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Munichain Market Perspective #9

By Matthew Gerstenfeld
Market Perspective

New issue volume is expected to rise over the course of the week as state and local governments address financing needs ahead of the third quarter. Despite this week’s return to palatable supply levels, severe volatility throughout the recent quarter constricted primary offerings as issuers evaluated market conditions.

As issuers adjust to a rising rate environment, widespread appetite for debt financing remains a question among market players as municipalities closely monitor current borrowing costs and potential savings. Further rate increases on behalf of the Fed may encourage municipalities to issue debt in the near term in order to curtail true interest costs and adequately fund operations.

Greater scrutiny surrounding issuance costs and refunding benefits have prompted issuers to shift into neutral, playing a major factor in lackluster supply figures over the past six months. Declining volumes and wide fluctuations in muni benchmarks remains a challenge among retail and institutional investors seeking to deploy capital across a myriad of municipal credits.

In an effort to minimize considerable losses, buyers have placed greater emphasis on comparing secondary offerings relative to primary yields given the abrupt movements noted across benchmarks. Last week’s pricing activity favored short term investors after US treasuries bull steepened by 4-16 basis points, with the 5YR tenor registering the sharpest tightening and settling at 3.18% by week end.

Muni benchmarks witnessed mixed performance against treasuries given another week of even yield contractions, with a flat 12 basis point cut noted across the major tenors. Muni/UST ratios reacted to last week’s pricing performance with the 10YR and 30YR ratio standing at 89% and 100% respectively. As the market presses ahead into the third quarter, attention will remain geared towards financing activities and rate levels as issuers navigate evolving and complex market conditions.

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