Mu­nis Stay Strong as Mar­kets Reel from Shut­down Drama

The Bond Buyer - - Market News - BY AARON WEITZMAN

Mu­nis strength­ened Fri­day as the threat of a gov­ern­ment shut­down roiled fi­nan­cial mar­kets.

“Mu­nic­i­pal bonds are trad­ing rel­a­tively un­changed but firm to­day as very pos­i­tive mar­ket tech­ni­cals keep de­mand steady,” said Michael Pi­etron­ico, chief ex­ec­u­tive of­fi­cer, Miller Tabak As­set Man­age­ment. “There is likely some money com­ing in from the stock mar­ket, which likely should sup­port mu­tual fund flows into early 2019.”

Bench­mark muni yields dropped no more than two ba­sis points across curve.

High-grade mu­nis were also stronger, with yields cal­cu­lated on MBIS’ AAA scale de­creas­ing by as many as two ba­sis points in the three- to 30-year ma­tu­ri­ties. The re­main­ing two ma­tu­ri­ties saw yields in­crease by less than a ba­sis point.

Mu­nic­i­pals were a bit stronger on Mu­nic­i­pal Mar­ket Data’s AAA bench­mark scale, which showed the yield on both the 10-year muni gen­eral and the 30-year muni ma­tu­rity one ba­sis point lower.

On Thurs­day, the 10-year muni-to-Trea­sury ra­tio was cal­cu­lated at 82.4% while the 30-year muni-to-Trea­sury ra­tio stood at 100.0%, ac­cord­ing to MMD. The muni-to-Trea­sury ra­tio com­pares the yield of tax-ex­empt mu­nic­i­pal bonds with the yield of tax­able U.S. Trea­sury with com­pa­ra­ble ma­tu­ri­ties. If the muni/Trea­sury ra­tio is above 100%, mu­nis are yield­ing more than Trea­sury; if it is be­low 100%, mu­nis are yield­ing less.

There are no bond sales next week, as is­suance for 2018 has come to an end. At this point, mu­nis sold this year to­tal $319.804 bil­lion in 8,531 trans­ac­tions, a far cry from the $436.345 bil­lion in 11,668 deals in 2017.

An MMD sur­vey of var­i­ous sub­scribers, in­clud­ing deal­ers and some buy-side firms, found that most ex­pect vol­ume to be 10%-15% higher in 2019 than this year. While new money is ex­pected to be flat, cur­rent re­fund­ings are not ex­pected to be can­ni­bal­ized by ad­vance re­fund­ings.

The muni re­search team at Wells Fargo said seea “year of tran­si­tion” in 2019.

“We see 2019 as a tran­si­tional year as cap­i­tal mar­ket volatil­ity in­creases driven by credit and eco­nomic cy­cles that ap­pear to be long in the tooth,” wrote Randy Ger­ardes, Ge­orge Huang and Roy Eap­pen, se­nior an­a­lysts, in a commentary. “We think credit qual­ity in the mu­nic­i­pal mar­ket will re­main sta­ble and ac­tu­ally ex­pect con­tin­ued solid rev­enue per­for­mance amid a soft­en­ing eco­nomic land­scape. The re­sult could be a vir­tu­ous in­vest­ment cy­cle in 2019, with con­strained bond is­suance in high tax and is­suance states, but lim­ited in­come tax de­ductibil­ity op­tions for high earn­ers. This makes for a pos­i­tive back­drop for in­vest­ment per­for­mance in mu­nic­i­pal bonds for 2019, in our view.” The Wells re­search team is op­ti­mistic that muni fund per­for­mance will im­prove next year, fol­low­ing a dif­fi­cult 2018.

“We be­lieve the con­tin­u­a­tion of a com­pa­ra­bly tight sup­ply en­vi­ron­ment, fewer in­ter­est rate hikes and flight to qual­ity amid eq­uity and Trea­sury mar­ket volatil­ity should ben­e­fit mu­nis,” the re­port said. “The re­sult could be net muni fund in­flows of­fer­ing a good tech­ni­cal foun­da­tion, which should drive per­for­mance for the over­all Muni sec­tor next year.”

One pop­u­lar topic of con­ver­sa­tion has been ad­vance re­fund­ing, a mech­a­nism elim­i­nated by tax re­form that had been used by is­suers to take ad­van­tage of his­tor­i­cally low in­ter­est rates.

“We do not ex­pect ad­vance re­fund­ings to re­turn to the mar­ket in 2019, but we do note that $37 bil­lion in Build Amer­ica Bonds are callable in 2019 and 2020 un­der an op­tional redemp­tion pro­vi­sion,” the Wells re­searchers wrote. ◽

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