Triumph of the taxables; municipal bond market awaits this week's supply surge

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Municipal bond buyers were eagerly awaiting this start of this week’s new-issue sales, as they kept one eye on taxable supply and the other on Treasury yields.

Taxables nab attention
“It would be a fair statement to say that recent activity has carried a theme of taxable munis triumphing over tax-exempts in the attention category,” according to Kimberly Olsan, senior vice president at FTN Financial. “In just two trading days there were 15 unique taxable deals that came to market and provided some distraction to the normal flows in tax-exempts.”

She pointed to recent surge in such pricings.

“Taxable supply as a percentage of the overall projected total cannot be discounted,” she wrote in a Monday market comment. “Bloomberg data shows $2 billion was issued in taxable munis during July, grew to $7-8 billion in August and September and should end October with $12 billion in volume.”

Olsan looked at the New York State bond sale last month.

“A three-part sale of New York State GO taxable bonds due 2020-2041 brought compelling spreads of +34/5y UST and +70/10y UST. A long series was purchased with a final maturity of 2041 at +95/OLB for an absolute yield of 3.29%,” she wrote. “Although the amount of supply in October put pressure on performance (indicated at a monthly loss of 1.08%), the year-to-date gain stands at over 10% or nearly 400 basis points excess return to the broad tax-exempt market.”

As far as taxable refundings are concerned, George Friedlander of Court Street Research Group, said there were several factors which are pushing up issuance, such as the recent fall in taxable yields, which saw U.S. Treasury 30-year yields drop 68 basis points from July 24 to Aug. 28.
“This sharp decline, we suspect, pushed a large number of issuers to come in to take advantage of low borrowing costs on advanced refundings, even though they were of the taxable variety,” Friedlander wrote in a market report. “Issuers were given a choice of coming in the taxable category, or waiting until three months before the first call date to bring tax-exempt current refundings. Some issuers have clearly concluded that waiting, say, one to three years to do a current refunding brought with it the risk of higher overall yields, so they came now in the taxable category. The timing, we suspect was related to underwriters getting the word out that taxable refundings made sense, with yields down so much by the end of August.”

Will this continue?

“We are confident that there are still quite a few issuers with paper to refund that is well before the first optional call date, so we would be surprised to see taxable refundings fall off sharply, for now,” he said. “Eventually, however, we would expect to see potential taxable advanced refundings ‘used up,’ and with that, a decline in monthly supply from the October peak — but clearly not yet. In addition, of course, if yields were to bounce sharply, we would expect to see taxable advance refundings dwindle, but not disappear. Issuers with paper to advance refund or wait to current refund would still be concerned about a bounce in borrowing costs by the call date.”

He did note another factor that could influence supply. “We suspect that with yields so awful in European and other developed nation paper, the increased supply of taxable muni issuance is likely to attract some buyers from non-U.S. nations.”

Primary market
Market attention turns to the taxable sector as some the week’s biggest deals are being readied to hit the screens.

BofA Securities is set to price the week’s biggest deal — the Massachusetts School Building Authority’s (Aa3/AA/AA+) $720 million of Series 2019B taxable subordinated dedicated sales tax refunding bonds on Wednesday. Proceeds will refund some of the authority’s Series 2011B senior dedicated sales tax bonds.

Barclays and Ramirez are lead managers with Citigroup, Goldman Sachs, Jefferies, Morgan Stanley, RBC Capital Markets, UBS and Wells Fargo Securities as co-managers.

PFM Financial Advisors is the financial advisor; Mintz is the bond counsel.

In the competitive arena on Tuesday, Orange County, Fla., (Aa1/AA+/AAA) is selling $103.615 million of Series 2019 taxable sales tax revenue refunding bonds.

PFM Financial Advisors is the financial advisor. Nabors Giblin and Ruye H. Hawkins is the bond counsel. Proceeds will be used to refund certain outstanding debt.

Secondary market
Munis were mixed on the MBIS benchmark scale, with yields rising two basis points in the 10-year maturity and falling by one basis point in the 30-year maturity. High-grades were weaker, with yields on MBIS AAA scale rising by four 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 GO remained unchanged at 1.49% while the 30-year rose two basis points to 2.08%.

