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Muni-Bond Funds See Head-Scratching Inflows Despite Losses
Friday, February 9, 2018
By Amanda Albright
(Bloomberg) -- The municipal bond market can thank volatile stocks for propping up demand even as state and local debt posts losses of its own.
Municipal-bond funds drew in $675 million in the week ended Wednesday, marking the fifth straight week of inflows, according to Lipper US Fund Flows data. The continued demand for tax- exempt debt comes despite the market's 1.4 percent loss this year, driven by concerns the Federal Reserve will increase interest rates more aggressively to slow the economy.
Investors are looking to state and local debt for stability as volatility in the equity market surges, said Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York, which oversees $1.2 billion in municipals. Inflows should continue unless interest rates are expected to rise more quickly than expected, he said.
"I would expect money to move in a slow and methodical fashion," Pietronico said.
Investors are looking to de-risk and are turning to the municipal market to do so, said Andrew Clinton, founder of Stamford, Connecticut-based Clinton Investment Management, which oversees more than $440 million of municipal bonds for wealthy investors.
"Most have come to the conclusion that while there may be further room to run in terms of valuation in risk assets, we're still much closer to the end of this cycle than the beginning," he said.
Municipal bond investors would typically rush to the exits once they notice that the market is posting losses, he said.
They might be deterred from doing so this time if they compare losses from state and local debt versus equities, he said.
"In light of what's transpired in recent days, it's all relative," Clinton said.
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Looking for positive signs in a dark and murky market
Friday, February 2, 2018
By Aaron Weitzman, Christine Albano, and Chip Barnett
Although market conditions are not pristine, with rising yields and little primary action, market participants expressed reason to believe the first week of February will be a positive one.
Ipreo estimates volume will do the limbo and go even lower to $3.83 billion, from the revised total of $3.59 billion sold in the past week, according to updated figures from Thomson Reuters. The calendar for the week ahead is composed of $2.60 billion of negotiated deals and $1.23 billion in competitive sales.
Municipal buyside experts reacted to the threat of rising rates with hope for a positive outcome next week amid liquidity concerns and lower supply.
"As Treasury rates back up, the selling pressure in the municipal market searches for demand," Peter Delahunt, managing director of municipals at Raymond James & Associates, said on Friday afternoon. "Dealers and arb desks with heavier inventories are hard pressed to provide liquidity," he explained. "One large bid list did give a glimpse into the lack of depth in our market. New issue supply next week will be fairly light at $4 billion, however the market will look at the larger deals for demand and price discovery at the new higher rates."
Michael Pietronico, CEO, Miller Tabak Asset Management, said that right now the market is in a good buy zone spot for those investors who can handle some price volatility.
"We would urge investors not to try and pick the top in yields but to dollar cost average into tax-free municipal bonds of superior quality," he said. "The recession will come the only unknown is the timing. Everything looks great right now in the economy which is reason to believe much of the good news has been priced in."
There are only 11 deals on this week's schedule of $100 million or larger, with the third and fourth largest of these being taxables, continuing an early 2018 trend. Three of those larger deals will come via the competitive route.
Goldman Sachs is set to price Harris County, Texas' $567.2 million of toll road senior lien revenue bonds on Wednesday. The deal is rated Aa2 by Moody's Investors Service and AA by Fitch Ratings.
JPMorgan is scheduled to price the State of Utah's $326.425 million of general obligation on Tuesday. The deal is rated triple-A by Moody's, S&P Global Ratings and Fitch.
Citi is slated to price the Dartmouth-Hitchcock Obligated Group, N.H.'s $302 million of taxable bonds on Wednesday. The deal is rated A by S&P and Fitch.
Citi is also expected to price the State of Delaware's $250 million of taxable GO bonds on Wednesday for the Port of Wilmington Projects. The deal is rated triple-A by Moody's, S&P and Fitch.
Week's actively traded issues
Some of the most actively traded bonds by type in the week ended Feb. 2 were from New York, Georgia and California issuers, according to Markit.
In the GO bond sector, the New York City zeroes of 2038 traded 21 times. In the revenue bond sector, the Main Street Natural Gas Inc. of Ga.'s 4s of 2048 traded 42 times. And in the taxable bond sector, the California 2.193s of 2047 traded 42 times.
Week's actively quoted issues
California and New Jersey names were among the most actively quoted bonds in the week ended Feb. 2, according to Markit.
