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In The News

In The News - 2017

  News from 2018
November 10, 2017 How investors would adjust under the GOP House tax reform proposal - The Bond Buyer
October 2, 2017 Fourth quarter game plan focuses on duration, protection, and value - The Bond Buyer
August 11, 2017 Maryland's high-grade paper leads $6.7B week - The Bond Buyer
July 25, 2017 Chicago prepares to host investors - The Bond Buyer
July 3, 2017 Portfolio managers differ on 3Q strategies to manage policy and rate uncertainty - The Bond Buyer
May 5, 2017 Muni volume to soar to $9.4B - The Bond Buyer
April 21, 2017 Market to perk up as volume grows to $8.3B - The Bond Buyer
January 17, 2017 Munis Strengthen as Issuance Flows In - The Bond Buyer
  News from 2016
  News from 2015
  News from 2014
  News from 2013
  News from 2012
  News from 2011
  News from 2010
  News from 2009
  News from 2008

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How investors would adjust under the GOP House tax reform proposal

Friday, November 10, 2017
By Christine Albano

Municipal investors said the House GOP tax reform bill may create some opportunities, even as it slashes issuance of bonds and raises credit risk.

The Tax Cuts and Jobs Act (HR1), approved by the House Ways and Means Committee Thursday, would eliminate tax-exempt advance refundings, private activity bonds [PABs] for housing, private universities, not-for-profit hospitals, certain airports, ports, toll-roads, stadiums, and industrial development, as well as tax credit bonds, and alternative minimum tax paper.

The Senate Republicans' tax reform proposal, based on an outline released late Thursday, would preserve private activity bonds and even enhance them, while advance refundings would still be terminated after this year.

"The biggest change in the Senate version is the ability of non- for- profits like hospitals to continue to issue tax-exempt bonds and other private activity type entities such as airports and toll roads to also issue tax-exempt debt to finance those type of projects," said Dan Heckman, senior fixed income strategist Minneapolis-based U.S. Bank. "This makes sense from the standpoint of emphasizing Infrastructure projects in the US. Both the House and Senate versions however do eliminate advance refunding's, reducing billions of dollars in additional bonds that would come to the market, consequently denying governments the ability to refinance existing tax-exempt debt."

"The most concerning aspect for investors should be the expected decline in municipal bond issuance moving forward as we see the stadium bond proposal as highly likely of becoming law," Michael Pietronico, chief investment officer at Miller Tabak Asset Management, said regarding the House GOP's bill last week.

"This potential decline in issuance tells us investors are too underweight in duration and as such should look to add both cash and duration to their existing municipal bond portfolios," Pietronico said.

"If passed in its current form, the proposal would create a supply nightmare and lead to a wide range of credit issues for the public finance sector," Triet Nguyen, head of public finance credit at New Oak Fundamental Credit, in a weekly municipal report on Nov. 3.

He noted that state and local governments would lose a tool for reducing their debt service costs if the elimination of advance refunding issuance is approved. As a result, "there might be a tendency to reduce the call protection period for investors, which will only add to the negative convexity already associated with municipal bonds," Nguyen wrote.

Speculation that a proposed reduction to 20% from 35% in the top corporate income tax will create less institutional demand for municipals will be offset by the reality that "the municipal market is dominated by retail investors," Heckman said. "Demand from individuals outweighs demand from institutions."

Dan Heckman of U.S. Bank suggested that the elimination of private activity bonds could remove between $12 billion and $25 billion in issuance from the municipal market annually.

That could all change if the House version of tax reform becomes law, according to a Nov. 6 report by Peter Block, managing director of credit strategy at Ramirez & Co. Block.

He said the bill's passage probably would transform the municipal market from a largely retail market into a more institutional market. He estimates that under the existing bill's proposal, gross tax-exempt new issue supply likely would decline by between 30% and 40% and only be partially replaced by taxable bond supply.

"Taxable supply would be structured to appeal more to institutional investors rather than retail investors with par coupons, make-whole calls, and shorter durations," he said. "The plunge in exempt supply would make tax-exempts the last remaining legal tax shelter available to individual investors -- even if individual rates remain 39.6% at the top bracket and/or corporate rates are 20%."

Although the general exemption for municipals remains, "we can't help but think that the GOP's mission was to dilute the exemption as much as possible," Jeffrey Lipton, head of municipal research and strategy and fixed income research at Oppenheimer Inc., wrote in a Nov. 6 report.

Heckman estimated that the elimination of private activity bonds would remove between $12 billion and $25 billion in issuance from the municipal market annually.

"Although it's not a gigantic slice of the overall muni market, it is incremental," he said, adding that PAB issuance is nearing pre-recession levels, after doubling in 2016 from 2015.

Over the past three years, tax-exempt advance refunding bonds and PABs together accounted for an average of 40% of gross municipal market supply, according to Block.

"The potential elimination of tax-exempts for this purpose is alarming for the market," he wrote.

Meanwhile, the imbalance of supply and demand in the municipal market may worsen if the tax reform gains approval, buyside experts said.

"If these tax changes become law, the supply/demand chasm will widen further -- assuming tax reform does not appreciably undermine demand for the municipal asset class," Lipton said in his report.

There is a strong argument to buy tax-exempt bonds in light of the proposed tax reform and its impact on volume going forward, Nat Singer, senior managing director at Swap Financial Group, told The Bond Buyer.

Pietronico agreed, saying, "some tax deductions will be done away with and as insurance against that we urge investors to stock up on the municipal bond exemption as it may be harder and more expensive to find in the coming years."

Singer said a tax reform-induced supply slump will be exacerbated by the already expected lack of current refundings in 2018 and 2019, as volume in 2008 and 2009 was dominated by Build America Bonds -- most of which had make-whole calls rather than standard 10-year calls.

"As a result, there will be less bonds in the market to current refund in the next two years," Singer said in an interview. Combined, the dearth in issuance of advanced and current refundings will make it harder for investors who remain in the 39.6% top tax bracket to find adequate tax exemption for their growing income, he said.

That, Singer said, "could crowd more high net-worth investors into the tax-exempt market."

"Less supply and more demand creates a scenario where muni bonds may become very rich," and lead to declining ratios, Singer said.

Heckman agreed, saying that the likelihood of the top tax bracket remaining at 39.6% -- on top of a 3.8% Medicare surtax -- "enhances the need for tax-exempt paper more than ever" ahead of the potential for a significant drop in volume if the House tax reform bill passes in its current form.

"When a high-income individual is looking for ways to minimize their income taxes, tax-exempt munis are one of the few options," Heckman said. "It becomes even more so the case if these measures pass."

Heckman said the supply crunch for investors would be compounded by the elimination of tax-exempt issuance by 501 (c) 3 non-profit organizations like hospitals, higher education facilities, and nursing homes.

These entities have significant capital needs often financed by municipal bonds. "If that provision passes we will see more taxable municipal issuance," Heckman said.

Still, some analysts said some of the bond reforms could lead to increases in price, value, and demand and other technical factors - if the House version of the bill passes.

