Buyers beware: Issuance not surging anytime soon

Bonds

Munis have been grooving along but next week will bring tiny issuance of less than $3 billion, along with a Federal Open Market Committee meeting.

IHS Markit Ipreo forecasts weekly bond volume plummeting to $2.4 billion from a revised total of $4.8 billion in the past week, according to updated data from Refinitiv. The calendar is composed of $1.7 billion of negotiated deals and $624 million of competitive sales.

The Fed is not expected to raise rates, but the FOMC meeting is one reason for the microscopic issuance.

According to Dan Heckman, Senior Fixed-Income Strategist at U.S. Bank Wealth Management, he is not surprised with the low figure but surprised about the consistency of it.

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“From a buyers perspective, it is concerning about why there is not more issuance,” he said. “With how low rates are, plus the fact that muni/Treasury ratios are tighter than they have been in years — along with the fact how sound the market is technically and strong demand — you would think there would be more issuance.”

Heckman said it is a difficult market for buyers right now, with the front-end being flat and not providing good value and the long-end very attractive.

“The supply is not sufficient enough to feed the need of market, and that won’t change until at least second half or maybe even 2020 as we get into another election cycle.”

Issuance has been a roller coaster ride and investors have yet to see a string of good issuance weeks.

“I think there is still hangover of reluctance to issue a lot of debt, if you are a state or local government, and It is also evident that not a lot of help is coming federally,” he said.

Nonetheless, the market is incredibly strong and Heckman doesn’t see issuance pushing yields higher like you would normally think, like this past week for example.

“Unless we get consecutive back-to-back mega issuance weeks, I don’t see yields going up much higher,” he said. “The front-end could get even flatter, as there is only a 15 basis point difference from the two-year to the 10-year maturity.”

There are only a handful of deals scheduled $100 million or larger.

Bank of America Securities is expected to price the Indianapolis Local Public Improvement Bond Bank’s $610.495 million of community justice campus bonds for the courthouse and jail project on Thursday.

Goldman is expected to price the California Educational Facilities Authority’s $460 million Stanford University revenue bond transaction.

Piper is scheduled to run the books on Prosper Independent School District, Tx.’s (AAA/NR/NR) $200.5 million of general obligation unlimited tax school building bonds on Tuesday.

The long-term impact of the supply-demand imbalance — and the future forecast for lower rates — should continue to tighten the percentage of municipals to Treasuries as it has in recent months, according to a New York trader.

“Munis had a larger move last week spurred on by an awful lot of money in the last two months and not a lot of supply,” he said on Friday.

“The calendar is pretty weak this week and continues to be weak.” Any new issues of size and appeal, such as the Austin deal, were oversubscribed, he said, adding that the yields on that deal were lowered by 10 basis points due to heavy demand. “There’s not much of a calendar and billions of dollars flowing in over the last two months, and that inequity will create a continued interest in munis,” he said.

Describing next week’s $3 billion calendar as “anemic” the trader said the ongoing supply problem is leading to tight ratios of munis to Treasuries — 95% on the long end, which is some of the lowest percentages in over a year, according to Municipal Market Data. “It’s been 14 months since we have seen a 2.87% on the MMD,” he noted.

“We know that when MMD pushes through 3%, retail has a tough time digesting — and that’s what’s happening now,” he said. But, at the same time, demand is being augmented by fund flows. “The funds continue to get money and the Street continues to be light,” he said. “As long as the supply continues to be light you’re going to continue to have interest in munis — and could grind even tighter.”

Despite an expected boost in the visible supply over the next month, he said the situation should worsen — especially as investors contemplate their tax bills in the midst of tax season and look for ways to shelter their money.

“Until then, as long as Treasuries stay in this range, and people continue to think rates will go down and not up, we’ll have a pretty good bid for the municipal market,” the trader said. “Despite the tightening of muni to Treasuries there still a case to be made for munis,” he said.

Ten in a row for Lipper
For the tenth week in a row, cash surged into municipal bond funds, according to data from Refinitiv Lipper released late Thursday.

Lipper said the weekly reporting mutual funds had $1.645 billion of inflows in the week ended March 13 after seeing inflows of $797.501 million in in the previous week. Exchange traded muni funds reported inflows of $415.919 million after inflows of $84.664 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.229 billion after inflows of $712.837 million in the previous week.

The four-week moving average remained positive at $1.404 billion, after being in the green at $1.355 billion in the previous week.

Long-term muni bond funds had inflows of $1.009 billion in the latest week after inflows of $372.94 million in the previous week. Intermediate-term funds had inflows of $435.856 million after inflows of $350.599 million in the prior week. National funds had inflows of $1.483 billion after inflows of $670.193 million in the previous week. High-yield muni funds reported inflows of $387.164 million in the latest week, after inflows of $373.681 million the previous week.

Secondary market
Municipal bonds were stronger on Friday, according to the MBIS benchmark scale, with muni yields falling two basis points in the 10-year maturity and lower by less than a basis point in the 30-year maturity. High-grade munis were also stronger, with the yield falling no more than two basis points in the 10-year and less than one basis point in the 30-year maturity.

Investment-grade municipals were stronger on Refinitiv Municipal Market Data’s AAA benchmark scale, which showed the yields on the 10-year lower by one basis point and 30-year decreased by two basis points.

The 10-year muni-to-Treasury ratio was calculated at 78.6% while the 30-year muni-to-Treasury ratio stood at 94.3%, according to MMD.

Previous session’s activity
The MSRB reported 38,257 trades on Tuesday on $10.872 billion of volume. California, Texas and New York were most traded, with the Golden State taking 16.584% of the market, the Empire State taking 10.436% and the Lone Star State taking 8.891%. The most active issue was the Arizona Industrial Development Authority 5s of 2054 which traded 35 times on volume of $49,475 million.

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.

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