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US Muni Market (Jan 20-24): Taxables May Benefit From 20-Year Treasury Bond


Senior Market Analyst at Interactive Brokers

IBKR senior market analyst Steven Levine discusses the state of the municipal bond market, including supply & demand dynamics, relative performance, investor interest, deals in the pipeline and more.

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Produced on January 21, 2020

Video Script:

Municipal bond returns generally continued to outperform Treasuries this past week, with around US$7 billion of new sales crossing the wires. Market participants have observed an imbalance in supply and demand, with taxable issuance mainly being sold in the primary market to refinance outstanding tax-exempt debt – this has generally left a dearth of tax-exempt paper in its wake, amid ongoing appetite for munis in general. 

According to Refinitiv U.S. Lipper Fund Flows, municipal bond funds – excluding ETFs – witnessed more than US$1.8bn worth of net inflows in the week ended January 15th, marking the 54th straight week of positive inflows— and within earshot of the prior week’s level – which was the heaviest influx of net inflows in almost 30 years. Analysts at Nuveen noted, for example, that the City Of Chicago’s GO sale last week was “so well received that the issuer upsized” the offering and lowered yields on the deal by 15-20 basis points.

Meanwhile, U.S. Treasury rates climbed a bit higher in the latter part of the week, amid a rebound in risk appetite, and alongside an announcement by the U.S. Treasury Department that it intends to issue a 20-year bond in the first half of the current calendar year. The Treasury said it thinks there will be strong demand from investors for a 20-year bond, which will increase its financing capacity over the long-term at the least possible cost to taxpayers. Some analysts weighed-in on what the new issuance may mean for munis. Strategists at Barclays, for example, said that for taxable municipal debt, 20-year bonds represent a sizable portion, or around 20%, of the total—these mainly comprise long-dated Build America Bonds. Barclays highlighted that most of these non-callable BABs trade somewhat cheap to newly issued taxables due to their high dollar prices, rather than the absence of maturity-matched hedges, adding that while the reintroduction of 20-year Treasuries “should be a small positive for all non-callable taxable bonds in that part of the curve,” they do not expect to see a surge in demand or a notable spread tightening.

Against this backdrop, the yield on the 10-year note has fallen at the start to this holiday-shortened week, amid a darker global growth outlook from the International Monetary Fund, as well as fears about the contagion of a deadly new virus emerging out of China. In the week ahead, issuance of new municipal debt could tally in the area of US$7-8 billion, with a slight tilt towards taxable sales.  Among the deals on the radar, NYU Langone Hospitals is set to issue US$575 million worth of single-‘A’ rated, taxable munis in large part to refund existing debt. Moody’s Investors Service, which assigned an ‘A3’ credit rating to the notes, said that robust margins are necessary to grow the hospital’s balance sheet resources, support large capital spending, and provide a cushion for rising debt – this, while the issuer maintains a high debt burden, amid a likely increase in capital spending over the next two years— and this, in a highly competitive market. Moody’s added that a material level of unfunded pension liability will further burden the issuer’s already high direct leverage. The deal is being co-lead managed by BofA Securities, Goldman Sachs and J.P. Morgan. 

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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