"Muni bond buyers hit a triple with this news and could fare very well in this proposal," Michael J. Belsky, senior portfolio management director of Morgan Stanley Wealth Management's Vector Group, told The Bond Buyer on Nov. 7.

"Although issuance might spike to take advantage of any changes in the law, I expect a marked decrease in supply, which should keep prices buoyant," he said. "I don't expect an increase in rates as I did previously. Any decrease in corporate tax rates that would force rates higher is mitigated by the tighter supply."

Lipton said there is potential scarcity value by eliminating certain types of financings, which can produce tighter spreads within these sector categories.

Heckman said the increase of taxable issuance by 501 [c] 3 entities under the new House bond reforms could turn into a positive for investors since the void "will increase the value of current tax-exempt bonds and any future issuance of tax-exempt bonds."

Both the elimination of PABs and tax-exempt issuance by 501 [c] 3 entities "could add to the appeal and attraction of existing and any future issuance of tax-exempt bonds," Heckman added.

"Should this financing vehicle be spared the ax, it may actually benefit from the spillover demand for yieldy instruments," Nguyen said of the proposed elimination of tax exempt issuance by the non-profits.

The supply curtailment could also benefit all outstanding traditional high yield municipals, according to Nguyen, but he said, the investment grade portion of the market may not fare as well particularly from a credit standpoint.

"The potential repeal of the AMT should lead to outperformance by bonds subject to the AMT, as the yield on those bonds would converge toward pure tax-exempt yield levels," he explained. In addition, "the proposed elimination of PABs and stadium bonds should boost the scarcity value of yieldy paper."

Buyside analysts said they were surprised to see the proposed elimination of new PAB issuance after it was previously considered the solution to a $1 trillion investment in infrastructure via public-private partnerships, but were not surprised by the elimination of tax-exempt stadium-bond financings.

"The [Trump] administration was pushing public-private partnerships as a way of achieving maximum operating results," Belsky said.

Nguyen pointed out that "after months of debates about an expansion of the PAB sector as a potential solution to America's infrastructure problem, drafters of the tax proposal ended up going in the opposite direction."

"Market participants were completely blindsided by the proposed elimination of tax exemption for advance refundings and for private activity bonds," Nguyen said.

"Proponents of tax-exempt financing were bracing themselves for a potential hit on the marginal demand for municipals, primarily from a tax rate reduction for corporate buyers such as the banks," he wrote. "What they got instead was a wholesale assault on the supply side of the equation."

As a percentage of total supply, advance refundings have been on a decline, according to Nguyen, as public issuers have largely exhausted refinancing opportunities in the low rate environment. But, he pointed out, "any further reduction in supply will only exacerbate the already tight technicals in our market."

There are also disadvantages for the sell-side, the experts noted.

Lipton said the loss of both PABs and AMT-subject bonds could create a dramatic shift in the technical landscape of the municipal market and issuers would find themselves "economically penalized with significantly scaled back access to the tax-exempt market."

"The proposed elimination of state and local income and sales tax deductions may severely limit the revenue-raising flexibility for high income tax states," Nguyen noted, even though the same may enhance the tax shelter appeal from those states.

This elimination could elevate demand for in-state municipal bonds in high taxed states, Lipton added.

"It's a bad day for issuers, as the plan restricts pre-refunding, puts limitations on non-profit hospitals and universities, and a reduction of exemptions for property and casualty companies," Belsky of Morgan Stanley said of the House plan.

"States and locals will have to tighten budget belts again, as they don't enjoy the same flexibility, especially with pre-refunding restrictions," he said, Belsky said he continues to prefer essential service revenue bonds for his high net worth individual investor clientele.

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Fourth quarter game plan focuses on duration, protection, and value

Monday, October 2, 2017
By Christine Albano

To quench their thirst for yield and position for a rally they believe will occur in the fourth quarter, municipal portfolio managers are using strategies that protect principle, remain defensive against market volatility, and deliver value as the end of 2017 nears.

Phil Fischer, managing director of municipal research at Bank of America Merrill Lynch, said the firm's core strategy is to stay invested and overweight on the long end of the municipal yield curve due to its expectation that the long end will rally amid subdued inflation and a steady tightening cycle by the Federal Reserve Board.

"That is the recipe for curve flattening," Fischer said. "The long end rallies the most, while the short end of the curve changes little."

Fischer said this isn't the first time the firm has been overweight on the long end of the curve that strategy has been in place since late 2016, he noted.

"The market conditions that have made this strategy work have not changed and the possibility of intensification exists if there is any deterioration of the economy or external risks," such as other fiscal or political risks, Fischer said.

Federal Reserve Board Chairwoman Janet Yellen in a Sept. 20 press conference said she expects gradual rate hikes to be warranted, but not preset, and said they will stay below the levels of prior decades.

In addition, inflation will be softer this year and next as it comes close to 2% in 2018 and stabilizes at that target in 2020, while the GDP is expected to be slightly stronger than originally expected back in June, according to Yellen.

Ahead of this scenario, other managers are being motivated by the appearance of a rich municipal yield curve and tight ratios and spreads, as well as one-year forward Treasury rates that imply a flattening of the yield curve with range-bound long rates.

To hedge potential downside risk on the short end and preserve income on the long end, Ramirez & Co. will continue to use a barbell strategy for clients in the fourth quarter, according to Peter Block, managing director of credit and market strategy.

The strategy offers clients the benefit of an effective duration of about 10 years, and a 20-year average maturity, the New York City-based investment banking and wealth management firm said in a Sept. 18 weekly municipal.

In the report, the firm said market conditions going into the fourth quarter suggest an opportunity for some accounts to swap out of higher-rated paper with shorter calls into lower-rated paper with longer calls.

Clients can currently achieve this strategy, and pick up between 40 and nearly 70 basis points of yield, by using two different swap possibilities.

In an interview, Block said the firm is recommending some clients sell double-A-rated paper with 10- to 30-year maturities and five- to seven-year calls and buy A-rated bonds with similar maturities and eight- to 10-year calls. By doing so, clients can earn 20 basis points for duration extension and 20 basis points for lower, albeit still strong, credit quality, he said.

Spreads on A-rated paper due in 10 and 30 years are tighter by about 47 and 64 basis points, respectively, versus one-year averages.

"However, the A-rated sector at this time represents the most compelling credit-down swap versus other credit-down trades," such as single A to a triple-B trade or triple-B to a high-yield credit, according to the report.

The credit down trade can also be achieved by swapping Connecticut general obligation bonds for University of Connecticut GO paper, for instance, to pick up an extra 65 to 67 basis points on 10-year paper, Block noted.

"UConn GOs are unsecured university obligations and should over time outperform state of Connecticut," the Ramirez report stated.

Meanwhile, quality and portfolio diversification are two essential strategies for absorbing potential market volatility that could arise from political, economic, or market shocks in the upcoming fourth quarter, according to Jeffrey Lipton, managing director, head of municipal research and strategy and fixed income research at Oppenheimer & Co. More specifically, he recommends owning premium bonds because their larger coupons offer a cushion from adverse price performance in declining markets.

