Will muni mojo return in second half?
The municipal bond market was little changed in quiet activity during Wednesday’s shortened trading session ahead of the Fourth of July.
Lipton: Remaining bullish for the second half
The bond market lost its mojo as the rally fizzled in June with munis again ceding outperformance to U.S. Treasuries for the month and now underperforming year-to-date, according to Jeffrey Lipton, managing director at Oppenheimer & Co.
“Given our outlook for constructive technicals, we can expect to see a return to more expensive ratios, but we are not sure that they break through the lows already achieved for the year,” Lipton said in a Wednesday report. “New data points showing stronger economic momentum and firmer inflation, and a more optimistic view on a trade agreement could soften market probability of more aggressive rate cuts and alter our muni performance outlook.”
Lipton said that demand for municipals has shown unwavering support from retail investors leading to 25 consecutive weeks of positive municipal bond mutual fund flows, with still outsized inflows.
“We have to wonder just how sustainable this trajectory is, but given our technical outlook there is a logical argument favoring an extended run of inflows,” Lipton said. “If sentiment shifts with a technical reversal, we could at the very least see a slowdown in the pace of inflows, and if there is a sustained shift from the first six months of the year, we may even see a period of cash outflows.”
Lipton said that bond funds and separately managed accounts are likely to display the most substantial interest given “a volume-starved market flush with cash ready for redeployment.”
He said that unless there is a change in law regarding muni issuance, the firm didn’t see any other catalyst to drive breakout supply for now
“At the beginning of the year, we were forecasting 2019 volume at $350-$360 billion, and now we expect supply to come in at $330 billion,” he said.
“We really cannot be all that surprised over recent muni underperformance given that Treasuries have been gaining ground and that conventional wisdom holds that munis tend to underperform during bond rallies,” he said. “Munis have already surpassed our initial call for modest single-digit positive returns and we are optimistic that muni returns will finish the year within the upper range of single-digit returns.”
ICI: Muni funds see $2.5B inflow
Long-term municipal bond funds and exchange-traded funds took in a combined inflow of $2.517 billion in the week ended June 26, the Investment Company Institute reported on Wednesday.
It was the 25th straight week of inflows into the tax-exempt mutual funds and followed an inflow of $1.590 billion in the previous week.
Long-term muni funds alone saw an inflow of $2.215 billion after an inflow of $1.414 billion in the previous week; ETF muni funds alone saw an inflow of $302 million after an inflow of $176 million in the prior week.
Taxable bond funds saw combined inflows of $8.013 billion in the latest reporting week after inflows of $6.342 billion in the previous week.
ICI said the total combined estimated inflows from all long-term mutual funds and ETFs were $1.945 billion after inflows of $18.289 billion in the prior week.
The muni market saw an early close on Wednesday ahead of the full close for the July 4 holiday. Trading resumes Friday and the market will be looking ahead to next week’s heftier calendar.
Topping the negotiated slate is the Trustees of the California State University’s (Aa2/AA-/NR) $543.72 million of revenue bonds. Barclays Capital will price the Series 2018A and taxable Series 2019B bonds on Thursday.
Citigroup is expected to price the Massachusetts Port Authority’s (Aa2/AA/AA) $461.215 million of Series 2019B revenue bonds not subject to the alternative minimum tax and Series 2019C AMT bonds on Wednesday.
Barclays is set to price the NYC Municipal Water Finance Authority’s (Aa1/AA+/AA+) $400 million of tax-exempt fixed-rate second general resolution revenue bonds on Wednesday after a one-day retail order period on Tuesday.
In the competitive arena, San Jose, California, (Aa1/AA+/AA+) is selling $502.26 million of general obligation bonds in three offerings on Tuesday.
The sales consist of $173.4 million of Series 2019A-1 disaster preparedness, public safety and infrastructure GOs, $170.37 million of Series 2019B Taxable GOs and $158.49 million of Series 2019C refunding, libraries, parks and public safety project GOs.
Proceeds from the Series 2019A-1 bonds will be used to finance traffic, public safety and storm sewer improvements; proceeds from the Series 2019B taxables will be used to buy open space in Coyote Valley to prevent flooding and water quality contamination, lighting improvements and community centers/emergency shelters, and to refund certain outstanding debt; proceeds from the Series 2019C bonds will be used to finance library, public safety improvements and to refund certain outstanding debt.
The financial advisor is Public Resources Advisory Group. The bond counsel is Jones Hall.
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 weaker, with MBIS’ AAA scale showing yields rising by less than one basis point in both the 10- and 30-year maturities.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year fell two basis points to 1.60% while the 30-year declined two basis points to 2.27%.
The 10-year muni-to-Treasury ratio was calculated at 82.0% while the 30-year muni-to-Treasury ratio stood at 91.9%, according to MMD.
Treasuries were stronger as stocks traded higher. The Treasury three-month was yielding 2.208%, the two-year was yielding 1.758%, the five-year was yielding 1.742%, the 10-year was yielding 1.957% and the 30-year was yielding 2.473%.
Most BB Indexes dip, with BB40 unchanged
In the week ended July 3, the weekly average yield-to-maturity of the Bond Buyer Municipal Bond Index, which is based on 40 long-term bond prices, was flat at 3.70% from the previous week.
The Bond Buyer's 20-bond GO Index of 20-year general obligation yields dipped one basis point to 3.49% from 3.50% the week before. It is at its lowest level since June 6, when it was at 3.48%.
The 11-bond GO Index of higher-grade 11-year GOs slipped one basis point to 3.03% from 3.04% the previous week. It is at its lowest level since June 6, when it was at 3.02%.
The Bond Buyer's Revenue Bond Index was two basis points lower to 3.97% from 3.99% the week before. It is at its lowest level in two weeks, when it was at 3.97%.
The yield on the U.S. Treasury's 10-year note dropped five basis points to 1.96%, while the 30-year Treasury was six basis points lower to 2.47%.
Previous session's activity
The MSRB reported 40,823 trades Tuesday on volume of $10.20 billion. The 30-day average trade summary showed on a par amount basis of $12.55 million that customers bought $6.60 million, customers sold $3.87 million and interdealer trades totaled $2.08 million.
New York, California and Texas were most traded, with the Empire State taking 14.608% of the market, the Golden State taking 14.288% and the Lone Star State taking 9.892%.
The most actively traded security was the Los Angeles 2019 TRANs 5s of 2020, which traded 50 times on volume of $57.57 million.
Treasury auctions announced
The Treasury Department announced these auctions:
- $16 billion 29-year 10-month 2 7/8% bonds selling on July 11;
- $24 billion 9-year 10-month 2 3/8% notes selling on July 10;
- $38 billion three-year notes selling on July 9;
- $36 billion 182-day bills selling on July 8; and
- $36 billion 91-day bills selling on July 8.
Treasury auctions bills
The Treasury Department Thursday auctioned $40 billion of four-week bills at a 2.210% high yield, a price of 99.828111. The coupon equivalent was 2.251%. The bid-to-cover ratio was 2.47. Tenders at the high rate were allotted 27.78%. The median rate was 2.165%. The low rate was 2.100%.
Treasury also auctioned $35 billion of eight-week bills at a 2.155% high yield, a price of 99.664778. The coupon equivalent was 2.198%. The bid-to-cover ratio was 2.76. Tenders at the high rate were allotted 75.33%. The median rate was 2.140%. The low rate was 2.110%.
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, or contact Ziad Saba at 212-803-6079 for more information.