Municipals outperformed Treasury losses in the latter half of the week making for the lowest relative value for the sector since early Summer, which spells out a challenging dynamic for next week's deals.
The state of California successfully placed nearly $3 billion general obligation bonds with a very aggressive pricing this past week. This was especially notable as the broader municipal market was struggling somewhat given a weaker Treasury market and on the tails of the largest month of August issuance in over two decades.
The low interest rate environment that has persisted almost the entirety of 2016 has led issuers to offer a different array of coupon structures. In recent cases, we are seeing more and more 3% and 4% coupons on longer-dated bonds, which is usually the realm of 5% coupons. We look at why this is the case and what it means going forward inside.
With most taxable bond markets generally staying range-bound, municipals were little changed for most of last week. A low volume of trading in the secondary market and limited new-issue offerings allowed municipal markets to keep an even keel.
The Internal Revenue Service will once again due to sequestration lower the payment to issuers of Build America Bonds in the coming fiscal year 2017. This time it is by 6.9%, after a 6.8% cut last fiscal year. This is now the fourth year in a row that BAB subsidy payments have been cut.
In the past quarter the municipal secondary market saw its first increase in volume since the very start of 2015. This is a deviation from the general theme of less secondary market trading in the wake of the financial crisis of 2007 and 2008. We view this as a positive for price transparency for investors but the result is part of a new group of professional trading desks that represent a new ‘middlemen’ in the market.