Strong technical factors should bolster the municipal market this summer, as buyers vie for securities s in a supply-starved environment, according to market comment from Oppenheimer & Co.
The report also examined the July/August reinvestment needs, which stem from heavy maturities, redemptions, and coupon payments.
“With next week’s calendar expected to be back up to more respectable levels, we are anticipating strong investor appetite with a likely presence of oversubscribed loans as there should be a shortage of product,” said Jeffrey Lipton, a managing director at Oppenheimer.
The amount of bond calls and maturities scheduled to be removed from the market over the next 30 days is estimated to total $33.37 billion, according to Bloomberg data. The 30-day total fixed rate supply just surpasses $3.7 billion, resulting in a 30-day net supply of about negative $29.67 billion, Oppenheimer said.
“Against a backdrop of constructive market technicals and a more visible flight-to-quality-bid (that may be more prevalent through the balance of the year as geopolitical concerns, including global trade headwinds, evolve) price discovery has seen noted improvement and liquidity challenges have eased somewhat,” Lipton said. “We continue to believe that munis have the potential to unlock additional performance and finish the year with modest single digit positive returns.”
Lipton said that supply trends this year have been distorted by the effects of tax reform. While tax-exempt advance refundings have been removed from the supply mix, actual new-money transactions make up 64% of the year to date issuance, versus 45% for the same period last year, Oppenheimer said, citing Bloomberg data.
“While technical equilibrium should reclaim its place in the muni market, remaining monthly supply figures for 2018 could come in lower year-over-year, especially given that tax-exempt advance refundings have been eliminated. Further, we do not believe that institutional buyer preferences will return to historical trends,” Lipton said.
Relative value ratios are likely to move in tandem with muni market technicals, Lipton said. He advises investors to “follow relative value relationships as any appreciable underperformance by munis can elevate ratios and provide more compelling entry points on an intermittent basis. Nevertheless, if our summer technical expectations materialize, we may see a meaningful drop in ratios.”
Secondary market
Municipal bonds were stronger on Tuesday, according to a read of the MBIS benchmark scale. Benchmark muni yields fell as much as one basis point in the one- to 30-year maturities.
High-grade munis were also stronger, with yields calculated on MBIS’ AAA scale falling throughout the curve by as much as one basis point.
Municipals were stronger on Municipal Market Data’s AAA benchmark scale, which showed both the 10-year muni general obligation yield and the 30-year muni maturity falling by one basis point.
Treasury bonds were little changed as stocks traded lower.
On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 86.4% while the 30-year muni-to-Treasury ratio stood at 98.9%, 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.
While there was a lot of inactivity before Independence Day, there was a flicker of business to keep the day from totally fizzling out altogether, a New Jersey trader said on Tuesday.
“There was more activity in the muni market than I would have anticipated,” he said. “It’s not gangbusters, but given that it’s a short day and pre-holiday I didn’t expect much of anything.”
He observed a decent amount of secondary market business and medium sized retail trades ranging from $250,000 to $1 million in the 5 to 10-year maturity slope.
“There isn’t a lot of long business,” he said, but described the activity as “decent flow for a day like this.” He attributed some of the activity to July 1 redemption money needing to be replaced -- but otherwise said many investors will likely wait until next week to pull the trigger.
“There is a lot of money in the system and not a lot of bonds, so it’s got to go sometime,” he said. “It needs an opportunity to invest; in the bigger volume weeks the market likes it because they can get the money off the shelf, but the lower volume weeks are problematic because they don’t have something to buy,” he added.
New-issue volume was definitely uneventful this week as the holiday approached, other observed.
“Due to the July 4th holiday on Wednesday, the new issue slate is essentially nonexistent for the upcoming week,” Stephen Winterstein, managing director of research and chief municipal strategist at Wilmington Trust wrote in a June 29 report that was released on Tuesday.
“Because of the dramatic upswing last December, and the slow start in 2018, it appears unlikely that we will reach our initial $350 billion supply estimate for all of 2018,” he added.
He revised his 2018 projection down to $315 billion, a 28% decline from 2017’s $436.345 billion.
While Winterstein said the municipal bond market delivered reasonably sturdy performance last week, he described this week’s trading as “all but motionless.” Some new deals ahead of July 4th were postponed, and trading activity “will likely be negligible,” he wrote.
Previous session's activity
The Municipal Securities Rulemaking Board reported 38,142 trades on Monday on volume of $10.55 billion.
California, New York and Texas were the states with the most trades, with the Golden State taking 15.035% of the market, the Empire State taking 12.467% and the Lone Star State taking 10.18%.
Primary market
Ipreo estimates weekly bond volume at $73.8 million, down from a revised total of $4.69 billion last week, according to updated data from Thomson Reuters. The calendar contains no negotiated deals, just competitive sales.
Bond Buyer 30-day visible supply at $4.27B
The Bond Buyer's 30-day visible supply calendar increased $1.14 billion to $4.27 billion on Tuesday. The total is comprised of $1.87 billion of competitive sales and $2.39 billion of negotiated deals.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