“The ICE muni yield curve is one basis point higher with low volume,” ICE Data Services said in a Monday market comment. “Tobaccos and high-yield are unchanged. Taxables are higher by as much as six basis points.”

The 10-year muni-to-Treasury ratio was calculated at 81.8% while the 30-year muni-to-Treasury ratio stood at 90.7%, according to MMD.

Stocks were trading higher as Treasuries strengthened. The Dow Jones Industrial Average was up about 0.5% in late trading as the S&P 500 Index was around 0.4% higher while the Nasdaq gained 0.7%. All three indexes hit all-time intraday highs.

Equities were responding favorably to Sunday’s reports that Commerce Secretary Wilbur Ross said there was no reason that a “phase-one” trade deal between the U.S. and China could not be signed later this month.

“The fade in Treasuries expands … with the risk-on shift and concession building ahead of this week's $84 billion auction package,” Peter Franks, MMD senor market analyst wrote in a market comment.

The Treasury three-month was yielding 1.547%, the two-year was yielding 1.596%, the five-year was yielding 1.605%, the 10-year was yielding 1.789% and the 30-year was yielding 2.277%.

“[Corporate] investment-grade spreads are generally tighter as Treasuries sell off,” ICE said. “The high-yield oil and gas is higher while the rest of the sector is mixed.”
Previous session's activity
The MSRB reported 27,995 trades Friday on volume of $12.07 billion. The 30-day average trade summary showed on a par amount basis of $10.68 million that customers bought $5.86 million, customers sold $2.92 million and interdealer trades totaled $1.91 million.

New York, California and Texas were most traded, with the Empire State taking 15.497% of the market, the Golden State taking 13.884% and the Lone Star State taking 10.051%.

The most actively traded securities were the Broward County, Florida, airport Series 2019C taxable 3.477s of 2043, which traded 16 times on volume of $27.151 million.

MarketAxess completes acquisition of LiquidityEdge
MarketAxess Holdings Inc. said it has completed its previously announced acquisition of LiquidityEdge. The purchase price was about $150 million, including $100 million in cash and 146,450 shares of MarketAxess common stock. The deal was completed on Friday.

MarketAxess is the operator of an electronic trading platform for fixed income securities and the provider of market data and post-trade services. LiquidityEdge is operates an electronic U.S. Treasuries marketplace.

“We’re thrilled to welcome the LiquidityEdge team to MarketAxess and look forward to the expansion of our fixed income trading capabilities to include U.S. Treasuries,” said Chris Concannon, MarketAxess president and COO. “Additionally, the acquisition supports the further expansion of our Treasury hedging capabilities, with the first phase of these enhancements set to launch in the coming weeks.”

Last week's actively traded issues
Revenue bonds made up 52.70% of total new issuance in the week ended Nov. 1, down from 52.78% in the prior week, according to IHS Markit. General obligation bonds were 41.71%, up from 41.56%, while taxable bonds accounted for 5.59%, down from 5.66%.

Some of the most actively traded munis by type in the week were from South Carolina, California and Ohio issuers.

In the GO bond sector, the Charleston County School District, S.C., 3s of 2020 traded 24 times. In the revenue bond sector, the Tobacco Securitization Authority of Southern California 5s of 2048 traded 44 times. In the taxable bond sector, Ohio 3.276s of 2042 traded 59 times.
Treasury auctions discount rate bills
Tender rates for the Treasury Department's latest 91-day and 182-day discount bills were lower, as the $45 billion of three-months incurred a 1.520% high rate, down from 1.620% the prior week, and the $42 billion of six-months incurred a 1.535% high rate, down from 1.610% the week before.

Coupon equivalents were 1.551% and 1.573%, respectively. The price for the 91s was 99.615778 and that for the 182s was 99.2239726.

The median bid on the 91s was 1.470%. The low bid was 1.440%. Tenders at the high rate were allotted 68.17%. The bid-to-cover ratio was 2.63.

The median bid for the 182s was 1.490%. The low bid was 1.450%. Tenders at the high rate were allotted 96.18%. The bid-to-cover ratio was 2.69.

Gary 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 Taxable bonds Massachusetts School Building Authority County of Orange, FL State of New York State of California State of Texas Broward County County of Charleston, SC State of Ohio
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