On the bid side, California taxable 7.55s of 2039 were quoted by 35 unique dealers. On the ask side, the New Jersey Turnpike Authority revenue 4s of 2043 were quoted by 241 dealers. And among two-sided quotes, the California taxable 7.55s of 2039 were quoted by 24 unique dealers.
Lipper: Muni bond funds saw inflows
Investors in municipal bond funds again put cash into the funds in the latest week, according to Lipper data released on Thursday.
The weekly reporters saw $235.926 million of inflows in the week of Jan. 31, after inflows of $781.160 million in the previous week.
Exchange traded funds reported outflows of $16.893 million, after outflows of $17.950 million in the previous week. Ex-ETFs, muni funds saw $252.819 million of inflows, after inflows of $799.110 million in the previous week.
The four-week moving average was positive at $789.939 million, after being in the green at $811.354 million in the previous week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.
Long-term muni bond funds had inflows of $170.114 million in the latest week after inflows of $772.983 million in the previous week. Intermediate-term funds had inflows of $264.852 million after inflows of $329.453 million in the prior week.
National funds had inflows of $347.233 million after inflows of $776.001 million in the previous week.
High-yield muni funds reported outflows of $143.414 million in the latest week, after inflows of $32.551 million the previous week.
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What the muni bond market is saying about Trump's infrastructure plan
Wednesday, January 31, 2018
By Chip Barnett and Christine Albano
Municipal bond market participants are weighing in on what they think about what President Trump said about infrastructure in his State of the Union address.
The president on Tuesday night called for Congress to pass legislation that will generate at least $1.5 trillion for new infrastructure investment, but he provided no details on how it should be funded.
Some members of the buyside community feel the infrastructure plan may be too much for lawmakers, municipalities, and investors to swallow after barely having time to digest the latest tax amendments that kicked off the New Year.
"Given the recent passage of tax reform we sense that members of both political parties may be concerned with potentially adding to the federal deficit," Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said in an interview on Wednesday.
"While the case can be made for states to work alongside the federal government on this initiative, we remain of the mindset that out-sized pension obligations are handcuffing lawmakers at the local level," he said. "It is for this reason we sense infrastructure spending may become more of a 2019 possibility after the results of the midterm elections."
Other buyside participants said the $1.5 billion infrastructure proposal is still in its infancy -- and therefore wasn't disappointing as much as it just wasn't ironed out yet.
"It's going to be something that is a political process," said Ron Schwartz, managing director and senior portfolio manager at Seix Investment Advisors, who manages $1.4 billion in tax-exempt mutual funds and separately managed accounts.
"We will see what is proposed and if it can pass through Congress. Right now, there's nothing to say about it because there are no details about it," he said, adding that he hadn't expected President Trump to provide details Tuesday.
"I'm not sure they know what it will be at this point in time," Schwartz added. "They have to figure out the plan they want to set up, and once they have their plan set up, they will release it."
Others were not convinced.
"I am skeptical of the announcement," John Donaldson, director of fixed income at Haverford Trust, said in an interview on Wednesday afternoon. The few details seem to indicate that very little federal money will be involved in the stimulus plan and there are many rumors about actual figures involved, he said.
He also questioned the fundamentals of how municipalities would be involved and how the plan would translate into day-to-day operations on some of the aging infrastructure.
"For the vast majority of necessary projects; how do those who fund the difference earn an acceptable return? Bridges not [located] on toll roads that need replacing do not generate revenue. All of the older dams that need replacing do not generate revenue," he said.
"I am sure that we are not the only city that has suffered multiple water main breaks on very cold days," Donaldson said. "If cities could charge rates sufficient to replace aging systems, new pipes would already be there."
Donaldson said he was in a position to see the earliest Infrastructure funds in 2006-2007.
"The ones that were most successful were private equity funds in disguise," he explained. "That is, they bought assets and then sold them at a profit. The promise of long-lived assets generating cash flows for long-term investors has always appeared to be more myth than reality."
Donaldson said there are various turnpike and parking assets as evidence of projects not meeting projections.
"I doubt there will be any impact on the muni market until a plan has more defined revenue generation to repay potential lenders," he added.
The market will now be waiting for any further word from the White House on what form the financing and funding for this huge program could take.
Morgan Stanley priced Kansas City, Mo.'s $165 million of Series 2018A sanitary sewer system improvement revenue bonds.
The issue was priced to yield from 1.83% with a 4% coupon in 2021 to 3.51% with a 4% coupon in 2035; a 2042 maturity was priced as 4s to yield 3,55%. A 2019 maturity was offered as a sealed bid.