"Premium bonds can offer maximum tax-free income and high cash flow, higher yield to maturity and yield to call than bonds priced at discounts or close to par, and less secondary market price volatility," Lipton said.

Like his colleagues, he also suggests extending to 20-year maturities where clients can earn 90% of the yield on the municipal curve.

As of Sept. 28, the generic, triple-A general obligation scale in 30 years yielded 2.85%% in 2047, compared with 2.27% a year earlier, according to Municipal Market Data.

Triple-A MMD yields have trended down recently, as the 30-year has been sitting below 3% and the 10-year lower than 2%. The 2027 through 2047 maturities were one basis point higher on May 9 and since then, that range has been either unchanged or lower in yield daily, according to MMD.

In addition, he believes a barbell strategy can reduce reinvestment risk and provide added protection on the short end if rates rise, while locking in higher, long-term returns if rates decline, he added.

"The value trade is even more relevant as we are seeing shifts in risk appetite given geopolitical factors and uncertain fiscal and monetary policy stances here at home," Lipton said. "Add to the mix a run of natural catastrophes and you have all the ingredients for unsettled market conditions, which are testing the risk appetite among investor classes."

Reflecting on the third quarter, Lipton said summer technicals and a widely-held perception that political inertia would delay any progress towards tax reform and general stimulus measures have been supportive of muni bond prices and have contributed to generally positive fund flows and to the year-to-date outperformance of the asset class relative to Treasuries.

"A likely shift in market technicals could soften demand, although we are not convinced that volume will see an appreciable pick-up through year-end," Lipton added.

With year to date volume down approximately 15% from last year, long-term volume totaled $256.70 billion in 7,331 issues as of Aug. 31, compared with $302.85 billion among 9,297 issues over the same period in 2016, according to Thomson Reuters.

Ramirez forecasts net market supply to end 2017 at $38 billion higher than last year, while it estimates long-term new-issue gross supply for 2017 at $368 billion a decline of about $60 billion, or 14% from last year, the firm said in its report.

At the same time, there may be some opportunities from market volatility as the year wraps up, Lipton of Oppenheimer noted.

He said there is a possibility that the tax reform debate could heat up before year end and increase concern over the current tax benefits provided by municipal bonds. This could generate some "intermittent volatility through year-end as prospects for lower taxes are weighed against implications for future muni demand and valuations," Lipton said.

"We think that fiscal policy-driven volatility could present buying opportunities and investors should pay attention to upward shifts in yields and relative value ratios as perceived threats to the asset class take hold," Lipton suggested. "We maintain that demand should hold in under anticipated scenarios of lower individual and corporate tax rates, yet rhetoric surrounding its elimination can add to market volatility."

Others, meanwhile, said they plan to maintain strategies that generate higher yield income and principle protection.

"Going into fourth quarter of 2017, we will most likely continue to focus on the type of structure we focused on in the past two quarters: higher coupon, cushion bonds," said John Mousseau, managing director of municipals at Vineland, N.J.-based Cumberland Advisors.

Premium bonds, known as cushion bonds, are securities purchased at a price higher than its par value and with a coupon rate that is higher than the prevailing market interest rate. A premium bond can provide less secondary market price volatility than similar maturity bonds selling near par or at a discount. They can also offer higher yield to maturity and yield to call than bonds priced at discounts or close to par and offer protection in a rising rate environment.

At the end of 2016 and in the first quarter of 2017 Mousseau favored the use of long maturity discount structures with 3% handle coupons and 4% par-like bonds, he said. "As yields came down and core inflation as well we realized that issuers would resume the refinancing and pre-refunding activity which dominated the first three quarters of 2016," Mousseau said.

Owning premium bonds in the last three months of 2017 will continue to reap value for his clients, according to Mousseau. "The cushion bond structure provides a greater amount of yield per unit of duration risk, with the added value of appreciation in the case of pre-refunding," he said.

Others, meanwhile, are being cautious into the fourth quarter and beyond due to fiscal and economic concerns and are adjusting their strategies accordingly.

Miller Tabak Asset Management will focus on upgrading credit quality in client portfolios in the coming quarter, said Michael Pietronico, chief executive officer of the New York City-based asset manager.

"We sense the beginnings of a weaker issuer financial profile in the municipal market next year," he said. "While economic growth has remained positive, the potential for a recession sometime next year cannot be ruled out as the Federal Reserve continues to remove liquidity from the financial markets."

Some states, like Illinois, have "burdensome" obligations, according to Pietronico, who said that raises concern that the market may be "too apathetic" about the ultimate repayment of those states' debt.

Unlike his peers, Pietronico said he will avoid premium bonds and stick with discount paper for its relative value.

"We have and will continue to focus on lower coupon bonds as we continue to see them as extraordinarily cheap relative to premium bonds -- especially around the 15-year area of the municipal yield curve," Pietronico explained.

Michael J. Belsky, senior portfolio management director and co-founder of Morgan Stanley's Vector Group, said he remains cautious on municipal bonds.

"We are interested in issues revolving around the Puerto Rico legalities of cashflow seniority between GOs and sales tax bonds, which might throw muni security structures into question," he said. Belsky manages approximately $1 billion for high net worth clients, small corporations, and endowments, as well as so-called "legacy" clients that are older individuals with low risk tolerance and the need for asset allocation.

Additionally, he said 10-year relative value ratios have declined to levels he has not seen for two years, and that is keeping him sidelined for now.

"We are waiting for a more-timely entry point," Belsky said.

The muni to Treasury ratio in 10 years was 86.7% as of Sept. 28, down from 94.6% a year earlier in 2016, and 98.7% at the same time in 2015, according to Thomson Reuters.

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Maryland's high-grade paper leads $6.7B week

Friday, August 11, 2017
By Aaron Weitzman and Chip Barnett

Primary municipal bond market volume is expected to increase to $6.7 billion in the coming week with a variety of deals, including triple-A rated paper from Maryland.

Ipreo estimates volume will climb to $6.73 billion, from the revised total of $5.57 billion sold in the past week, according to updated figures from Thomson Reuters. The calendar for the week ahead is composed of $4.29 billion of negotiated deals and $2.44 billion of competitive sales.

There are 15 sales scheduled larger than $100 million, with four coming on the competitive route.

Demand has been strong and Michael Pietronico, chief executive officer at Miller Tabak Asset Management doesn't expect that to change.

"Reasons to be positive on upcoming performance from the municipal bond asset class are stable inflation, positive technicals, and ongoing geopolitical tensions which tend to gravitate cash towards fixed-income on the margin," Pietronico said. "We suspect that 4% and 3% coupons will begin to tighten relative to 5% coupons as the dollar price on many high quality issuers debt seems to be getting quite unattractive to individual investors on 'premium' bonds."

There has been a recent trend of an influx of lower coupons, as market sources indicated that investors reaching for yield have had an impact on the structure of deals, leading to strong performance for lower coupon structures.

