Municipal bonds were stronger on Wednesday in quiet trading ahead of the Thanksgiving holiday.
The upcoming week will see a hefty slate of supply. Ipreo forecasts bond volume will jump to $6 billion from a revised total of $863.8 million in the holiday week, according to updated data from Thomson Reuters. The calendar is composed of $4.9 billion of negotiated deals and $1.1 billion of competitive sales.
With the market eager to head home for the upcoming Thanksgiving holiday, traders saw a quiet end to lackluster activity.
“It’s extremely quiet today,” a New York trader said Wednesday. “Munis have performed well all week following the lead of a strong Treasury market.”
He said sizable bid lists continue to flood the secondary market and there are expectations for a heavy new issue calendar over the next three weeks.
Primary market
Topping the new issue calendar are $1.2 billion of general obligation bonds coming out of New York City.
Bank of America Merrill Lynch is set to price the city’s $856 million of tax-exempt fixed-rate bonds, consisting of Fiscal 2019 Series D Subseries D-1 and Fiscal 2008 Series J Subseries J-1 and J-11 as a reoffering.
The deal is expected to have a two day retail order period starting on Tuesday and be priced for institutions on Thursday, Nov. 29.
Joint lead manager is Blaylock Van; Citigroup, Goldman Sachs, JPMorgan Securities, Jefferies, Loop Capital Markets, Ramirez & Co., RBC Capital Markets and Siebert Cisneros Shank & Co. are serving as co-senior managers.
Also on Thursday, the city is competitively selling $350 million of taxable fixed-rate GOs in two sales consisting of $223.79 million of Fiscal 2019 Series D Subseries D-2 GOs and $126.21 million of Fiscal 2019 Series D Subseries D-3 GOs.
Proceeds will be used for capital projects, with the exception of some of the tax-exempt fixed-rate bond proceeds, which will be used to convert $175 million of outstanding floating-rate bonds into fixed-rates, the city said.
The deals are rated Aa2 by Moody’s Investors Service and AA by S&P Global Ratings and Fitch Ratings.
Also on tap, the Chicago
JPMorgan Securities is expected to price the BOE’s $763.305 million of dedicated revenues Series 2018C unlimited tax GO refunding bonds and Series 2018D unlimited tax GOs on Wednesday and the school’s $86 million of Series 2018 dedicated capital improvement tax bonds on Tuesday.
PFM Financial Advisors and Public Alternative Advisors are advisors. Katten Muchin Rosenman and Taft Stettinius & Hollister are bond counsel.
On Thursday, the BOE will competitively sell $200 million of Series 2018B tax anticipation notes.
The TANs are unrated and bids are capped at 5%. PFM and Columbia Capital Management are advising the district while Ice Miller and Pugh Jones & Johnson are bond counsel on the notes.
The GOs are rated junk by two rating agencies and low investment grade by a third. Ahead of the deal, Fitch affirmed the district’s BB-minus rating and positive outlook and S&P affirmed its B-plus rating and stable outlook. Kroll Bond Rating Agency assigns a rating of BBB with a positive outlook.
The CIT bonds are rated between BBB and the single-A category.
Bond Buyer 30-day visible supply at $8.07B
The Bond Buyer's 30-day visible supply calendar increased $3.8 billion to $8.07 billion for Wednesday. The total is comprised of $1.90 billion of competitive sales and $6.17 billion of negotiated deals.
Year-end opportunities seen
As year end approaches, opportunities are ripe for investors looking to end 2018 with some value added, said John Mousseau, president of Cumberland Advisors.
“Intermediate and particularly longer munis offer great value,” especially relative to a volatile stock market, which is currently at zero return, Mousseau said.
He noted that a 4% muni is comparable to a 6.35% taxable equivalent and a long Treasury of 3.35%. Mousseau said the taxable equivalent would be even higher if that investor hails from a high tax state under the SALT provisions.
“The large rollover period in front of us is unlikely to get much leakage into equities,” given last week’s volatility and losses that eroded earlier year’s gains, he said.
Meanwhile, Mousseau said other economic factors also bode well for munis, including the realization that the economy may be slowing.
“Housing is slowing down with price cuts in most of the Northeast and high-tax states,” he said. “Part of this is a market which has gotten ahead of affordability and also the specter of what the SALT provisions will mean next April 15."
