The short-end of the municipal bond market, from the zeros to three-year maturity range, is still rich relative to other options such as U.S. Treasury and corporate bonds, J.R. Rieger writes in Monday’s Rieger Report.
The long end did see pressure on Friday to move cheaper as new issue supply increases, but stayed in line with Treasury yields, he said, adding that AA and A rated bonds on the long end saw more volatility.
With regard to municipals versus corporate bonds, he said that excluding the short end of the curve, the yields of AA and higher munis are still attractive for higher tax bracket market participants.
Primary market
Municipal bond buyers are looking ahead to the wide variety of new deals heading their way this week. Weekly bond volume is estimated to total $6.3 billion, consisting of $4.4 billion of negotiated deals and $1.9 billion of competitive sales.
Action gets underway on Tuesday, with the focus on the competitive sector.
The Shoreline School District No. 412, Wash., is selling $206.81 million of unlimited tax general obligation bonds under the Washington state school district credit enhancement program. Proceeds will be used to pay costs of carrying out and accomplishing certain capital improvements.
The financial advisor is PFM Financial Advisors; the bond counsel is Foster Pepper. The deal is rated AA-plus by S&P Global Ratings.
Saint Petersburg, Fla., is selling $204.605 million of Series 2018 public utility refunding revenue bonds. The proceeds together with other city money will be used to currently refund all of the city's outstanding Series 2017 public utility subordinate lien bond anticipation notes and finance or reimburse the costs of the project
The financial advisor is PFM Financial Advisors; the bond counsel is Bryant Miller. The deal is rated Aa2 by Moody’s Investors Service and AA by Fitch Ratings.
Also in the Sunshine State, Pompano Beach is selling $102.42 million of Series 2018 GOs. Proceeds along with other city money will be used to finance certain capital projects.
The financial advisor is PFM Financial Advisors; the bond counsel is Greenspoon Marder. The deal is rated AA by S&P.
The Fort Mill School District No. 4 of York County, S.C., is selling $100 million of Series 2018B GOs. Proceeds will be used to defraying the costs of capital improvements to facilities of the School District.
The financial advisor is Compass Municipal Advisors; the bond counsel is Haynsworth Sinkler. The deal is rated Aa1 by Moody’s and AA by S&P.
And North Las Vegas is selling $99 million of Series 2018 limited tax GO building refunding bonds additionally secured by pledged revenues. Proceeds of the 2018 Bonds will be used to: (i) refund the City’s outstanding General Obligation (Limited Tax) Judicial/Public Safety Bonds (Additionally Secured by Pledged Revenues) Series 2003, outstanding General Obligation (Limited Tax) Building Bonds (Additionally Secured by Pledged Revenues) Series 2006 and outstanding General Obligation (Limited Tax) Judicial/Public Safety Refunding Bonds, Series 2007A.
The financial advisor is Zions Public Finance; the bond counsel is Stradling Yocca. The deal is rated Baa1 by Moody’s and BBB by S&P.
Prior week's top underwriters
The top municipal bond underwriters of last week included Loop Capital Markets, Citigroup, Goldman Sachs, Jefferies and Morgan Stanley, according to Thomson Reuters data.
In the week of Sept. 2 to Sept. 8, Loop underwrote $750.0 million, Citi $575.3 million, Goldman $426.6 million, Jefferies $313.6 million and Morgan Stanley $306.1 million.
Bond Buyer 30-day visible supply at $11.24B
The Bond Buyer's 30-day visible supply calendar increased $340.4 million to $11.24 billion for Tuesday. The total is comprised of $3.48 billion of competitive sales and $7.76 billion of negotiated deals.
Supply reignited?
An end to the year-long supply shortage in the municipal market could soon be in sight between now and the close of 2018, Stephen Winterstein of Wilmington Trust said in Monday report.
“Now that we are past the Labor Day holiday, new issuance seems to have reignited and should accelerate into mid-September,” Winterstein predicted, adding that he also expects a healthy pace of issuance leading up to the Thanksgiving holiday.
Total year-to-date issuance stood at $227.243 billion as of Friday’s close, Winterstein wrote. He said that figure was a 15.4% decline from the same period a year earlier.
“The supply deficit has narrowed somewhat over the summer months,” looking back to June 22 when 2018’s new issuance was 18.779% under 2017’s on a year-to-date basis.
As supply builds, demand continues to thrive, according to Winterstein, who cited the positive $186 billion of municipal bond fund flows tracked by the Investment Company Institute for the week ending Aug. 29. The next ICI fund flows report on Sept. 12 covers the four trading days ending on Sept. 5 when the S&P Municipal Bond Index generated a negative 0.078% return, he noted.
