Long-term muni bond funds had inflows of $1.181 billion in the latest week after inflows of $1.233 billion in the previous week. Intermediate-term funds had inflows of $317.712 million after inflows of $162.772 million in the prior week.

National funds had inflows of $1.724 billion after inflows of $1.469 billion in the previous week. High-yield muni funds reported inflows of $510.652 million in the latest week, after inflows of $525.472 million the previous week.

On Wednesday, the Investment Company Institute reported long-term municipal bond funds and exchange-traded funds saw a combined inflow of $2.533 billion in the week ended July 17, while long-term muni funds alone saw an inflow of $2.211 billion and ETF muni funds saw an inflow of $322 million.

Kazatsky noted that the argument could be made that the Tax Cuts and Jobs act happened at the end of 2017/early 2018, so why big inflows now?

“I think much has to do with taxpayers and their professionals having a full year to assess new liabilities under the plan and the impact of SALT limitations,” he said. “We have heard from many new accounts that their tax professionals have directed them to munis as one of the last vestiges of being able to protect income.” He added that until/unless there is a reversal of tax changes, he thinks technicals will remain supportive for municipals, though still following seasonal trends, like redemption season in the summer for example.

Secondary market
Munis were stronger in late trading on the MBIS benchmark scale, with yields falling by less than one basis point in both the 10- and 30-year maturities. High-grades were also stronger, with MBIS’ AAA scale showing yields falling by less than one basis point in the both 10- and 30-year maturities.

On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on both the 10- and 30-year GOs remained unchanged at 1.54% and 2.25%, respectively.

The 10-year muni-to-Treasury ratio was calculated at 74.1% while the 30-year muni-to-Treasury ratio stood at 86.5%, according to MMD.

Treasuries were stronger as stocks traded higher. The Treasury three-month was yielding 2.118%, the two-year was yielding 1.870%, the five-year was yielding 1.863%, the 10-year was yielding 2.077% and the 30-year was yielding 2.599%.

“The broader ICE muni yield curve is steady. High-yield and tobaccos are extremely quiet and unchanged,” ICE Data Services said in a Friday market comment. “Puerto Rico bonds are also steady despite this week’s resignation of the island’s governor.”
Previous session's activity
The MSRB reported 33,648 trades Thursday on volume of $12.18 billion. The 30-day average trade summary showed on a par amount basis of $11.01 million that customers bought $5.80 million, customers sold $3.25 million and interdealer trades totaled $1.96 million.

New York, Texas and California were most traded, with the Empire State taking 16.299% of the market, the Lone Star State taking 13.996% and the Golden State taking 13.496%.

The most actively traded security was the San Antonio Independent School District, Texas, revenue refunding 3s of 2049, which traded 34 times on volume of $58.71 million.

Week's actively traded issues
Some of the most actively traded munis by type in the week ended July 26 were from Texas, Colorado and Illinois issuers, according to IHS Markit.

In the GO bond sector, the San Antonio Independent School District, Texas, 3s of 2049 traded 42 times.

In the revenue bond sector, the Colorado Health Facilities Authority 4s of 2043 traded 62 times. In the taxable bond sector, the Illinois 5.1s of 2033 traded 35 times.

Week's actively quoted issues
Puerto Rico, New York and Illinois names were among the most actively quoted bonds in the week ended July 26, according to IHS Markit.

On the bid side, the Puerto Rico Sales Tax Financing Corp. revenue 5s of 2058 were quoted by 47 unique dealers. On the ask side, the Hudson Yards Infrastructure Corp., N.Y., revenue 4s of 2047 were quoted by 223 dealers. Among two-sided quotes, the Illinois taxable 5.1s of 2033 were quoted by 22 dealers.

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 Ziad Saba at 212-803-6079 for more information.

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