The U.S. Week Ahead: Muni Market (May 6-10)

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Demand for municipal bonds appears to have recently exceeded the pace of new supply, amid consistently positive fund flows – these have been highlighted by increased purchases by mutual funds and insurance companies. Recent federal tax reform has placed a cap on state and local tax deductions, while also limiting muni bond issuers to offer advance refunding of tax-exempt munis – this is where a municipality sells debt to repay an existing bond prior to its typical 10-year non-call date. According to Barclays figures, a total of $28bn of muni issuance priced in April, a plunge of 12% from the prior year. Meanwhile, caps on SALT deductions also appear to have revved-up demand for funds holding tax-exempt state bonds – with the most recent fund flows data marking the 16th straight week of inflows, with long-term municipal funds having taken in more than US$2bn. Against this backdrop, and among the deals in the pipeline, the Commonwealth of Massachusetts is poised to offer US$400m worth of double-‘A’ rated General Obligation Bonds, which are slated to be sold through competitive, electronic bidding on May 7.

The state aims to use the proceeds from the sale towards the financing of certain capital projects aligned with its 2019 investment plan. Moody’s Investors Service attributed its investment-grade credit rating on the transaction to the state’s' “continually growing economy, anchored by education, healthcare, and technology sectors.” And while the state’s debt and pension liabilities are among the highest in the country, these figures include borrowing and benefits for local governments. Overall, Massachusetts’ economy, with its concentration of higher education institutions, medical industries, and high technology companies, has outperformed the broader national economy during and immediately following the most recent recession. It also maintains an unemployment rate about average for the New England region and below the nation’s current pace. Find out more in my full article ‘Muni Market Dynamics Driven by Strong Demand and Weak Supply’ on IBKR’s Traders’ Insight, and receive a wealth of muni bond trading tools using the IBKR Trader Workstation.