With $10B in total and four AAA-rated deals, muni market could see a 'reset'
A $10 billion week starts off with four AAA deals on Tuesday, which could shape the tenor of the market for the rest of it. The bonanza headed for the primary market should not only entice investors responsible for record-setting fund flows in 2019, but also set the volume bar at one of the highest levels so far this year.
IHS Markit Ipreo forecasts weekly bond volume will spike up to $10.07 billion from a revised total of $3.93 billion in the prior week, according to Refinitiv. The calendar is composed of $7.63 billion of negotiated deals and $2.44 billion of competitive sales.
“I think next week’s primary will test the market’s conviction, as we are still getting inflows and ratios have widened from their lows,” said one southern trader.
The rather large calendar next week in which the negotiated side will see a mix of vanilla and yieldier names and a fair number of $100 million-plus issues also will be priced. Meanwhile, the competitive calendar will definitely be the one to watch, he said.
“There are several AAA sales — Frederick, Mecklenburg and recently upgraded Washington State on Tuesday — these names will confirm or reset market levels,” he said. “North Carolina came at a concession to normal levels this week and I would expect that Tuesday’s sales will do the same.”
However, one New York trader is not so sure we will have a “reset” just yet, with Treasuries still just in corrective mode and therefore not going to shake the muni bid-side as investors digest those competitive deals.
“However, I do feel that the Treasury market is a bit saturated at current levels and could be due for a larger correction, although today’s [non-farm payrolls] report has helped stem the tide of yesterday’s declines,” he said. “Munis will take their lead from treasuries but continue to outperform on any down trades until the technicals turn negative. September is supposed to be a net positive supply month but as long as the flow of funds stays positive, the sentiment will remain overall positive as well.”
Some suggest its timing will be interesting a week ahead of the Federal Reserve Board’s Sept. 17 and 18 meeting.
“There’s still very high demand for municipals — particularly investment-grade and better — because of all the massive inflows of money into municipal bond funds for the past few months,” Howard Mackey, managing director at NW Financial Group LLC in Hoboken, said on Friday afternoon.
Mackey said Friday’s market was fairly stable and improving after Thursday’s market stumble after speculations of a resolution with China trade talks caused the market to sell off and a drop in the Refinitiv Municipal Market Data yield curve.
The backdrop is ripe for the giant slate of issuance, according to Mackey. “You’re going to see a tremendous amount of interest because it’s a big improvement from the last couple of weeks,” he said. “With that kind of demand, I don’t think we will have trouble absorbing $10 billion.”
Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management, said next week’s supply surge will be a significant occurrence given that volume has been spotty in 2019.
“It will be a test before the Fed makes a rate decision,” amid optimism over the possibility of a China and U.S. tariff deal, Heckman said.
At the same time, he said the decreasing expectation for a 50 basis-point cut in the Fed Funds rate, as well as a backup in Treasury yields will determine how the market digests the voluminous slate.
“It’s a long time coming and should be welcomed by the market, which has been very supply-constrained lately,” Heckman said.“It will be interesting to monitor how the week goes and the pricing of the AAA offers with a back up in muni yields in concert with the Treasury market might be a good time to take advantage of this supply since there is cash on the sidelines to do so."
Mackey said specialty states, like New Jersey, have been seeing significant demand because of the incentive for in-state investors to avoid the local tax consequences.
“We have seen more New Jersey and Pennsylvania names, such as triple-A New Jersey counties and cities, trade through the scale,” Mackey said.
He said separately managed accounts have many customers who only want high-grade paper — double-A to triple-A — as they are very risk averse. These investors will gravitate toward high-grades. .
Heckman agreed that next week’s triple-A offerings will be highly sought after since quality is on investors’ minds.
“At this period of the economic cycle, we are long into the cycle and there are some recession fears over the trade tariffs and an economic slow down, so investors are going to want to look at upgrading the quality of their portfolios,” Heckman said.
At the same time, investors will question whether the triple-A deals have enough yield to incentivize purchases — but Heckman said the need for quality could offset those concerns.
“It will be interesting to watch and see how those AAA deals are put away as people are looking for quality,” he said.
About that primary ...
First, Washington State (AAA/AA+/AA+) is coming with two competitive deals totaling $714.90 million. The larger of the two deals is $490.405 million of various purpose general obligation bonds and that will be followed by $224.495 million of motor vehicle fuel tax and vehicle related fees GO bonds on Tuesday.
A market maker for AAA benchmarks, Mecklenburg County, N.C., (Aaa/AAA/AAA) will also competitively sell $200 million of GO public improvement bonds on Tuesday.
Yet another top-rated issuer, Frederick County, Md., (Aaa/AAA/AAA) will hit the competitive market with a $118.320 million of GO public facilities bonds on Tuesday.
In the negotiated world, JP Morgan is scheduled to price the largest deal of the week — Parish of St. John the Baptist, Louisiana’s (Baa3/BBB/BBB) $600 million revenue refunding non-alternative minimum tax bonds for the Marathon Oil Corp. Project on Thursday, for those who seek higher yields.