Maryland plans the biggest sale in the coming week. The Old Line State is expected to issue $1.34 billion in two competitive sales. The general obligation state and local facilities loan of 2017 bonds will include $550 million of Series A and $792.825 million of Series B bonds. They carry the highest rating possible triple-A by Moody's Investors Service, S&P Global Ratings and Fitch Ratings.

Bank of America Merrill Lynch is scheduled to run the books on the largest negotiated deal of the week, the City and County of Honolulu, Hawaii's $411 million of GO bonds that will feature tax-exempts, tax-exempt refundings, taxable refunding and a taxable green bond. The deal is rated Aa1 by Moody's and AA-plus by S&P and is scheduled to price on Wednesday after a one-day retail order period.

Citi is scheduled to price the State of Louisiana's $368 million of gasoline and fuels tax revenue refunding bonds on Wednesday. The Series B bonds for $61 million are rated Aa2 by Moody's and then $307 million of second lien Series C bonds are rated Aa3 by Moody's.

Citi is also expected to price the Commonwealth of Kentucky Property and Buildings Commission's $233.5 million of revenue and refunding and taxable bonds on Tuesday. The deal is rated A1 by Moody's and A-plus by Fitch.

Citi will round out the hat trick when they price the Colorado Health Facilities Authority's $226 million of health facilities revenue and revenue refundings bonds for the Evangelical Lutheran Good Samaritan Society Project on Thursday. The deal is rated BBB by S&P.

Secondary market

Top shelf municipal bonds finished unchanged on Friday. The yield on the 10-year benchmark muni general obligation was flat from 1.88% on Thursday, while the 30-year GO yield was steady from 2.73%, according to a read of Municipal Market Data's triple-A scale.

Treasuries were mixed on Friday. The yield on the two-year Treasury dropped to 1.29% from 1.33% on Thursday, the 10-year Treasury yield declined to 2.19% from 2.21% and the yield on the 30-year Treasury bond was unchanged from 2.79%.

The 10-year muni-to-Treasury ratio was calculated at 86.0% on Friday, compared with 85.1% on Thursday, while the 30-year muni-to-Treasury ratio stood at 98.0% versus 97.3%, according to MMD.

MSRB: Previous session's activity

The Municipal Securities Rulemaking Board reported 37,278 trades on Thursday on volume of $10.68 billion.

Week's actively traded issues

Some of the most actively traded bonds by type in the week ended Aug. 11 were from Massachusetts and Ohio issuers, according to Markit.

In the GO bond sector, the Massachusetts 2s of 2018 were traded 85 times. In the revenue bond sector, the Ohio 3.25s of 2035 were traded 62 times. And in the taxable bond sector, the Ohio 3.7s of 2043 were traded 39 times.

Week's actively quoted issues

Nevada, California and Indiana names were among the most actively quoted bonds in the week ended Aug. 11, according to Markit.

On the bid side, the North Las Vegas, Nev., taxable 6.572s of 2040 were quoted by 86 unique dealers. On the ask side, the Bay Area Toll Authority, Calif., revenue 3.25s of 2036 were quoted by 232 unique dealers. And among two-sided quotes, the Indiana Finance Authority revenue 5s of 2028 were quoted by five unique dealers.

Lipper: Muni bond funds see inflows

Investors in municipal bond funds put cash into the funds in the latest week, according to Lipper data.

The weekly reporters saw $631.216 million of inflows in the week of Aug. 9, after inflows of $143.847 million in the previous week.

The four-week moving average was positive at $349.152 million, after being in the green at $148.209 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 $406.426 million in the latest week after inflows of $118.150 million in the previous week. Intermediate-term funds had inflows of $137.827 million after inflows of $19.414 million in the prior week.

National funds had inflows of $615.734 million after inflows of $203.351 million in the previous week. High-yield muni funds reported inflows of $148.092 million in the latest reporting week, after inflows of $73.549 million the previous week.

Exchange traded funds saw inflows of $160.401 million, after inflows of $54.212 million in the previous week.

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Chicago prepares to host investors

Tuesday, July 25, 2017
By Yvette Shields

CHICAGO Chicago Mayor Rahm Emanuel will have some progress to report as he welcomes the buyside back to town for the city's annual investors' conference on Aug. 9.

The city is now assigned a stable outlook by three of the four main rating agencies, and has several state budget victories in hand, along with good news on corporate relocations and tourism.

Those strides are set against a backdrop of lingering buyside concerns over the city pension system's long term health and funding burden, and possible contagion from Chicago Public Schools' fiscal ills as well as ongoing state pressures.

Investors will also have fresh fiscal data to digest. The city is set to release on Monday its annual financial analysis, which provides an overview of its structural budget gap, revenue forecast, and status of debt levels and pension obligations. That follows the release earlier this month of the city's 2016 comprehensive annual financial report.

Though the city is benefiting from passage of a state budget and items in the budget, "obviously the credit is still under pressure. Longer term not much has changed," said Michael Pietronico, chief executive officer of Miller Tabak Asset Management. The city also remains at risk as the state tackles lingering fiscal challenges, led by its $126.5 billion pension tab.

State

Chicago reaped several victories from the break in the state's two-year-old budget impasse, and that's helped trim the city's spread penalties in secondary market trading.

Lawmakers passed and then overrode Gov. Bruce Rauner's veto of a 9-1-1 emergency fee hike. Democratic leaders tucked the city's overhaul of its municipal and laborers' pension funds in the budget implementation bill, as well as a new local government borrowing program for home rule units sought by Chicago as a means to bypass its own weak ratings.

The city is expected to use the new borrowing program as a primary vehicle for new money and to refund higher interest rate debt, although chief financial officer Carole Brown has not yet laid out Chicago's plans.

Fitch Ratings last week weighed in, saying Chicago and others that opt to take advantage of the program could win high-grade ratings if the deals are properly structured.

The new program allows the state's 200 home rule municipalities to dedicate tax revenues they receive from the state to a special limited use entity with a statutory lien attached. That entity in turn would leverage those revenues in a financing. The structure allows municipalities to bypass their own coffers and shields them from the threat of being dragged into a bankruptcy proceeding.

"Since operating risk resides with the transferring unit rather than the issuing entity, the issuing entity debt would be rated without consideration of operating risk, as represented by the issuer default rating," Fitch wrote. The rating service said the Illinois program resembles those of several authorities in New York, all of which are rated AAA. Chicago's general obligation ratings range from junk to BBB-plus.

Revenue streams that municipalities could tap include their share of personal property replacement taxes, gambling, sales tax, local government distributive fund revenue, and motor fuel tax revenues.

The new structure raises concern for some market participants, who say diversion of revenues may undercut the value of existing debt and the positives of lowering interest rates are erased if the city adds significantly to its debt load.

The 9-1-1 override allows Chicago to increase its emergency communications surcharge to $5.00 per month from $3.90. The new funding will help cover the costs of upgrades and operational expenses for the emergency communications system, freeing up funds for other costs such as pensions.

