Weekly Insights of a Municipal Bond Trader
A LOOK AHEAD – WEEK OF APRIL 8TH, 2019
Here comes the “Taxman.” April has fallen upon us and so has the “2017 Tax Cuts and Jobs Act’s” new sweeping changes to the tax code. If you are waiting to file your taxes to the last possible moment, you are probably learning that you may have to pay the “Taxman” this year. We are hearing from investors who say the change in the tax code on SALT deductions along with changes to withholding rules are causing some to actually pay more in taxes this year than last. It has been our belief that as we head into next week we could see some slowing in the municipal funds flow data. We have been saying for the past couple of weeks that we feel mid-April could be a better entry point back into the municipal bond market. However, the first quarter of 2019 has been a record year for inflows as people searched for safety and tax-free income. The new issuance calendar continues to be light pushing municipals to low ratios vs. treasuries and have continued to perform very well against other fixed income asset classes.
MUNI / TREAS RATIOS
Lipper reported weekly inflows of $714mn for the week ended 4/3/2019. This extends the record year-to-date inflows to $23.4bn and the best start to a year since the data series began in 1992. By category, the year-to-date flows are $5.2 bn for high-yield, $9.8 bn for intermediate, and $11.5 bn for long-term.
New Issue We mentioned last week that the deal of the week was most likely the highly anticipated, high profile, high yield deal for Virgin Trains USA, and it did not disappoint. The deal was upsized from $1.5bn to $1.75bn as investors piled in with over $4bn in orders on the deal. The deal performed very well when it opened for trading in the secondary with prices quickly climbing from $100.00 to as high at $103.5 on the first day of trading. This performance shows the strong appetite from high yield funds and other funds as portfolio managers have been searching for yield in this tight market. This week the new issue calendar again will be light with around $5bn in negotiated deals coming to market. $2bn of which will be the State of California which will be issuing general obligation debt with maturities mostly within 15 years. This should set the tone for the week as we anticipate next week’s calendar to again be light as we head into the Easter holiday weekend. The light calendar weeks are one of the risks we mention in our thesis of hoping for a better entry point into the market at cheaper ratios.
Data Sources: MMD from TM3 and Treasury data from Bloomberg; Lipper data from JP MorganInsights of a Municipal Bond Trader_4.08.19