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US Muni Market (Jan 13-17): Muni Bonds Trade Rich to Treasuries


Senior Market Analyst at Interactive Brokers

IBKR senior market analyst Steven Levine provides an update about the U.S. municipal bond market, amid continued healthy demand for new offerings. In this latest summary, taxable issuance is explored, as well as upcoming sales, including a potential US$500 million deal from the Cottage Health Group.

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Produced on January 13, 2020

Video Script:

Prices of municipal bonds generally rose higher, with returns that outperformed U.S. Treasuries, this past week, after a total of around US$8 billion worth of new deals were sold to decent demand. An easing of geopolitical tensions between the U.S, Iran and the broader Middle East, as well as trade progress between the U.S. and China, had spurred yields on U.S. Treasuries a bit higher to end the week. Longer-dated government debt finished about 3 basis points higher, while shorter-dated maturities climbed about 4 bps.

Nuveen analysts Bill Martin and John Miller noted that municipal bonds appear expensive compared to Treasuries, and are likely to remain rich through 2020. Many tax-exempt deals, they said, are being refunded with taxable bonds, so the market should have less tax-exempts outstanding by year-end. Martin and Miller also said they anticipate a secular change, where municipal bonds may continue trading richer versus their historical averages.

Meanwhile, demand for munis continues to be healthy – according to Refinitiv U.S. Lipper Fund Flows, municipal bond funds – excluding ETFs – witnessed more than US$2.3bn worth of net inflows in the week ended January 8th, marking their 53rd straight week of positive inflows. Issuance also continues to roll-out to meet the demand, with anywhere between US$6 to 8bn worth of new deals lined-up over the near-term, including more than US$910 million worth of Illinois second lien sales-tax securitization bonds, as well as US$500 million worth of taxable bonds from the Cottage Health Group.

The Cottage Health Group said it intends to apply the net proceeds from its taxable sale in large part for the general corporate purposes of a number of health facilities, including the Santa Barbara Cottage Hospital. Barclays strategists recently noted that taxable munis still present good value at current levels, and it seems that some of taxable bonds – especially single-‘A’ rated deals – have already started performing this past week, following the lead of investment-grade corporate debt.  Other offerings on the radar include close to $350 million of general obligation bonds from the City of Chicago, and a little over $300 million of revenue bonds from Connecticut’s Health and Educational Facilities Authority.

In the meantime, visit Traders’ Academy for a complete educational course about municipal bonds, and use the global bond scanner in the IBKR Trader Workstation to locate munis available to trade in the secondary market, along with U.S. Treasuries, corporate bonds, non-us sovereign debt and more. I’m Steven Levine with Interactive Brokers asking you to enjoy the week ahead.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Author Security Holding: No Positions

The author does not hold any positions in the financial instruments referenced in the materials provided.

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