The insertion of the city's overhaul of the municipal and laborers funds allowed the city to bypass a threatened veto of the individual bill. Without passage in the coming months, the city was at risk of losing ratings ground it had gained last year. Fitch last August revised its outlook on the city's BBB-minus credit to stable. S&P which rates the city's GOs BBB-plus followed in October.

Spreads

Chicago spreads are benefiting "against that backdrop," Triet Nguyen, head of public finance credit at New Oak, said in the firm's MuniCredit Insights report.

Following passage of the budget, the spread for a tax-exempt 2040 maturity has narrowed about 60 basis points to 230 basis points over the Municipal Market Data's top benchmark although that is "based on very few sizable trades," the report read.

IHS Markit's Edward Lee said Chicago spreads have generally narrowed by about 50 basis points, while Illinois spreads have narrowed by more than 100 basis points. The spread on a 17-year Chicago bond was at 246 basis points with a yield of 5.06% compared to about 300 basis points before the budget passed.

Trading on some maturities on the taxable side have seen even greater narrowing, market participants said.

Secondary Chicago spread penalties had narrowed in recent months to about 300 bp after hitting a new primary market peak on its $1.2 billion January general obligation sale of between 339 and 347 basis points. Market participants attributed some of that penalty to contagion from the state impasse and CPS' rocky finances.

CAFR

Chicago's finance team calls the comprehensive annual financial report a sign of "significant progress the city has made over the past six years to improve our long-term financial stability and enhance our financial reporting."

The 2016 fund balance rose to $297 million from $215 million in 2015, with the available portion increasing to $154 million from $93 million in 2015.

The city's net position of governmental activities, which provides a fuller overall picture of the city's financial health, worsened by $3.4 billion bringing its net position deficit to $27.5 billion. The CAFR primarily attributed the change to "an increase in the pension liability due to assumption and plan changes." That brings the city's unrestricted net position to a deficit of $29.7 billion.

Pensions

Chicago is far from out of the woods in dealing with its more than $35 billion of net pension liabilities, even with funding increases and benefit changes for new employees.

"Chicago will still face large and growing liabilities for many years to come, and more change is necessary if these plans are to reach healthy and sustainable funded levels," S&P said in a recent report.

Moody's Investors Service is not expected to lift the city out of junk until progress is made in trimming unfunded liabilities, and that's more than a decade off under the city funding plan and could be set back by poor returns.

Higher contributions are coming from a water/sewer tax for the larger municipal fund and the 9-1-1 fees for laborers, and a big property tax hike for police and firefighter funds. Additional revenue will be needed in 2023 when actuarially based payments take effect for all four.

In a new report, Kroll Bond Rating Agency takes a deep dive into the future burden and finds that roughly $1.6 billion of cuts or new revenue are needed to meet the growing pension and debt obligations of the city and overlapping governments by 2023. Kroll believes the "potential needs for new revenue are substantial and politically sensitive" and "will be political painful."

But the needs are affordable, the report concluded. Based on a review of current debt and taxation levels, overlapping governmental burdens, and economic trends, Kroll believes the "underlying economy has the ability to absorb and afford the transition needed to fund the city's growing pension and debt burdens."

City leaders have also "have demonstrated the political will necessary to execute their plans and protect bondholder interests despite numerous obstacles" by controlling spending and identifying revenue streams to bolster funding.

"If current or future city leaders do not demonstrate similar commitment, then KBRA will revisit the city's credit rating," Kroll wrote in the 32 page report, "Chicago's Pension Liabilities: A look Beyond the Headlines."

CPS

Chicago Public Schools is banking on $300 million in higher state aid and pension help from the state to whittle down a $544 million deficit ahead of its Aug. 7 release of a fiscal 2018 budget. Gov. Bruce Rauner has threatened to cut that funding in half, and distribution of any state aid is hung up in a dispute between Rauner and Democrats that will be the subject of a special session beginning Wednesday.

Emanuel has pledged to help the district but has not specified whether that help would come in the form of more tax increment financing surplus dollars or a new tax or fee on high net worth individuals or downtown businesses. Emanuel has said he doesn't want to show his hand until state action is final.

Rating agencies are increasingly citing the district's financial woes as a risk to the city's credit profile. Moody's Investors Service, which is no longer asked to rate city deals, recently put its Ba1 rating on review for a downgrade over CPS' problems and the potential burden any future help might pose. Moody's also has the district's junk rating, now in the single-B category, on review for a downgrade.

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Portfolio managers differ on 3Q strategies to manage policy and rate uncertainty

Monday, July 3, 2017
By Christine Albano

The third quarter begins with municipal portfolio managers divided on how to deal with uncertainty over tax and interest rate policy.

They are using a range of strategies from maintaining an defensive approach with duration, coupon structure, credit quality, and income generation to taking on slightly higher credit risks or extending on the yield curve to get extra compensation. Some are just taking a wait and see approach.

"We are looking for more details on [President] Trump's tax reform package," said Michael Belsky, a financial advisor for Morgan Stanley Global Wealth Management.

Michael Pietronico, CEO of Miller Tabak Asset Management

"Credit risk has broadened out to more states," he said. "Legal issues are clouding our perspective on the realities of revenue streams and the value of a general obligation."

As a result, Belsky said the strength of current market prices will allow him to take some profits and sit on the sidelines "for a while."

Other portfolio managers, like J.B. Golden, first vice president and portfolio manager at Advisors Asset Management, want to remain nimble in the third quarter to take advantage of opportunities.

He is maintaining his current strategy, which consists of a relatively defensive posture due to the expectation for higher rates, and is content keeping his duration at 85% of the Bloomberg Barclays 1-10 Year Municipal Blend Index benchmark that he aims to replicate.

J.B. Golden, Advisors Asset Management
J.B. Golden of AAM recommends a defensive posture and shorter duration as a strategy for the upcoming third quarter

The benchmark has a duration of 4.05 years, and Golden keeps his portfolio at 3.5 years -- which he feels is appropriate at a time when rates are rising and there is growing strong demand for municipals as the best option for risk-adjusted returns.

The strong demand for municipals has contributed to it being one of the most difficult times in his career to find paper, he said.

"It's been a challenge to find good bonds in the market," Golden, a 14-year industry veteran, said in an interview. "We're not going to see any real improvement in supply any time soon," he added, noting that volume is off roughly 19% from last year.

Year-to-date his defensive strategy has helped him outperform his benchmark, and he expects to do the same going forward.

"We are not staying ultra-short, but 85% let's us be nimble and have enough liquidity as the market develops over the next few quarters," he said. "Historically we have captured quite a bit of long-term yields by staying with short duration."

He said he recently earned 65% to 70% of the 20-year yield by only going out 10 to 12 years -- "even in an environment where we haven't seen a sharp move up."

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, recommends positioning duration slightly longer than the 1, 5, and 10-year Bloomberg Barlcays General Obligation indices and adjusting credit quality higher.

