Flight From Eq­ui­ties Helps Ex­tend Rally in Mu­nis, Trea­surys

The Bond Buyer - - Market News - By Chip Bar­nett & aaron Weitzman

In­vestor wor­ries about the con­tin­ued volatil­ity in the stock mar­ket helped keep alive the rally in mu­nic­i­pal and Trea­sury bonds on Thurs­day. Yields fell as much as five ba­sis points ac­cord­ing to the MBIS bench­mark scale and as much as seven ba­sis points on the MMD AAA scale.

Lower rates and global volatil­ity are pro­vid­ing a chal­leng­ing back­drop forin­vestors as they ease into the New Year, ac­cord­ing to one New York trader.

“There are so many cross cur­rents from China and the trade wars to the govern­ment shut­down, and the House chang­ing hands to­day,” the trader said. Thrown into the mix is the eq­uity mar­ket volatil­ity that could spark a flight to qual­ity ahead of a large bounty of $9 bil­lion in new is­suance ex­pected to hit the mar­ket next week, he said.

The new is­sue mar­ket is pro­vid­ing the best op­por­tu­nity to find value in the mu­nic­i­pal mar­ket. The cur­rent low rates, he said, are less than op­por­tunis­tic for mu­nic­i­pal in­vestors. “A lot of peo­ple don’t re­ally see them­selves los­ing a lot by not par­tic­i­pat­ing.”

He said next week’s deals will have to come some­what at­trac­tive com­pared with the sec­ondary mar­ket for deals to get done, and should do well as long as Trea­suries con­tinue to get steady bids.

WINTERSTEIN SEES $375B YEAR

In his lat­est weekly mar­ket re­view, Stephen Winterstein, man­ag­ing direc­tor and head of mu­nic­i­pal strat­egy at Wilm­ing­ton Trust, said he fore­casts roughly $375 bil­lion of is­suance for the muni mar­ket in 2019, but added that sev­eral is­sues could fac­tor into that num­ber as the year pro­gresses.

“First, while state and lo­cal gov­ern­ments re­main sta­ble, loom­ing un­der­funded pen­sion is­sues may re­press the po­lit­i­cal will to bor­row,” he said. “On the other hand, the need to main­tain, im­prove, and ex­pand in­fra­struc­ture is om­nipresent, and is un­likely to abate over the next year. These two coun­ter­vail­ing forces may serve to off­set one an­other, leav­ing the desire and need to is­sue debt un­touched from last year.”

He also said that while look­ing at the cur­rent level and drift of in­ter­est rates, some may be­lieve the eco­nomic cy­cle is ap­proach­ing a near-term crest, and bor­row­ing costs may stay flat or even edge slightly lower. And, if that sen­ti­ment ma­te­ri­al­izes and en­dures, is­suers could take a wait-and-see pos­ture.

SEC­ONDARY MAR­KET

Mu­nic­i­pal bonds were stronger on Thurs­day, ac­cord­ing to a late read of the MBIS bench­mark scale. Bench­mark muni yields fell as much as five ba­sis points in the oneto 30-year ma­tu­ri­ties. High-grade mu­nis were also stronger, with yields cal­cu­lated on MBIS’ AAA scale fall­ing as much as five ba­sis points across the curve.

Mu­nic­i­pals were stronger on Mu­nic­i­pal Mar­ket Data’s AAA bench­mark scale, which showed the yield on the 10-year muni gen­eral obli­ga­tion fall­ing seven ba­sis points while the 30-year muni ma­tu­rity dropped six ba­sis points.

Trea­sury bonds were stronger amid con­tin­u­ing stock mar­ket volatil­ity.

Tax-free mu­nic­i­pal money mar­ket fund as­sets in­creased $712.3 mil­lion, rais­ing their to­tal net as­sets to $144.94 bil­lion in the week ended Dec. 31, ac­cord­ing to the Money Fund Re­port, a ser­vice of iMoneyNet.com.

The av­er­age seven-day sim­ple yield for the 190 tax-free and mu­nic­i­pal money-mar­ket funds in­creased to 1.28% from 1.25% last week.

Tax­able money-fund as­sets gained $22.18 bil­lion in the week ended Jan. 1, bring­ing to­tal net as­sets to $2.849 tril­lion.

The av­er­age, seven-day sim­ple yield for the 805 tax­able re­port­ing funds rose to 2.04% from 1.98% last week.

Over­all, the com­bined to­tal net as­sets of the 995 re­port­ing money funds gained $22.89 bil­lion to $2.994 tril­lion in the week ended Jan. 1. ◽

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