The deal is rated Aa2 by Moody's Investors Service and AA by S&P Global Ratings.
Since 2008, Kansas City, Mo., has sold about $2.99 billion of bonds, with the most issuance occurring in 2016 when it sold $517 million and the least amount in 2010 when it sold $81 million.
Bank of America Merrill Lynch priced the School Board of Palm Beach County, Fla.'s $114.73 million of Series 2018A certificates of participation.
The COPs were priced as 5s to yield from 1.38% in 2018 to 2.65% in 2027.
The deal is rated Aa3 by Moody's and AA-minus by Fitch Ratings.
There are no competitive sales of $100 million or above slated for the week.
Bank of America Merrill Lynch received the official award on the Upper Arlington City School District, Ohio's $230 million of Series 2018A school facilities construction and improvement GOs and Series 2018B taxable school facilities construction and improvement GOs.
The deal is rated Aa1 by Moody's and AAA by S&P.
JPMorgan Securities received the written award on the Arizona Board of Regents $110.84 million of University of Arizona system revenue bonds.
The deal is rated Aa2 by Moody's and AA-minus by S&P.
The Federal Open Market Committee left interest rates unchanged at the conclusion of its two-day monetary policy meeting. It was Janet Yellen's last FOMC meeting and set the stage for a rate hike in March under her successor Jerome Powell.
The MBIS municipal non-callable 5% GO benchmark scale was weaker in late trading while the MBIS AAA scale was also weaker.
The 10-year MBIS muni benchmark yield rose to 2.586% on Wednesday from the final read of 2.565% on Tuesday, according to Municipal Bond Information Services. The MBIS 30-year benchmark muni yield gained to 3.027% from 3.013%.
The 10-year MBIS muni AAA yield increased to 2.496% on Wednesday from the final read of 2.464% on Tuesday, according to Municipal Bond Information Services. The MBIS 30-year AAA muni yield rose to 2.927% from 2.905%.
The MBIS benchmark index is updated hourly on the Bond Buyer Data Workstation.
Top-rated municipal bonds finished mixed on Wednesday. The yield on the 10-year benchmark muni general obligation rose one basis point to 2.35% from 2.34% on Tuesday, while the 30-year GO yield was unchanged from 2.91%, according to the final read of MMD's triple-A scale.
On Wednesday, the 10-year muni-to-Treasury ratio was calculated at 86.5% compared with 84.1% on Tuesday, while the 30-year muni-to-Treasury ratio stood at 96.6% versus 99.0%, according to MMD.
MSRB: Previous session's activity
The Municipal Securities Rulemaking Board reported 45,113 trades on Tuesday on volume of $10.87 billion.
California, New York and Texas were the three states with the most trades on Tuesday, with the Golden State taking 15.119% of the market, the Empire State taking 11.668% and the Lone Star State taking 11.056%.
--Aaron Weitzman contributed to this report.
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Lower and slower looks like new normal for muni market
Monday, January 8, 2018
By Chip Barnett and Aaron Weitzman
The municipal bond market was quiet Monday as traders waited for this week's new issue sales
to get underway with competitive deals on Tuesday from Massachusetts and Fairfax County,
Trading was subdued in the secondary, with prices ending the day little changed.
After a slow start to 2018, this week's volume picks up a bit and is estimated at $3.30 billion; the calendar is made up of $1.72 billion of negotiated deals and $1.58 billion of competitive sales.
"January tends to be a tad sluggish in the beginning of the month," Stephen Winterstein, managing director at Wilmington Trust, wrote in a weekly market comment. "In point of fact, over the past 32 years since 1986, the first month of the year has averaged only 6% of that year's total supply, whereas the final three months of the year have averaged 9%. The month with the highest average new issuance over that same time period is May, at 11%."
Wilmington Trust's Stephen Winterstein says after December's issuance flood, supply slowed in the first week of 2018.
Wilmington Trust expects supply to accelerate to a more normal pace, though Winterstein said that the elimination of tax-exempt advance refundings will subdue issuance in 2018. The firm's municipal supply estimate for 2018 is about $350 billion, a 20% decline from last year.
"After December's $62.502 billion flood of new issuance, supply slowed in the first week of 2018 to a scant $42.100 million," Winterstein wrote. "The slowing of new deals should serve as a support mechanism for municipal bond prices. While we are closely watching retail demand as measured by mutual fund flows, the institutional market appears to be on firm footing for the upcoming week."
