** Municipals **
SSB Report
Reasons for Reduced Pessimism
March 3, 2000
Although aggregate institutional demand for municipals
remains negative, the magnitude of outflows seems to
be slowing.
Indeed, this week we saw significant buying from some
property and casualty companies - even on AMT bonds,
that they usually shun.
Bond fund outflows are slowly getting less severe,
although it is too early to tell whether this is a
permanent improvement.
We also suspect that a significant portion of the
improvement in tone relates to the continuing light new
issue calendar, which remains down more than 40%
from 1999 levels.
The municipal bond market showed some signs of life this
week, in spite of a continuing lack of new issue product. The
limited number deals that did come to market met with
considerable success. New York State Thruway Authority
was able to lower yields a bit, after receiving retail orders of
$201 million - nearly 60% of the deal. Lee County, Florida
Airport saw participation from a wide range of buyers - state
bond funds, property and casualty insurers, arb accounts and
direct retail. Indeed, retail demand for this loan of over $30
million was significant considering usual resistance to AMT
paper and a serial maturity range that didn't begin until 2011.
Another sign of increased optimism has been the significantly
stronger institutional bid for market discount bonds. After a
long period during which this sector remained orphaned,
institutions have begun to look favorably upon this sector.
This increased appetite appears to come from several
sources - a more bullish market outlook, the shortage of
current coupon paper, and the end of a major institutional
selling program which had kept discounts under constant
pressure.
The institutional demand side does appear to have improved
- not positive, but clearly a bit less negative. Bond fund
outflows according to AMG Data Services looked fairly bad in
the aggregate numbers - minus $877 million for the week
ended 3/1. However, this is the week that includes most of
the monthly reporting fund complexes - for these funds, the
3/1 number represents a full month of outflows. The same
number a month earlier was minus $1.328 billion. This time,
the flows out of the long-term weekly only reporting funds
was "only" $205 million - slightly worse than the weeks
ended 2/2 (-$189 million) and 2/9 (-$170.4 million), but
much better than the next two weeks which were at -404.8
million and -$299.5 million, respectively. We continue to hear
anecdotally that the outflow trend is moderating, but we're
not yet sure how permanent the improvement is. Some of it
may be coming from asset reallocation out of the stock side,
where most non-tech sectors have been volatile and weak.
Some may simply reflect the shortage of product to
purchase directly - investors seeking to swap out of funds
into bonds will tend to do so when they have something
attractive to purchase with proceeds. It may take several
more weeks to see how much the underlying trend has
improved. And it is important to stress that flows are still
negative, only at a slower pace.
On the P&C side, we saw a number of buyers on the Lee
County Airport issue. However, the overall outlook for the
P&C sector does not appear to have strengthened
significantly.
Putting all of this together, municipals remain highly
dependant upon retail sector, and only the void in new issue
product has kept the market from coming under additional
pressure. Market participants can talk all they want about the
importance of the price leadership provided by a heavy new
issue calendar. The fact remains that issuance this year is
running more than 13% behind 1999 year-to-date levels.
That's roughly $17 billion less bonds that the market has had
to absorb, in the first nine weeks of the year. That's nearly
$2 billion per week, a massive shortfall. The shortage is
clearly affecting behavior in many specialty states, as
reflected in the Lee County Florida issue, where in-state
funds were significant players. The shortage is also reflected
in the strong pricing of the new issue market, which is priced
on top of or through the secondary in many cases.
In other words, we remain a bit nervous. Heavier supply -
when and if it comes - would ultimately take away some of
the reasons for the current, more buoyant tone in the
municipal market. Given the magnitude of the year-to-date
shortfall, however, it could take quite a while before enough
extra supply would build up to cause any sort of market
overhang. And this assumes that issuance actually rebounds,
a pattern not yet in evidence. |
