Biggest Bond Glut of ’14 Imperils Record Debt Rally: Muni CreditBrian Chappatta
It takes a nationwide effort to halt the $3.7 trillion municipal-bond market’s record winning streak.
Benchmark yields are rising from a 15-month low as issuers from California to New York schedule about $12 billion of debt offerings in the next 30 days, amid the biggest wave since December, according to data compiled by Bloomberg.
Munis have lost 0.3 percent this month, part of a sell-off across fixed-income assets, Bank of America Merrill Lynch data show. A decline would end an unprecedented streak in which the market gained the first eight months of 2014. The supply slam is interrupting a sales slowdown that has the market on pace to shrink for a fourth straight year, and may cheapen local-government securities relative to Treasuries.
“The supply, with the other rate pressures, it’s going to have an effect,” said Adam Buchanan, vice president of sales and trading at Ziegler, a broker-dealer in Chicago. “People on the buy-side are going to try to take advantage of the other factors to try to get some better rates.”
The busier calendar suggests that more issuers are looking at interest rates close to generational lows as an opportunity to finance projects or embark on infrastructure repairs. Ohio State University may sell 100-year munis as soon as this week.
For investors, this year’s performance marks an about-face from 2013, which was the weakest for the municipal market since 2008. Even with September’s losses, state and local debt has gained 7.8 percent in 2014, on pace for the biggest advance in three years, Bank of America data show.
A slower pace of issuance and renewed investor interest has driven returns. Municipal supply is 13.3 percent below last year’s level, Bloomberg data show. Meanwhile, individuals have poured $8.3 billion into muni mutual funds in 2014, the most since 2012, Lipper US Fund Flows data show.
With the swelling slate of offerings, yields on benchmark 10-year munis have jumped to 2.29 percent, close to the highest since Aug. 4. On Sept. 3, the interest rate touched 2.15 percent, the lowest since May 2013.
Even with the latest yield increase, local securities are faring better than their federal counterparts, which have lost 1.2 percent this month.
The 10-year benchmark muni yield compares with about 2.6 percent for similar-maturity Treasuries. The ratio of the two figures, about 88 percent, compares with a five-year average of 98 percent. The lower the ratio, the costlier munis are relative to Treasuries.
Increased supply “takes the steam out of the outperformance,” said Phil Fischer, head of muni research in New York at Bank of America. “If we get a sustained period of issuance at this level, then perhaps we’ll get to the point where we get some weakening in prices.”
For Michael Zezas at Morgan Stanley, supply alone is unlikely to raise yields because of inflows into mutual funds. The additional deals may also go toward refinancing higher-cost debt, which doesn’t increase the amount of bonds available, he said.
“Supply is not problematic for the market,” said Zezas, Morgan Stanley’s chief muni strategist in New York. “Interest rates tend to move in fits and starts, and at some point there will be a more disorderly move in rates. That’s when munis will underperform.”
Before this week, the largest amount of planned issuance over 30 days was $13.8 billion in March, when Puerto Rico sold $3.5 billion of junk-rated general obligations.
New York City’s Sales Tax Asset Receivable Corp. is set to offer $2 billion of refunding debt starting tomorrow. All told, localities from 40 states plan sales in the 30 days starting this week.
“All year long we’ve been saying the same thing -- there’s underlying demand for infrastructure in the country that must be met,” Bank of America’s Fischer said. “The evidence of that is everywhere.”