Others also saw light issuance ahead for the near-term.
"With a rush to issue in Q4 ahead of new tax laws, we expect Q1 2018 will see a lull in supply," Morgan Stanley said in a Monday market comment. "We think about $20 billion was pulled forward into Q4, and now expect 2018 gross supply will be $315 billion, net supply of -$23 billion."
Michael Pietronico, chief executive officer at Miller Tabak Asset Management said he expects new issue supply will be met with solid demand.
Michael Pietronico, CEO of Miller Tabak Asset Management
"The technical forces in the market remain quite favorable," he said. "We think that buyers have plenty of cash and are looking for tax-free bonds. So perhaps taxable deals might need more concession to garner interest."
Primary activity on Tuesday will center in the competitive sector.
Massachusetts is competitively selling $600 million of unlimited tax general obligation bonds in two separate offerings.
The issues consist of $400 million of consolidated loan of 2018 Series A GOs and $200 million of consolidated loan of 2018 Series B GOs.
Both deals are rated Aa1 by Moody's Investors Service, AA by S&P Global Ratings and AA-plus by Fitch Ratings
The last time the state competitively sold comparable bonds was on Oct. 18, 2017, when Bank of America Merrill Lynch won $300 million of consolidated loan of 2017 Series E GOs with a true interest cost of 2.8724%.
Fairfax County, Va., is selling $225.19 million of Series 2018A unlimited tax GO public improvement bonds.
The deal is rated triple-A by Moody's, S&P and Fitch.
The Roseville Area Schools Independent School District No. 623, Minn., is selling $139.24 million of Series 2018A unlimited tax GO school building bonds.
The deal is being sold under the Minnesota School District Credit Enhancement Program.
Later in the week, Morgan Stanley is expected to price the Stanford Health Care's $500 million of Series 2018 corporate CUSIP taxables on Wednesday, RBC Capital Markets is expected to price the Pennsylvania Commonwealth Financing Authority's $410 million of Series 2-018A taxable revenue bonds on Thursday while JPMorgan Securities is set to price the Illinois Finance Authority's $218.67 million of Series 2018 taxable revenue refunding bonds on Thursday.
Previous week's actively traded issues
Revenue bonds comprised 56.45% of new issuance in the week ended Jan. 5, up from 56.41% in the previous week, according to Markit. General obligation bonds made up 37.83% of total issuance, down from 38.10%, while taxable bonds accounted for 5.72%, up from 5.49% a week earlier.
Some of the most actively traded bonds by type in the week were from New York and Illinois issuers.
In the GO bond sector, the New York City zeroes of 2042 were traded 31 times. In the revenue bond sector, the New York City Municipal Water Finance Authority zeroes of 2050 were traded 24 times. And in the taxable bond sector, the Illinois 5.1s of 2033 were traded 12 times.
The MBIS municipal non-callable 5% GO benchmark scale was steady in late trading.
The 10-year muni benchmark yield was unchanged on Monday from the final read of 2.275% on Friday, according to Municipal Bond Information Services. The MBIS 30-year benchmark muni yield was steady from 2.748%.
The MBIS benchmark index is updated hourly on the Bond Buyer Data Workstation.
Top-rated municipal bonds finished mixed on Monday. The yield on the 10-year benchmark muni general obligation was steady from 2.01% on Friday, while the 30-year GO yield rose one basis point to 2.59% from 2.58% according to the final read of MMD's triple-A scale.
U.S. Treasuries were little changed in late activity. The yield on the two-year Treasury slipped to 1.95% on Monday from 1.96% on Friday, the 10-year Treasury yield was unchanged from 2.48% and the yield on the 30-year Treasury was flat from 2.81%.
On Monday, the 10-year muni-to-Treasury ratio was calculated at 81.0% compared with 81.2% on Friday, while the 30-year muni-to-Treasury ratio stood at 92.1% versus 91.8%, according to MMD.
MSRB: Previous session's activity
The Municipal Securities Rulemaking Board reported 38,762 trades on Friday on volume of $10.35 billion.
Prior week's top underwriters
The top municipal bond underwriters of last week included RBC Capital Markets, Stifel, BB&T Capital Markets, Roosevelt & Cross and Robert W. Baird, according to Thomson Reuters data.
In the week of Jan. 1 to Jan. 6, RBC underwrote $566.7 million, Stifel $116.0 million, BB&T $37.7 million, R&C $10.5 million, and Baird $8.4 million.
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