With Memorial Day and the unofficial start to the summer approaching, the municipal bond market continues to dance to the same old song.
The asset class of muni bonds just seemingly keeps chugging along, and three constants are fueling the fire — huge inflows, super strong demand and insignificant issuance, according to Jim Colby, senior municipal strategist and portfolio manager at VanEck.
“Once again, we had enormous inflows in the Lipper funds, demand is through the roof and we have another week with under $8 billion of expected issuance,” Colby said. “I don’t see any of those things changing anytime soon — now we are in a season where calls, coupons and maturities will swamp the market and making the supply/demand dynamic worse.”
He noted that while the muni asset class has for the most part been considered “safe,” associated with a feeling that a market participant generally knows what he or she is going to get out of them. With the changes from tax reform and state and local tax deduction (SALT) cap, that feeling is more dramatic than ever.
“For the first time in a long time, it would appear that all the important features of munis are being considered — low default rate, the diversification factor and the return rate and investors are buying them up.”
Colby added that while there was a lot of talk about how taxpayer returns would change, “it is one thing to talk about it but another thing when you see the hard numbers and feel the impact.”
So with good demand and low rates and yields, why aren’t we seeing more issuance?
“I think it boils down to while there is concern and push back on the local level, they want to be cautious of taking on more debt and rather look for help federally to fund projects,” he said.
Primary market
IHS Markit Ipreo forecasts weekly bond volume will drop to $5.2 billion from a revised total of $7.2 billion in the prior week, according to updated data from Refinitiv. The calendar is composed of $4.3 billion of negotiated deals and $947 million of competitive sales.
There are 19 scheduled deals $100 million or larger — all negotiated.
The largest deal of the week will come from PEFA, Inc’s Iowa’s (A3/ /A) $643.86 million of gas project revenue bonds. Goldman Sachs will run the books on the transaction.
Bank of America is expected to price North Carolina’s (A2/AA/A+) $600 million of grant anticipation revenue vehicle bonds on Thursday.
Goldman is also scheduled to price the Arkansas Development Finance Authority’s (B3/B/NR) $487 million of industrial development revenue bonds for the Big River Steel Project on Tuesday.
Windy City’s changing of the guard
The handover of power in Chicago from Rahm Emanuel to corporate lawyer and former Chicago police board head Lori Lightfoot, whose political novice is official on Monday, the market’s eyes are now focused on how she will manage daunting budgetary and pension demands that loom in the next budget. Lightfoot inherits one junk rating, hundreds of millions of dollars in budget demands, and upcoming pension funding spikes.
What direction the new mayor will take and whether she can continue the progress Emanuel made in stabilizing city finances is being watching by the market with the city’s ratings, market reputation, and yield penalties, hang in the balance. Lightfoot has been cool to raising property taxes or issuing pension bonds, but has endorsed some tax ideas. We know who will guide her on finances after the announcement that Chicago Public Schools CFO Jennie Huang Bennett will serve as CFO.
Chicago’s most recent sale came at the end of March when the city sold $721.98 million of GO bonds. The deal was priced to yield 3.59% with a 5% coupon in 2029. In the secondary market, the 10-year was trading at an average of 3.573% on March 27. On April 24 it was trading with an average yield of 3.540%.
The 30-year maturity was original priced to yield 4.35% with a 5.5% coupon in 2049. On March 27 it was trading with an average yield of 4.305%, compared to the average yield of 3.820% as recently as May 17th.
As one Chicago trader put it, asset managers had no choice but to buy that deal, especially for the funds. “When that deal broke [free to trade], it traded up 15 to 20 basis points. High-yield is where the buyers are being pulled,” he said. He added that there is actually very little differentiation between Illinois and Chicago spreads. “The reality is that just isn’t any yield out there.”
Lipper: More inflows into muni funds
For the 19th week in a row, investors placed cash into municipal bond funds, according to data from Refinitiv Lipper released Thursday.
Tax-exempt mutual funds which report flows weekly saw $1.271 billion of inflows in the week ended May 15 after inflows of $1.502 billion in the previous week.
It was also the fourth week in a row and eighth out of the past 12 weeks that inflows exceeded $1 billion.
Exchange traded muni funds reported inflows of $19.289 million after inflows of $237.397 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.252 billion after inflows of $1.264 billion in the previous week.
The four-week moving average remained positive at $1.385 billion, after being in the green at $1.237 billion in the previous week.
Long-term muni bond funds had inflows of $726.027 million in the latest week after inflows of $982.190 million in the previous week. Intermediate-term funds had inflows of $517.470 million after inflows of $440.006 million in the prior week.
National funds had inflows of $1.004 billion after inflows of $1.313 billion in the previous week. High-yield muni funds reported inflows of $396.616 million in the latest week, after inflows of $429.105 million the previous week.
On Wednesday, the Investment Company Institute reported long-term municipal bond funds and exchange-traded funds saw a combined inflow of $2.331 billion in the week ended May 8, while long-term muni funds alone saw an inflow of $2.006 million and ETF muni funds saw an inflow of $325 million.
Secondary market
Munis were slightly weaker on the MBIS benchmark scale Friday, which showed yields inching up by less than one basis point in both the 10-year and 30-year maturities. High-grade munis were mixed, with yields unchanged in the 10-year and rising by no more than one basis point in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, munis were mixed as the yield on the 10-year was flat and the 30-year rose two basis points.
Treasuries and stocks yields ended slightly south.
The 10-year muni-to-Treasury ratio was calculated at 72.1% while the 30-year muni-to-Treasury ratio stood at 85.1%, according to MMD.
Previous session’s activity
The MSRB reported 41,631 trades for Thursday on volume of $16.84 billion. The 30-day average trade summary showed on a par amount basis of $12.47 million that customers bought $6.08 million, customers sold $4.22 million and interdealer trades totaled $2.18 million.
California, Texas and New York were most traded, with the Golden State taking 14.033% of the market, the Lone Star State taking 11.921% and the Empire State taking 10.326%.
The most actively traded security was the Puerto Rico Sales Tax Financing Corp. Series A-2 restructured 4.55s of 2040, which traded 67 times on volume of $72.23 million.
Week’s actively traded issues
Some of the most actively traded munis by type in the week ended May 17 were from Puerto Rico, Missouri and Florida issuers, according to IHS Markit.
In the GO bond sector, the Puerto Rico Commonwealth 8s of 2035 traded 33 times. In the revenue bond sector, the Mo. Health and Educational Facilities Authority 4s of 2054 traded 33 times. In the taxable bond sector, the Miami-Dade County aviation 3.555s of 2034 traded 37 times.
Week’s actively quoted issues
Puerto Rico, New York and California names were among the most actively quoted bonds in the week ended May 17, according to IHS Markit.
On the bid side, the Puerto Rico Sales Tax Finance Corp. revenue 5s of 2058 were quoted by 129 unique dealers. On the ask side, the Hudson Yards Infrastructure Cor., N.Y., revenue 4s of 2044 were quoted by 177 dealers. Among two-sided quotes, the California taxable 7.35s of 2039 were quoted by 25 dealers.
Yvette Shields contributed to this report.
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.