"While yield will always remain important when considering purchasing a bond, we sense a turn coming with regards to investor sentiment on credit risk," Pietronico said. "It is easy to see why, as the economic data has been soft, and the Federal Reserve remains intent on raising borrowing costs further."

He said a strategy of long duration and higher credit quality will act as "insurance against a policy mistake of overtightening credit by the Federal Reserve."

"For municipal bond investors, the best time to prepare for a recession is before we enter one," Pietronico advised.

Golden, on the other hand, suggests that a combination of buying 5% coupons that provide added protection against interest rate risk and dipping slightly in credit quality to make up for the lack of compensation in extending duration will reap rewards.

Quality GO spreads
Yield spreads between the triple-A, double-A, and single-A GO bonds between 1 and 30 years are tighter shorter, and wider longer on the yield curve

He is shifting downward in credit slightly, to single A paper from double-A paper, to capture some extra yield even if that means accepting some underperformance if rates fall.

Golden will continue to buy essential service paper, higher education, hospital, and airport bonds in the third quarter as he did earlier this year. He will also continue to be underweight in pension obligation bonds, and states like New Jersey, Illinois, and Connecticut, that have weathered severe fiscal stress lately.

"We don't necessarily avoid GOs, but based on what the market is providing recently, we have more revenue than GOs," he said.

With spreads "fairly tight" to post-credit crisis levels, Golden is willing to give up a little upside in order to maintain a defensive posture.

"We do see the municipal market more insulted from a rate hike than other markets," he explained. "Even if we see a sideways market we feel our positioning and coupon stance will benefit us," Golden said.

A more aggressive approach -- in terms of credit and duration -- is a strategy that will reap rewards as the second half begins, according to Peter Block, head of municipal research at Ramirez & Co.

"Curve positioning and credit selection are key to outperformance in 2017, given the potential for additional Fed rate increases and tax policy reform," Block wrote in a June 12 weekly municipal strategy report for the full-service investment bank, brokerage and advisory firm.

Block said he sees little reason to remain strictly defensive or significantly up in credit quality and like Golden agrees that slightly dipping in quality can help performance going forward.

Sectors he prefers include dedicated tax, transportation, public power, and housing.

"As long as muni investors remain in a defensive posture, short-dated, high quality paper is likely to remain expensive and underperform longer durations," Block wrote.

He supports extending duration as a strategy that will position investors for the eventual rise of long-term rates following a combination of ultra-low unemployment, slow but steady economic growth, wide rate hike expectations, and tax reform making municipals less attractive.

He believes the municipal market inside five years needs to cheapen on an absolute basis and relative to Treasuries to be attractive.

That belief leads to the use of a barbell strategy currently allocating 30% on the short end and 70% intermediate to long maturities.

That barbell strategy has an effective duration of approximately nine years, given a significantly cheaper long-end and range-bound long rates, according to Block.

"We think a barbell portfolio strategy is optimal, including extension of effective portfolio to about 10 years [20-year average maturity] to both hedge downside risk [on the short end] and preserve income [on the long end]," Block added.

A neutral duration stance is in favor at BlackRock Inc., according to a June municipal market report published earlier this month by the Wall Street investment firm and money manager.

"We like flexible strategies that can navigate rate and policy uncertainty," according to Peter Hayes, head of the municipal bond group, James Schwartz, head of municipal credit research, and Sean Carney, head of municipal strategy.

The team said it is extending curve bias to 20-plus years given waning tax policy risk, as investors remain yield-focused, favoring long-term and high-yield funds.

"Municipals posted a positive return in May as rates fell amid continued policy uncertainty in Washington, and supported by a favorable supply/demand dynamic," the team wrote.

The third quarter should bring with it continued demand for municipals and more investment opportunities especially on the long end of the curve given recent performance according to the BlackRock team.

It cited the S&P Municipal Bond Index, which returned 1.32% in May and 3.49% year-to-date.

"Credit and long duration broadly outperformed as post-election fears continued to diminish and investors placed a premium on higher-yielding assets," the analysts wrote. "Munis remain important portfolio diversifiers with a record of low volatility, high credit quality, and a tax-free income advantage," BlackRock added.

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Muni volume to soar to $9.4B

Friday, May 5, 2017
By Chip Barnett and Aaron Weitzman

Municipal market volume is set to rise to a nine week high, as issuers tap into growing demand for the securities.

Ipreo estimates volume will surge to $9.36 billion, from a revised total of $4.88 billion in the past week, according to updated figures from Thomson Reuters. The calendar for the week ahead is composed of $7.82 billion of negotiated deals and $1.54 billion of competitive sales.

The last time estimated volume was higher was for the week ended March 10, where it was estimated at $10.2 billion.

"The spike in volume should be readily absorbed by a municipal market that is entering a technically stronger period of the next few months, as portfolios will be seeing high levels of cash returned from maturing bonds and coupon interest," said Michael Pietronico, CEO of Miller Tabak Asset Management. "Demand should remain fairly steady as the economy is far from booming, and that keeps money coming into bonds on the margin."

Bank of America Merrill Lynch is expected to run the books on the two largest deals of the week.

The first is for the County of Cuyahoga, Ohio's $915 million of revenue bonds for the Metrohealth System Hospital. The deal is scheduled to price on Wednesday after a one-day retail order period and is rated Baa3 by Moody's Investors Service and BBB-minus by S&P Global Ratings and Fitch Ratings.

Moody's recently downgraded Cuyahoga citing "an unexpected and material increase in leverage relative to modest operating performance, while the system is executing new strategies and faces uncertainty regarding Medicaid funding. The rating is also constrained by significant competition in a consolidated market, high exposure to government payers, and construction risk associated with a large project."

The second BAML deal is the State of Hawaii's $856 million of general obligation bonds, which will also be priced on Wednesday following a one-day retail order period. This deal is rated Aa1 by Moody's, AA-plus by S&P and AA by Fitch.

Citi is slated to price the Houston Independent School District's $838 million of limited tax schoolhouse and refunding bonds. The deal is rated triple-A by Moody's, S&P and Fitch.

The largest competitive sale is set to take place Wednesday, as the Southern California Metropolitan Water Department will sell 245.165 million of subordinate water revenue refunding bonds.

One other thing to take note of when looking over the calendar for the upcoming week is the green bonds that are sprouting up.

The New York MTA is expected to come with $300 million of climate bond certified green bonds, the city of Los Angeles will be coming with plus $300 million of green bonds, the city and county of Denver are expected to come with $173 million of green bonds and a portion of the upcoming San Francisco Bay Area Rapid Transit's $388 million will be of the green bond variety.

Secondary market

Top rated municipal bonds ended flat on Friday after the release of a strong U.S. employment report for April. Non-farm payrolls rose 211,000 last month, higher than the 185,000 gain predicted in a survey of economists done by IFR Markets. The unemployment rate in April fell to 4.4%, the lowest since May 2001, and lower than the 4.5% rate predicted in IFR's survey.

The yield on the 10-year benchmark muni general obligation was steady from 2.17% on Thursday, while the 30-year GO yield was unchanged from 3.03%, according to the final read of Municipal Market Data's triple-A scale.

