Wish granted: Supply surges to nearly $10B as reinvestment cash gets to work

Bonds

After months of lamenting about the lack of supply, municipal investors will get their wish this week as nearly $10 billion of new volume will cure some of the pent-up demand.

IHS Markit Ipreo forecasts weekly bond volume will increase to $9.9 billion from a revised total of $6.4 billion in the prior week, according to updated data from Refinitiv. The calendar is composed of $6.4 billion of negotiated deals and $3.4 billion of competitive sales.

A frequent Northeast issuer and a Midwest issuer will lead the activity and jump-start a recently stale market.

“The Pennsylvania sale should receive strong support,” according to Alan Schankel, managing director of Janney Capital Markets. “The Commonwealth has not been to market with a GO sale in more than a year when the Pennsylvania 10-year spread was 68 basis points compared to about 29 basis points recently.”

Meanwhile, enplanement growth at Kansas City Airport is a selling point of the Midwest deal.

The airport has a dominant market position in its service area, and has averaged about 4% annually over the past five years, Schankel said.

“The upcoming sale involves a new type of security, with some elements of appropriation risk, so although demand should be strong, some potential buyers may be more cautious as they assess the new type of credit,” he added.

With steady fund inflows and the uptick in summer demand due to heightened reinvestment flows, Schankel said he expects the week’s larger, $10 billion calendar to be easily absorbed.

Primary market
The biggest deal of the week is coming from Pennsylvania (Aa3/A+/AA-), which is competitively selling on Wednesday $900.49 million of unlimited tax general obligation bonds, first refunding series of 2019.

Proceeds will be used for current and advance refunding of certain outstanding debt. The financial advisors are PFM Financial Advisors and Sustainable Capital Advisors. The bond counsel are McNees Wallace and Frannie Reilly, along with the State Attorney General.

The state last competitively sold comparable bonds on May 16, 2018 when BofA Securities won $1.247 billion of GO first series of 2018 bonds with a true interest cost of 3.6161%.

Ohio (NR/AA+/NR) is competitively selling $300 million of Series 2019A higher education unlimited tax GOs on Tuesday. Proceeds will be used to pay the costs of capital facilities for state-supported and state-assisted institutions of higher education.

Acacia Financial Group is the financial advisor; Frost Brown is the bond counsel.

The state last competitively sold comparable bonds on March 6, 2018 when JPMorgan Securities won $300 million of Series 2018A higher education GOs with a TIC of 3.4512%.

In the negotiated sector, Morgan Stanley is expected to price on Wednesday the Kansas City Industrial Development Authority, Missouri’s (A1/A/A) $851.335 million of special obligation airport bonds for the Kansas City International Airport terminal modernization project.

The issue consists of Series 2019B bonds subject to the alternative minimum tax and Series 2019C non-AMT bonds.

The New York City Housing Development Corp. (Aa2/AA+/NR) is coming to market with $685.56 million of multi-family housing revenue bonds in two separate sales.

BofA Securities is set to price the HDC’s $535.56 million of Series 2019 E-1 and E-2 sustainable neighborhood bonds on Wednesday while Morgan Stanley is expected to price the HDC’s $150 million of Series 2019F taxable sustainable neighborhood bonds on Wednesday.

Lipper: More inflows into muni funds
For the 22nd week in a row, investors placed cash into municipal bond funds, according to data from Refinitiv Lipper.

Tax-exempt mutual funds which report flows weekly saw $792.876 million of inflows in the week ended June 5 after inflows of $918.862 million in the previous week.

Exchange traded muni funds reported inflows of $52.877 million after inflows of $136.912 million in the previous week. Ex-ETFs, muni funds saw inflows of $740.000 million after inflows of $781.950 million in the previous week.

The four-week moving average remained positive at $1.121 billion, after being in the green at $1.298 billion in the previous week.

Long-term muni bond funds had inflows of $612.524 million in the latest week after inflows of $859.320 million in the previous week. Intermediate-term funds had inflows of $207.550 million after inflows of $165.568 million in the prior week.

