The muni market starting saw a steady stream of issuance on Tuesday, preceding a big wave of deals that are expected on Wednesday.
Siebert Cisneros Shank & Co. priced Los Angeles’ $360 million of wastewater system subordinate revenue green bonds and revenue refunding bonds. The deal is rated AA by S&P Global Ratings, Fitch Ratings and Kroll Bond Rating Agency.
Raymond James & Associates priced Ohio’s $170 million of capital facilities lease appropriation bonds and taxable parks and recreation improvement bonds on Tuesday. The deal is rated Aa2 by Moody’s Investors Service and AA by S&P and Fitch.
In the competitive arena, the Florida Department of Management sold $249.265 million of bonds. Wells Fargo Securities won the bidding, with a true interest cost of 2.71%.
Tuesday’s pricings
Flows and demand
Rising yields continue to impact flows and demand in the municipal market, Stephen Winterstein, managing director of research and head of municipal strategy at Wilmington Trust, wrote in a weekly municipal fixed income report.
“The tax-exempt municipal bond market has spent most of the year a bit underwater, as the somewhat systematic and well-behaved rise in yields has produced slightly negative returns in the broad market index,” he wrote. “In our opinion, investors seem to be tolerating this sidelong environment quite nicely.”
However, appetite as measured by mutual fund flows has turned negative, “undoubtedly due to disappointing performance,” according to Winterstein.
On Oct. 24, the Investment Company Institute reported $1.415 billion of municipal bond fund net outflows for the mid-week period ending Oct. 17, he noted.
“Prolonged market weakness could spark a non-virtuous cycle where fund share redemptions beget forced selling by mutual fund managers, which, in turn, moves bond valuations lower and returns negative, thereby perpetuating outflows,” he continued.
But, Winterstein speculated that the most recent two-week interlude of slightly positive performance may be enough to curb net outflows temporarily.
“Despite net withdrawals over the past four reports, investors have reallocated a net total of $13.177 billion into municipal bond funds thus far in 2018,” he wrote.
Meanwhile, Winterstein believes there is a reasonably strong -- albeit lagging -- relationship between market performance and retail investors’ willingness to add or withdraw capital in light of changes in net asset values of open-end municipal bond funds.
He referred to the immediate supply-demand equilibrium “delicate,” adding that a “seemingly inconsequential” event could spark a directional market move.
He cited Wilmington Trust’s chief economist Luke Tilley’s prediction that the curve may continue to flatten throughout this sequence, and the 10-year U.S.Treasury could crest at 3.50% to 3.750% over the next twelve to eighteen months.
“If a future upswing is in the neighborhood of his outlook and the 10-year UST reaches a 3.75% yield over the next 18 months, then it would give the impression most of the pain may be behind us -- at least for this market cycle,” Winterstein wrote.
“Nevertheless, we remain true to our duration-neutral discipline and are learning to live with the near-term annoyance of rising yields,” he continued.
Secondary market
Municipal bonds were mostly weaker on Monday, according to a midday read of the MBIS benchmark scale. Benchmark muni yields rose as much as one basis point in the one- to 11-year and 13- to 17-year maturities and the 30-year maturity. The remaining maturities were stronger by less than one basis point or unchanged.
High-grade munis were mostly stronger, with yields calculated on MBIS' AAA scale decreasing as much as a basis point in the one- to seven-year, the nine- to 13-year maturities and the 20- to 26-year maturities. The remaining maturities were weaker by less than one basis point or unchanged.
Munis were weaker on Municipal Market Data’s AAA benchmark scale, which showed yields on both the 10-year muni general obligation and 30-year muni rising as much as two basis points.
On Monday, the 10-year muni-to-Treasury ratio was calculated at 87.0% while the 30-year muni-to-Treasury ratio stood at 99.8%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.
Previous session's activity
The Municipal Securities Rulemaking Board reported 37,547 trades on Monday on volume of $8.724 billion.
California, New York and Texas were the municipalities with the most trades, with the Golden State taking 16.23%, the Empire State taking 12.765% of the market and the Lone Star State taking 10.948%.
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.
