Offerings of municipal bonds are set to ramp up in the week ahead, highlighted by US$1.5bn worth of New York City general obligation (GO) bonds.

Supply in the muni market has averaged around US$8bn over the past two weeks, contributing to a total of roughly US$185bn year-to-date in 2019.

Analysts at Barclays pointed out that during the week, US$885m of Children’s Healthcare of Atlanta revenue bonds sold across several issuers with 1.15-3.14% yields and mostly 5% coupons, US$652m of North Texas Tollway Authority System revenue refunding bonds sold with 1.16-2.88% yields and mostly 5% coupons, US$460m of Port of Seattle revenue bonds sold with 1.34-2.95% yields and primarily 5% coupons, US$300m of Massachusetts School Building Authority Subordinated Dedicated Sales Tax bonds sold with 1.13-2.52% yields and 5% coupons, and US$264m of Virginia Small Business Financing Authority Senior Lien revenue bonds (95 Express Lanes LLC Project) sold with 2.52-2.57% yields and 5% coupons.

The issuance generally continues to meet with strong demand, underscored by continued inflows into bond funds.

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For the week ended July 17, Thomson Reuters/Lipper U.S. Fund Flows reported a net inflow of roughly US$1.43bn into municipal bond funds – not including ETFs such as the iShares National Muni Bond fund (NYSEARCA: MUB) and the Vanguard Tax-Exempt Bond fund (NYSEARCA: VTEB).

Janney Montgomery strategists noted there will be “opportunities to put these funds to work” in the week ahead, with the Bloomberg 30-day visible supply at US$14.9bn – the most in nine months.

Janney said the heavy wave of new supply over the next few weeks “will benefit from strong and persistent investor appetite for tax-free bonds,” evidenced by the unbroken, 28-week string of positive weekly inflows to mutual fund and muni ETFs.

They added that following an underperforming week, with the 10-year AAA muni benchmark yield ending only 1.5 bps lower, compared to the nearly 7 bps drop in the 10-year U.S. Treasury, “munis are poised for a strong week.”

The yield on the 10-year U.S. Treasury note was last bid at around 2.03%.

Big Apple Bonds

The week ahead should bring around US$7.5bn of new muni bond issuance to market, including roughly US$1.5bn of New York City GO bonds.

While Fitch Ratings assigned a ‘AA’ investment-grade rating to the NYC deal, the ratings agency warned that the city “may be approaching a cyclical peak,” which is somewhat unsurprising after more than a decade of economic expansion in the U.S.

The U.S. census-estimated population for 2018 is 8.4 million, up 2.7% since 2010 – about half the rate of national population growth. However, according to Fitch, this remains well ahead of the less than 1% growth for the state.

Despite the population growth, Fitch analysts Eric Kim and Amy Laskey observed that labor market gains are “plateauing with the labor force essentially flat since 2014 and employment growth trending slightly lower for three consecutive years.”

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New York City’s largest source of revenues are from property taxes, with taxable assessed value having risen by more than 6% in each of the last several fiscal years. However, growth is expected to moderate due to the current sluggish real estate market.

Kim and Laskey pointed out that property tax revenues made up 30% of audited fiscal 2018 general fund revenues.

They said sales and income taxes are also substantial components of revenues at 10% and 24%, respectively, while intergovernmental revenues made up another 27% of the general fund total in fiscal 2018.

New York City’s GOs are backed by a pledge of the city’s full faith and credit and the levy by the city of ad valorem taxes on all real property within the city subject to taxation. The city is not subject to New York State’s property tax cap.

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The New York City Council Finance Division said it expects property tax collections “to maintain strong growth” throughout its latest Financial Plan, with revenues anticipated to grow 6.7% in both fiscal 2019 and 2020. However, it added that it anticipates growth to slow in subsequent years, reaching 4.3% by fiscal 2023. The Finance Division attributed the decline to rising interest rates, and the loss of “valuable” federal income tax deductions for state and local taxes (SALT).

Among other transactions in the pipeline, CommonSpirit Health is on tap with nearly US$2.72bn of taxable bonds, and the cities of Dallas and Fort Worth, Texas are set to issue over US$1.15bn worth of joint revenue refunding bonds for the Dallas Fort Worth International Airport.

Also, on the smaller-sized side of the spectrum, the City of Norwalk, Connecticut is set to grace the docket with a potential sale of US$50m worth of General Obligation bonds.

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In the meantime, market participants have been enjoying a fairly steady uptick in the prices of MUB and VTEB.

The ETFs have soared more than 8.30% and 8.50% since their latest 52-week lows set in early November 2018 of US$104.725 and US$49.065, respectively, according to the IBKR Trader Workstation.