National funds had inflows of $695.027 million after inflows of $636.857 million in the previous week. High-yield muni funds reported inflows of $250.240 million in the latest week, after inflows of $173.707 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 $1.624 billion in the week ended May 29, while long-term muni funds alone saw an inflow of $1.398 billion and ETF muni funds saw an inflow of $226 million.

Secondary market
Non-farm payrolls rose 75,000 in May after a downwardly revised 224,000 gain in April, the Labor Department reported Friday. Analysts had expected payrolls would rise by 175,000.

“The May U.S. employment report was soft, with subpar job growth, sustained moderate (but not accelerating) average hourly earnings growth, and only a slight increase in aggregate weekly hours worked,” U.S. Economist Roiana ReidBerenberg Capital Markets Chief Economist U.S., Americas and Asia Mickey Levy and U.S. Economist Roiana Reid said in a note.. “In our view, this May employment report overstates the weakness or trend, and economic growth and labor market conditions are ‘okay.’ ”

Stifel Chief Economist Lindsey Piegza said the weaker-than-expected employment report reinforced the notion the U.S. economy is slowing.

“While the Fed has been resistant to acknowledge the weakness bubbling under the surface as consumption, investment and inflation have faltered, the latest slowdown in hiring is another data point that should at least force the Fed to consider a more accommodative policy stance at the June meeting or later in the year,” Piegza said. “To be clear, a change in policy is not yet expected, but the Fed could expectedly change the tone in 12 days’ time, opening the door to the cycle’s first rate cut in the second half of 2019.”

Munis were mixed on the MBIS benchmark scale after the report, with yields rising by two basis points in the 10-year maturity and falling one basis point in the 30-year maturity. High-grade munis were also mixed, with MBIS’ AAA scale showing yields up by less than one basis point in the 10-year maturity and down by less than a basis point in the 30-year maturity.

On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year GO fell three basis points to 1.61% and the yield on the 30-year muni was unchanged at 2.30%.

The 10-year muni-to-Treasury ratio was calculated at 77.3% while the 30-year muni-to-Treasury ratio stood at 89.4%, according to MMD.

Treasuries were stronger as stocks traded higher. The Treasury three-month was yielding 2.268%, the two-year was yielding 1.849%, the five-year was yielding 1.855%, the 10-year was yielding 2.085% and the 30-year was yielding 2.574%.

“Munis are winding down the week on a positive note,” ICE Data Services said in a Friday market comment. “The ICE muni yield curve is two basis points lower across all maturities. Despite the continued good tone of the muni market overall, the outsized move in Treasuries this week has improved the muni to Treasury yield ratio from one to five percentage points, with the exception of the 30-year sector, which saw the ratio decline from 90% to 89%. High-yield is also better today, but only on the order of one basis point.”

Previous session’s activity
The MSRB reported 40,960 trades Thursday on volume of $16.12 billion. The 30-day average trade summary showed on a par amount basis of $12.74 million that customers bought $6.31 million, customers sold $4.22 million and interdealer trades totaled $2.21 million.

California, Texas and New York were most traded, with the Golden State taking 14.109% of the market, the Lone Star State taking 11.619% of the market, and the Empire State taking 11.071%.

The most actively traded security was the Northwest Independent School District, Texas, GO 4s of 2044, which traded 10 times on volume of $50 million.

Week’s actively traded issues
Some of the most actively traded munis by type in the week ended June 7 were from Georgia, New York, Iowa and Puerto Rico issuers, according to IHS Markit.

In the GO bond sector, the Fulton County, Georgia, 2.5s of 2019 traded 29 times. In the revenue bond sector, the Matagorda County Navigation District, Texas, 2.6s of 2029 traded 45 times. In the taxable bond sector, the Puerto Rico Sales Tax Finance Corp. 4.55s of 2040 traded 31 times.

Week’s actively quoted issues
Puerto Rico and California names were among the most actively quoted bonds in the week ended June 7, according to IHS Markit.

On the bid side, the COFINA revenue 4.5s of 2034 were quoted by 25 unique dealers. On the ask side, the California taxable 7.55s of 2039 were quoted by 107 dealers. Among two-sided quotes, the California taxable 7.3s of 2039 were quoted by 25 dealers.

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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