ICI: Long-term muni funds saw $770M outflow
Long-term tax-exempt municipal bond funds saw an outflow of $770 million in the week ended Nov. 14, the Investment Company Institute reported Wednesday.
This followed an outflow of $909 million in the week ended Nov. 7 and outflows of $1.196 billion, $179 million, $1.310 billion, $1.653 billion, $3 million and $374 million in the previous six weeks.
Taxable bond funds saw an estimated outflow of $1.543 billion in the latest reporting week, after seeing an inflow of $1.703 billion in the previous week and an outflow of $17.409 billion in the week ended Oct. 31.
ICI said the total estimated outflows to long-term mutual funds and exchange-traded funds were $96 million after outflows of $2.437 billion in the prior week and $16.359 billion in the week ended Oct. 31.
Looking at Treasury yields
Treasury yields have declined sharply on concerns over slowing economic momentum, falling oil prices and Brexit uncertainty, according to Bill Merz, a director of fixed-income at U.S. Bank Wealth Management in Minneapolis.
“Market expectations for [Federal Reserve] rate hikes dropped, with investors challenging the idea that the economy can sustain numerous additional rate hikes,” Merz wrote in a weekly market comment released on Wednesday. “Even if the Fed trims its outlook for 2019 rate increases, markets still likely underappreciate the extent of tightening. We believe U.S. Treasury yields will migrate higher on Fed hikes, increasing Treasury issuance, declining central bank purchases and unattractive U.S. yields for foreign investors once currency risks are hedged.”
He said expected Fed rate hikes suggest an upside to Treasury yields going forward.
“The futures market prices in more than a 90% likelihood of a December hike. We expect a 0.25% increase to the Fed’s target funds range, but only a 0.20% increase to interest on excess reserves. The futures market prices in an additional 1.45 hikes (+0.37%) in 2019 compared to the Fed’s median estimate of three hikes (+0.75%),” he said.
Merz said that market expectations on rate hikes in 2019 dropped after Fed Chairman Jerome Powell emphasized the Fed’s data dependence and acknowledged slowing global growth. He also cited Fed Vice Chairman Richard Clarida’s cautious comments on the economy.
“Economic conditions suggest rate hikes are likely to continue for the time being,” he said. “However, it appears increasingly likely the Fed’s median estimates for 2019 and later rate hikes will come down slightly.”
Secondary market
Municipal bonds were mostly stronger on Wednesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell as much as one basis point in the four- to 30-year maturities, rose less than a basis point in the one- and two-year maturities and were unchanged in the three-year maturity.
High-grade munis were mostly stronger, with yields calculated on MBIS' AAA scale decreasing as much as one basis point in the five- to 30-year maturities, rising less than a basis point in the one- to four-year maturities.
Municipals were steady on Municipal Market Data’s AAA benchmark scale, which showed the yield on both the 10-year muni general obligation and the yield on 30-year muni maturity remaining unchanged.
Treasury bonds were weaker as stocks traded up. The Treasury 10-year stood at 3.074% while the Treasury three-month bill was at 2.407%.
The Dow Jones Industrial Average was up 0.7% while the Nasdaq Composite Index rose 1.6% and the S&P 500 Index gained 1.0%.
Previous session's activity
The Municipal Securities Rulemaking Board reported 46,605 trades on Tuesday on volume of $13.32 billion.
California, New York and Texas were the municipalities with the most trades, with the Golden State taking 14.379% of the market, the Empire State taking 13.719% and the Lone Star State taking 9.222%.
Treasury announces auction details
The Treasury Department announced these auctions:
- $32 billion of seven-year notes selling on Nov. 28;
- $40 billion of five-year notes selling on Nov. 27;
- $39 billion of two-year notes selling on Nov. 26;
- $18 billion of one-year 11-month 0.045% floating rate notes (reopening) selling on Nov. 28;
- $36 billion of 182-day bills selling on Nov. 26; and
- $39 billion of 91-day bills selling on Nov. 26.
Treasury sells $11B TIPs
The Treasury Department sold $11 billion of inflation-indexed 9-year 8-month TIPs at a 1.109% high yield, an adjusted price of 97.275351, with a 3/4% coupon. The bid-to-cover ratio was 2.59.
Tenders at the market-clearing yield were allotted 80.47%. Among competitive tenders, the median yield was 1.070% and the low yield 1.000%, Treasury said.
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.
