Maryland Set to Sell US$350m of Residential Revenue Bonds
Uncertainties over the path of U.S. monetary policy may throw a wrench into investors’ demand for municipal bonds in the week ahead, despite recent interest rate stability.
The Federal Reserve’s recent lack of clarity and consensus about the direction of rates has many in the market rethinking its potential near-term rate-cut decisions.
Market participants’ views about an additional 25-basis point rate cut by the Federal Open Market Committee (FOMC) at the conclusion to its two-day meeting October 30, for instance, appear to have dwindled, with fed fund futures indicating a less than 50% chance.
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In fact, dissenting outlooks among several FOMC members have generally spurred jitters in the financial markets – especially against a backdrop of rising political uncertainties, slowing global growth, as well as escalating U.S.-China trade tensions and a nearing deadline for Brexit.
Meanwhile, the yield on the U.S. Treasury note has fallen roughly 21bps since September 13 to 1.69% at the close of the bond market Friday. Prices remained about unchanged in intraday trading Monday, with the 10-year note around 6bps wide of conversion with the 2-year yield.
Analysts at Janney Montgomery pointed out that ‘AAA’ tax-free benchmark yields did not move on Friday, despite a firmer U.S. Treasury market, spurring muni / Treasury ratios to edge slightly higher – with the 10-year muni / Treasury ratio last at around 87%.
Demand Side
The heightened demand for munis was also reflected in the latest flow of funds data.
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For the week ended September 25, Thomson Reuters/Lipper U.S. Fund Flows posted net inflows into muni bond funds (for the 38th straight week) of around US$1.36bn, up from US$307m in the prior week and above their weekly average of US$1.185bn since August 7, 2019.
Also, prices of certain exchange-traded funds (ETFs), such as the iShares National Muni Bond fund (NYSEARCA: MUB) and the Vanguard Tax-Exempt Bond fund (NYSEARCA: VTEB), have risen roughly 9.40% and 7.53%, respectively, since their most recent 52-week lows set in early November 2018.
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Offerings prices this past week included New Jersey Transportation Trust Fund Authority’s US$950m worth of program bonds, which sold with yields ranging from 2.48% to 3.69%, as well as around US$835m of Texas Water Development Board revenue bonds, which priced to yield to maturity at about 1.25% to 2.67%.
Some market participants have highlighted the critical role of mutual funds’ support of municipal issuance following the recent tax reform.
Analysts at Barclays, for example, noted that in the aftermath of the Tax Cuts and Jobs Act of 2017, most institutional and direct retail investors “have not shown much appetite for munis and remain on the sidelines; mutual funds are the main source of market support these days; their appetite has been supported by record inflows for the first 8-9 months of the year; however, inflows have started to slow down in response to low rates and increased volatility.”
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Barclays added that municipal bond supply is also “extremely heavy,” as nearly US$40bn have priced in two back-to-back months, which will be followed by October – “historically is one of the heaviest issuance months each year.”They underscored that “a substantial portion” of supply is taxable, but tax-exempt issuance is also “quite heavy.”
Supply Side
A total of just under US$275bn worth of municipal bonds priced year-to-date in 2019, with another US$9bn set to be sold in the week ahead.
The Bond Buyer’s U.S. 30-Day Visible Supply was last at around US$12.98bn, according to Bloomberg.
While Barclays appears less optimistic about investor interest in municipal bonds in the coming week, other market participants seem more upbeat.
Janney Montgomery added that given the latest report on inflows, “there should be plenty of investor interest in this week’s slate.”
Maryland’s Residential Revenue Bonds
Among the deals on the radar, the Maryland Community Development Administration (CDA) is poised to price US$262.5m of 2019 Series C (non-alternative Minimum Tax (AMT)) notes, as well as US$87.5m worth of 2019 Series D, federally taxable bonds.
CDA, a unit of the Division of Development Finance of the Maryland Department of Housing and Community Development, intends to use the net proceeds from the sale for purposes such as providing financing for mortgage loans, mortgage-backed securities (MBS), as well as for the purchase of owner-occupied single-family, limited-income residences.
The offering, rated investment-grade ‘Aa2’ by Moody’s Investors Service, is being lead-managed by Bank of America Merrill Lynch.
Moody’s analyst Rachael McDonald noted that CDA’s intention to add primarily MBS going forward will “strengthen the composition of the portfolio and reduce the potential for loan losses. In addition, delinquency and foreclosure rates for the whole loan portfolio have been trending down, mirroring the decline in unemployment in Maryland, which will reduce losses within the portfolio.”
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Maryland’s unemployment rate has been trending under 4% since July 2018 and was hovering at around 3.8% as of August 2019.
Moody’s also noted that under the terms of the transaction, the bonds are payable solely from the revenues and assets of CDA pledged under the resolution, which consists primarily of interest on first-lien mortgages, investments, and reserves held with the trustee.
There is a debt service reserve requirement for whole loans of 2% of loans and lendable proceeds.
CDA has also established a collateral reserve fund under the bond resolution to provide additional pledged collateral as it deems appropriate.
Other offerings on the radar for the week ahead include New York City’s US$850m of General Obligation and Mass Transportation’s US$700m of highway system revenue notes.
In the meantime, including New York City’s US$850m of General Obligation and Mass Transportation’s US$700m of highway system revenue notes.
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