U.S. Treasuries were little changed on Friday. The yield on the two-year Treasury was unchanged from 1.31% on Thursday, while the 10-year Treasury yield was flat from 2.35%, and the yield on the 30-year Treasury bond decreased to 2.99% from 3.00%.

The 10-year muni to Treasury ratio was calculated at 92.3% on Friday, compared with 92.3% on Thursday, while the 30-year muni to Treasury ratio stood at 101.4%, versus 101.1%, according to MMD.

Week's actively traded issues

Some of the most actively traded issues by type in the week ended May 5 were from Georgia, Kentucky and Wisconsin, according to Markit.

In the GO bond sector, the Fulton County, Ga., 2s of 2017 were traded 19 times. In the revenue bond sector, the Kentucky Economic Development Finance Authority 4s of 2045 were traded 46 times. And in the taxable bond sector, the Wisconsin 3.154s of 2027 were traded 72 times.

Week's actively quoted issues

Puerto Rico, Connecticut and New York & New Jersey names were among the most actively quoted bonds in the week ended May 5, according to Markit.

On the bid side, the Puerto Rico Aqueduct and Sewer Authority revenue 5.25s of 2042 were quoted by 115 unique dealers. On the ask side, Connecticut taxable 5.459s of 2030 were quoted by 76 unique dealers. And among two-sided quotes, the Port Authority of New York & New Jersey taxable 5s of 2039 were quoted by 22 unique dealers.

Lipper: Muni bond funds see inflows

Investors in municipal bond funds continued to put cash back into the funds in the latest week, according to Lipper data released late on Thursday.

The weekly reporters saw $127.783 million of inflows in the week ended April 26, after inflows of $144.519 million in the previous week.

The four-week moving average was still in the green at positive $547.560 million, after being positive at $443.814 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 also had inflows, gaining $21.355 million in the latest week after rising $291.183 million in the previous week. Intermediate-term funds had outflows of $20.400 million after outflows of $2.015 million in the prior week.

National funds had inflows of $205.904 million after inflows of $195.710 million in the previous week. High-yield muni funds reported inflows of $36.671 million in the latest reporting week, after outflows of $129.979 million the previous week.

Exchange traded funds saw outflows of $21.160 million, after outflows of $72.246 million in the previous week.

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Market to perk up as volume grows to $8.3B

Friday, April 21, 2017
By Chip Barnett and Aaron Weitzman

The municipal market is set to see a bump in new supply next week, something that market participants have been craving. The estimated total would be the most since the week ended on March 10.

Ipreo estimates volume will increase to $8.26 billion, from a revised total of $5.94 billion in the past week, according to updated figures from Thomson Reuters. The calendar for the week ahead is composed of $6.51 billion of negotiated deals and $1.75 billion of competitive sales.

"The increase to the extent that volume causes a widening of credit spreads in the secondary market it is much needed as investors [in our view] are not being adequately compensated for credit risk in the current market environment," said Michael Pietronico, CEO of Miller Tabak Asset Management. "It is for that reason that we as a firm, are gravitating towards higher quality credits as we deploy cash."

Another week and yet another issuer from California is topping the calendar. This time around, Goldman Sachs is set to price the California Health Financing Authority's $1.9 billion of revenue bonds for Kaiser Permanente and is expected to include a green bond portion. The deal is scheduled to price on Tuesday and is rated AA-minus by S&P Global Ratings and A-plus by Fitch Ratings. Kaiser Permanente is also scheduled to sell $2 billion of corporate CUSIP's on either Tuesday or Wednesday.

"I don't recall as large of a corporate CUSIP but I do think [the] California market will easily absorb bond deals," said Alan Schankel, managing director at Janney Capital Markets. "For one thing, the taxable issues have a wider demand base, since pension funds and non U.S. buyers are in mix. As far as tax free issues, California's high income tax environment generates ongoing demand which I expect to continue."

Schankel also said that the tax-exempt should do well, since Kaiser is more of an insurance program than hospital system (although they have hospitals) it may be considered by some investors as a diversification play since little insurance exposure is available in muni space.

"In general, I think muni demand will continue to be solid, as the fund flows continue [to be] positive," he said.

Wells Fargo is slated to price the Port Authority of New York and New Jersey's $994.74 million of consolidated, alternative minimum tax and taxable bonds on Wednesday after a one-day retail order period on Tuesday. The deal is rated Aa3 by Moody's Investors Service and AA-minus by S&P and Fitch.

Bank of America Merrill Lynch is expected to price the Department of Water and Power of the City of Los Angeles' $530 million of water system revenue bonds on Thursday after a one-day retail order period on Tuesday. The deal is rated Aa2 by Moody's, AA-plus by S&P and AA by Fitch.

"There is a standard group of money managers who cannot commit the time to the secondary market that is required, so yes we believe the new issue deals will meet good demand," said Pietronico.

In the competitive arena, the largest sale will come from the Maryland Department of Transportation. It plans to auction $285 million of consolidated transportation bonds on Wednesday. The deal is rated Aa1 by Moody's, triple-A by S&P and AA-plus by Fitch.

Rhode Island is set to sell a total of $158.945 million, which is expected to be broken into two portions: $91 million of consolidated capital development loan and $67.945 million of consolidated capital development loan refunding bonds.

"Although Rhode Island has its issues with sub-par economic growth and somewhat elevated pension liabilities, I like the state credit," Schankel said. "Unlike some of the lower rated states, Rhode Island has maintained relatively stable reserves, and their pension reforms from a few years back were very meaningful, demonstrating willingness to tackle fiscal challenges."

Secondary market

Municipals finished unchanged on Friday. The yield on the 10-year benchmark muni general obligation was flat from 2.05% on Thursday, while the 30-year GO yield was steady at 2.90%, according to the final read of Municipal Market Data's triple-A scale.

U.S. Treasuries were narrowly mixed on Friday. The yield on the two-year Treasury fell to 1.18% from 1.20% on Thursday, while the 10-year Treasury yield declined to 2.23% from 2.24%, and the yield on the 30-year Treasury bond was unchanged from 2.89%.

The 10-year muni to Treasury ratio was calculated at 92.0%, compared with 91.5% on Thursday, while the 30-year muni to Treasury ratio stood at 100.4%, versus 100.3%, according to MMD.

Week's most actively traded issues

Some of the most actively traded issues by type in the week ended April 21 were from California and Pennsylvania, according to Markit.

In the GO bond sector, the California 3.5s of 2027 were traded 23 times. In the revenue bond sector, the Geisinger Authority, Pa., 4s of 2047 were traded 36 times. And in the taxable bond sector, the Riverside County Public Financing Authority, Calif., 4s of 2040 were traded 15 times.

Week's most actively quoted issues

Puerto Rico, New York and New Jersey names were among the most actively quoted bonds in the week ended April 21, according to Markit.

