Relative Value
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.”
Caribbean Echo
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.
California, which won its highest grade in 13 years from Moody’s Investors Service in June, plans to issue $2.3 billion of general obligations Sept. 23, Bloomberg data show.
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.”