“Investors seem to have been somewhat dismissive of softer returns over the prior two weeks as flows remained positive, but they steadily lessened and the most recent print was the weakest of the summer,” he wrote. “We would not be at all astonished if that near-term trend persists in the next week’s account.” Despite recent softness, investors have reallocated a net total of $16.219 billion into municipal bond funds so far in 2018, according to Winterstein.
Meanwhile, the market may see a softer tone arise early in the week this week, he predicted. The market, he pointed out, has adapted a more bearish tone over the past week as Treasury interest rates moved higher and municipals followed suit.
“The new-issue calendar is much healthier for the impending five trading days,” he wrote in the Sept. 7 report, “and could exacerbate the current market mood.” He added that "fund flows are weaker and we remain concerned that they could turn negative in a prolonged down market.”
Prior week's top FAs
The top municipal financial advisors of last week included Public Resources Advisory Group, Acacia Financial Group, Hilltop Securities, PFM Financial Advisors, and Blue Rose Capital Advisors, according to Thomson Reuters data.
In the week of Sept. 2 to Sept. 8, PRAG advised on $1.7 billion, Acacia $625.0 million, Hilltop $133.9 million, PFM $131.4 million, and Blue Rose $90.1 million.
Secondary market
Municipal bonds were weaker on Monday, according to a late read of the MBIS benchmark scale. Benchmark muni yields rose as much as one basis point in the one- to 30-year maturities.
High-grade munis were also weaker, with yields calculated on MBIS' AAA scale rising as much as one basis point across the curve.
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 stronger as stock prices traded little changed.
On Monday, the 10-year muni-to-Treasury ratio was calculated at 84.8% while the 30-year muni-to-Treasury ratio stood at 100.5%, 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.
“On Friday, after the release of the employment and wage growth data in the U.S., Treasuries broke out of their recent tight trading range,” ICE Data Services said in a Monday afternoon market comment. “The two-year pushed above a 2.70% yield and has stayed there so far today … it is the highest yield in over 10 years. The 10-year yield rose all the way to 2.94% Friday and has remained there. The front end of the curve is now set up for two Fed rate hikes over the remainder of this year.”
Previous session's activity
The Municipal Securities Rulemaking Board reported 37,066 trades on Friday on volume of $12.37 billion.
California, New York and Texas were the municipalities with the most trades, with Golden State taking 14.329% of the market, the Empire State taking 15.691% and the Lone Star State taking 11.302%.
Unenthused investors
While investors are prepping for increased volume in the coming weeks and months, they are making little rush to market as buyers or sellers -- at least this week, according to a New York trader. “It’s real quiet, and some of that is because it’s a holiday for some,” the trader said on Monday afternoon, referring to the observance of the Jewish New Year, Rosh Hashanah.
Although the market saw some of its largest volume of the year in the last three weeks, “that’s not saying much,” given the supply shortage year to date.
“The market just continues to suffer from a little bit of malaise,” the trader said. “We’ve had a little back off in Treasuries, but [muni] percentages [to Treasuries] haven’t moved and that doesn’t help. We have been lock step at 100%” in recent weeks, he said. “The market can’t get out of its own way - it can’t break out,” of its trading range and close relationship with Treasuries.
He said while traditional mom and pop customers continue to buy new issue product when available, trading accounts have been sellers, though not in a “crazy rush” to sell. “For every three sellers, there’s only one buyer,” he said.
“People continue to carry blocks and hopefully look for the right opportunity to sell them,” he added. “Desks are slowly getting themselves longer than where they like to be. Investors are not all that enthused playing at these relative low raw yields,” he said, calling the market environment “challenging.”
Prior week's actively traded issues
Revenue bonds comprised 56.60% of total new issuance in the week ended Sept. 7, up from 56.54% in the prior week, according to
Some of the most actively traded munis by type were from Massachusetts, Texas, and Illinois issuers. In the GO bond sector, the Massachusetts 4s of 2019 traded 66 times. In the revenue bond sector, the Texas 4s of 2019 traded 170 times. And in the taxable bond sector, the Chicago 5.432s of 2042 traded 12 times.
Treasury auctions discount rate bills
Tender rates for the Treasury Department's latest 91-day and 182-day discount bills were higher, as the $48 billion of three-months incurred a 2.110% high rate, up from 2.095% the prior week, and the $42 billion of six-months incurred a 2.265% high rate, up from 2.240% the week before.
Coupon equivalents were 2.151% and 2.323%, respectively. The price for the 91s was 99.466639 and that for the 182s was 98.854917.
The median bid on the 91s was 2.090%. The low bid was 2.055%. Tenders at the high rate were allotted 89.57%. The bid-to-cover ratio was 3.02.
The median bid for the 182s was 2.250%. The low bid was 2.230%. Tenders at the high rate were allotted 26.12%. The bid-to-cover ratio was 3.14.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