On the bid side, the Puerto Rico Commonwealth GO 5s of 2041 were quoted by 41 unique dealers. On the ask side, the New York City Transitional Finance Authority revenue 3.5s of 2038 were quoted by 230 unique dealers. And among two-sided quotes, the New Jersey Turnpike Authority taxable 7.414s of 2040 were quoted by 30 unique dealers.

Lipper: Muni bond funds see inflows

Investors in municipal bond funds continued to put cash back into the funds in the latest week, according to Lipper data released late on Thursday.

The weekly reporters saw $290.227 million of inflows in the week ended April 19, after inflows of $1.628 billion in the previous week.

The four-week moving average was still in the green at positive $473.945 million, after being positive at $444.756 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 also had inflows, gaining $382.696 million in the latest week after rising $1.094 billion in the previous week. Intermediate-term funds had inflows of $129.744 million after inflows of $505.697 million in the prior week.

National funds had inflows of $317.247 million after inflows of $1.699 billion in the previous week. High-yield muni funds reported inflows of $227.034 million in the latest reporting week, after inflows of $604.105 million the previous week.

Exchange traded funds saw inflows of $96.644 million, after inflows of $113.902 million in the previous week.

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Munis Strengthen as Issuance Flows In

Tuesday, January 17, 2017
By Chip Barnett and Aaron Weitzman

Top-shelf municipal bonds ended Tuesday stronger, as yields on some maturities fell as many as four basis points, according to traders. The first of the week's issuance started to trickle in as well.

Secondary Market

The 10-year benchmark muni general obligation yield was two basis points lower to 2.14% from 2.16% on Friday, while the yield on the 30-year GO was down three basis points to 2.88% from 2.91%, according to a final read of Municipal Market Data's triple-A scale.

U.S. Treasuries were stronger on Tuesday at the market close. The yield on the two-year Treasury dropped to 1.15% from 1.19% on Friday, while the 10-year Treasury yield decreased to 2.32% from 2.38%, and the yield on the 30-year Treasury bond declined to 2.93% from 2.98%.

On Tuesday, the 10-year muni to Treasury ratio was calculated at 92.0% compared to 90.4% on Friday, while the 30-year muni to Treasury ratio stood at 98.3%, versus 97.4%, according to MMD.

Primary Market

Municipal bond traders were looking at a short-holiday week of sales jammed into a three-day window. Almost $9 billion of new issues are slated for sale in this new week, which started after the market was closed on Monday for the Rev. Martin Luther King, Jr. holiday.

Ipreo estimates volume for the week at $8.9 billion, up from a revised $8.2 billion of supply in the prior week, according to updated figures from Thomson Reuters. The calendar is composed of about $7.4 billion of negotiated deals and around $1.5 billion of competitive sales.

The issuance started to flow on Tuesday, as Bank of America Merrill Lynch priced the Philadelphia Authority for Industrial Development's $268.995 million of fixed rate revenue bonds for Thomas Jefferson University. The bonds were priced to yield 3.42% with a 5% coupon in 2032 and to yield from 3.54% with a 5% coupon in 2034 to 3.68% with a 5% coupon and 4.05% with a 4% coupon in a split 2037 maturity. A term bond in 2040 was priced at par to yield 2.875%. A term bond in 2042 was priced at par to yield 3.00% and to yield 4.10% with a 4% coupon and 3.72% with a 5% coupon in a triple split maturity. A term bond in 2047 was priced to yield 4.14% with a 4% coupon and 3.78% with a 5% coupon in a split maturity. The deal is rated A-plus by Moody's Investors Service.

The State of Florida Board of Education sold $150.2 million of public education capital outlay refunding bonds, which were won by JP Morgan with a true interest cost of 3.03%. The bonds were priced to yield from 0.95% with a 5% coupon in 2018 to 3.20% with a 4% coupon in 2037. The deal is rated Aa1 by Moody's and triple-A by S&P and Fitch.

The New Jersey Environmental Infrastructure Trust sold two deals totaling $107.82 million on Tuesday. The $73.875 million of environmental infrastructure refunding bonds, Series 2017A-R1, 2010A financing program green bonds were won by Citi with a TIC of 2.23%.

The $33.945 million of Environmental Infrastructure Refunding Bonds, Series 2017A-R1, 2009A financing program green bonds were won by Raymond James with a TIC of 2.21%.

The action should pick up a bit Wednesday and even more so on Thursday.

Goldman Sachs is expected to price the city of Chicago's $1.16 billion of taxable and tax-exempt general obligation bonds. This is the deal of the week and one that everyone will be keeping their eyes on.

The underwriter said the sale will be on Wednesday or Thursday, noting that the taxable part and tax-exempts will come on separate days.

The deal is rated BBB-plus by S&P Global Ratings and Kroll Bond Rating Agency and BBB-minus by Fitch Ratings.

Institutional players will be looking at yield and balancing it with risk while retail will likely remain on the sidelines.

Michael Pietronico of Miller Tabak Asset Management said retail investors may shy away from the loan due to its much publicized financial difficulties.

"The demand will be adequate to get the Chicago GO deal done as we suspect institutional demand will be the main driver," he said.

It's rare that broker-dealers have approval for distribution of a high-yield credit like Chicago to retail investors.

"For anyone looking for yield, absolutely, I can see a variety of buyers," a Chicago trader said, "but at the end of the day Illinois is not a good retail state to begin with."

RBC Capital Markets is expected to price the city and county of Denver, Colo., School District No. 's $476.645 million of GO bonds on Wednesday. The deal is insured by the Colorado State Intercept Program and rated Aa2 by Moody's, AA by S&P and AA-plus by Fitch.

In the competitive arena on Wednesday, the city and county of San Francisco, Ca. will be selling $174.11 million of GO public health and safety bonds. The deal is rated Aa1 by Moody's and AA-plus by S&P and Fitch.

Also, Fulton County, Ga.is expected to sell $104.785 million of GO library bonds. The deal is rated Aa1 by Moody's, AA-plus by S&P and AA by Fitch.

Prior Week's Actively Traded Issues

Revenue bonds comprised 58.64% of new issuance in the week ended Jan. 13, down from 58.8703% in the previous week, according to Markit. General obligation bonds comprised 36.07% of total issuance, down from 36.15%, while taxable bonds made up 5.29%, up from 4.98%.

Some of the most actively traded issues by type in the week were from Texas, California and Pennsylvania.

In the GO bond sector, the Ysleta ISD, Texas, 5s of 2046 were traded 30 times. In the revenue bond sector, the Los Angeles Department of Airport 5s of 2041 were traded 55 times. And in the taxable bond sector, the University of Pittsburgh 3.646s of 2036 were traded 32 times.

Previous Week's Top Underwriters

The top negotiated and competitive underwriters of last week included Goldman Sachs, Bank of America Merrill Lynch, Citigroup, RBC Capital Markets and Jefferies, according to Thomson Reuters data.

In the week of Jan. 8 to Jan. 14, Goldman underwrote $1.78 billion, BAML $1.47 billion, Citi $1.40 billion, RBC $1.06 billion and Jefferies $706.8 million.

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