Munis steady, analysts predict slightly higher issuance in 2019


With stocks and equities continuing their sell-off, munis continue to flex their muscles — even with a budget showdown in Washington taking place.

“Municipal bonds are trading relatively unchanged but firm today as very positive market technicals keep demand steady,” said Michael Pietronico, chief executive officer, Miller Tabak Asset Management. “There is likely some money coming in from the stock market which likely should support mutual fund flows into early 2019.”

Secondary market
Benchmark muni yields dropped no more than two basis points in the one- to 30-year maturities.

High-grade munis were also stronger, with yields calculated on MBIS’ AAA scale decreasing by as many as two basis points in the three- to 30-year maturities. The remaining two maturities saw yields increase by less than a basis point.

Municipals were a bit stronger on Municipal Market Data’s AAA benchmark scale, which showed the yield on both the 10-year muni general and the 30-year muni maturity as much as one basis point lower.

On Thursday, the 10-year muni-to-Treasury ratio was calculated at 83.1% while the 30-year muni-to-Treasury ratio stood at 101.3%, 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.

Primary market
There are no bond sales next week, as issuance for 2018 has come to an end. At this point, munis sold this year total $319.804 billion spanning 8,531 transactions, a far cry from the $436.345 billion in 11,668 deals in 2017.

MMD took a survey of various subscribers (dealers and some buy-side firms) and most believe that volume should be 10-15% higher in 2019, than this year. New money is expected to be flat but current refundings are not expected to be cannibalized by advance refundings.

The muni research team at Wells Fargo said see 2019 as a “year of transition.”

“We see 2019 as a transitional year as capital market volatility increases driven by credit and economic cycles that appear to be long in the tooth,” wrote Randy Gerardes, George Huang and Roy Eappen, senior analysts, in a recent commentary. “We think credit quality in the municipal market will remain stable and actually expect continued solid revenue performance amid a softening economic landscape. The result could be a virtuous investment cycle in 2019, with constrained bond issuance in high tax and issuance states, but limited income tax deductibility options for high earners. This makes for a positive backdrop for investment performance in municipal bonds for 2019, in our view.”

The Wells research team is optimistic that muni fund performance will improve next year, following a difficult 2018.

“We believe the continuation of a comparably tight supply environment, fewer interest rate hikes and flight to quality amid equity and Treasury market volatility should benefit munis,” says the report. “The result could be net muni fund inflows offering a good technical foundation, which should drive performance for the overall Muni sector next year.”

One popular topic of conversation has been advance refundings, which were eliminated by tax reform, and had been used by issuers to take advantage of historically low interest rates.

“We do not expect advance refundings to return to the market in 2019, but we do note that $37 billion in Build America Bonds are callable in 2019 and 2020 under an optional redemption provision,” they wrote. “Given current interest rates, many of these bonds could be refunded with tax-exempt bonds at their call date. For perspective between 2013 and 2016, advance refundings comprised an average of about 21.7% of total annual volume.”

Previous session’s activity
The Municipal Securities Rulemaking Board reported 47,066 trades on Thursday on volume of $13.948 billion.

California, New York and Texas were the municipalities with the most trades, with the Golden State taking 16.695% of the market, the Empire State taking 13.05% and the Lone Star State taking 9.816%.

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.

Leave a Reply

Your email address will not be published. Required fields are marked *