RBC Capital Markets is set to price Broward County, Fla.’s (A1/A/ ) and (A2/A- / ) $468.95 million of port facilities revenue bonds, featuring AMT and non-AMT bonds on Tuesday.
In another university looking out long, Morgan Stanley is expected to price Rutgers University’s (Aa3/A+/ ) $330 million of federally taxable GO bonds on Friday. The 100-year bond is due May 1, 2119.
Mackey said the deal may be challenging, due to its lower ratings.
“The spread on those would have to be significant enough to make people take on that duration,” he said. “At this level of interest rates, that’s going to be an interesting sale.”
Mackey continued to say investors may be reluctant to lock into historically low interest rates for a century.
“In this interest-rate environment, people will become more duration defensive,” he said, noting that they prefer 4% and 5% coupon premium bonds which perform better in a potential market downturn than par bonds. “When you increase duration with a 100-maturity, a lot of that is going to get lost — so it’s going to be a challenging sale."
Lipper: More inflows, but lowest amount in five weeks
For 35 weeks in a row investors have poured cash into municipal bond funds, according to the latest data released by Refinitiv Lipper on Thursday.
Tax-exempt mutual funds that report weekly received $820.1 million of inflows in the week ended Sept. 4 after inflows of $1.536 billion in the previous week. This marks the smallest inflows since the week of July 31, when munis saw $433.609 million of inflows. This latest week also marks only the third time in the past 12 weeks where inflows have been less than $1 billion.
Exchange-traded muni funds reported inflows of $44.376 million after inflows of $291.351 million in the previous week. Ex-ETFs, muni funds saw inflows of $775.724 million after inflows of $1.245 billion in the previous week.
The four-week moving average remained positive at $1.385 billion, after being in the green at $1.769 billion in the previous week.
Long-term muni bond funds had inflows of $267.661 million in the latest week after inflows of $1.213 billion in the previous week. Intermediate-term funds had inflows of $455.942 million after inflows of $152.656 million in the prior week.
National funds had inflows of $669.588 million after inflows of $1.347 billion in the previous week. High-yield muni funds reported inflows of $184.802 million in the latest week, after inflows of $410.496 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 $1.960 billion in the week ended Aug. 28, while long-term muni funds alone saw an inflow of $1.633 billion and ETF muni funds saw an inflow of $327 million.
Munis were weaker on the MBIS benchmark scale, with yields rising by two basis points in the 10-year maturity and by less than one basis point in the 30-year maturity. High-grades were also weaker, with MBIS’ AAA scale showing yields rising by less than two basis points in both the 10-year and 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10- and 30-year year muni GOs both were unchanged at 1.28% and 1.90%, respectively.
The 10-year muni-to-Treasury ratio was calculated at 82.6% while the 30-year muni-to-Treasury ratio stood at 94.0%, according to MMD.
Treasuries were mostly lower as stocks traded in the green. The Treasury three-month was yielding 1.961%, the two-year was yielding 1.528%, the five-year was yielding 1.420%, the 10-year was yielding 1.552% and the 30-year was yielding 2.023%.
“The ICE muni yield curve is up one basis point following [Thursday’s] rise in Treasury yields,” ICE Data Services said in a Friday market comment. “Tobaccos and high-yield are quiet and unchanged. Taxable yields are down one to two basis points.”
ICE also said that Puerto Rico bonds were steady but that “despite a looming teachers’ strike, Chicago Board of Education bonds are down in yield due to a well-received new issue.”
Previous session's activity
The MSRB reported 33,155 trades Thursday on volume of $13.45 billion. The 30-day average trade summary showed on a par amount basis of $11.08 million that customers bought $5.90 million, customers sold $3.19 million and interdealer trades totaled $1.98 million.
Texas, California and New York were most traded, with the Lone Star State taking 13.912% of the market, the Golden State taking 13.661% and the Empire State taking 11.196%.
The most actively traded security was the Commonwealth of Massachusetts taxable consolidated lien 2.9s of 2049, which traded 35 times on volume of $76.50 million.
Week's actively traded issues
Some of the most actively traded munis by type in the week ended Sept. 6 were from New York, Texas and Massachusetts issuers, according to IHS Markit.
In the GO bond sector, the New York City 0s of 2042 traded 20 times. In the revenue bond sector, the Texas TRANs 4s of 2020 traded 51 times. In the taxable bond sector, the Massachusetts 2.9s of 2049 traded 72 times.
Week's actively quoted issues
Puerto Rico, New York and California names were among the most actively quoted bonds in the week ended Sept. 6, according to IHS Markit.
On the bid side, the Puerto Rico Sales Tax Financing Corp., sale tax revenue, 5s of 2058 were quoted by 35 unique dealers. On the ask side, the Port Authority of New York and New Jersey revenue 4s of 2045 were quoted by 174 dealers. Among two-sided quotes, the California taxable 7.55s of 2039 were quoted by 16 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.