Hefty Demand for $269 Billion of Muni Sales Has Buyers on Hunt

(Bloomberg) -- The $9 billion-a-week market for new sales of state and local government debt is now so crowded that investors are being forced to get creative in their hunt for value.

Most Read from Bloomberg

There’s been a record onslaught of issuance from municipal borrowers this year, with sales totaling $269 billion marking an increase of 38% from 2023’s volume. That supply — bolstered by a rush to issue before the November US presidential election — has been met with a surprising amount of enthusiasm in the $4 trillion muni market, frustrating long-time investors because it’s harder to get allocations of securities they want.

ADVERTISEMENT

That tension is mirrored across fixed-income markets as global investors clamor for bonds. Credit spreads on both investment grade and junk-rated corporate bonds have tightened, with high-yield taxable debt trading at a spread roughly 100 basis points below the five-year average.

Some muni buyers are searching for debt on the cheap or looking to buy in areas that are less popular to gain more income. Others have shifted down the credit spectrum to capture yield. That hunt has become even more relentless this summer as more securities mature and are called back during June, July and August — handing holders more cash to reinvest and raising competition.

Money managers at asset-management firm Vanguard Group Inc. are favoring the secondary market, because new issue sales in certain segments of the curve have become too expensive.

“A lot of primary deals have been wildly oversubscribed and have been coming at levels inside of the secondary market,” said Paul Malloy, head of municipals at Vanguard. “There hasn’t been any new issue premium at all. So that’s really left secondary markets as the place to actually find out a little more extra return.”

Certain governments are benefiting from the strong demand, allowing them to achieve a lower cost of borrowing with the increased competition. Brandishing new investment-grade ratings, once-bankrupt Detroit sold debt earlier this month with yields roughly 100 basis points tighter than when the city issued about a year ago, according to the city’s Chief Financial Officer Jay Rising.

ADVERTISEMENT

This week, the South Carolina Public Service Authority, known as Santee Cooper, sold debt met with strong demand — with investor orders totaling over $6.2 billion, according to the utility.

Bids came in from 90 investors which allowed the utility to upsize its offering by roughly $400 million to $1.3 billion and lower yields on individual bonds. Spreads tightened by an average of 5 to 10 basis points through the pricing process, much narrower than in 2022 when the utility last came to market, JPMorgan Chase & Co. banker Kevin Plunkett said during the utility’s board meeting after the debt sale.

“Deals are initially priced to attract demand and then the deals get so oversubscribed – this gives the issuer the ability to lower the final yield right back down to fair value or even overvalued,” said John Flahive, head of fixed income at BNY Mellon Wealth Management, who said the dynamic had taken hold for months.

Hunting for Value

BlackRock Inc., the world’s largest asset manager, is looking for where there may be gaps in demand for a new deal.

ADVERTISEMENT

Sean Carney, BlackRock’s chief investment officer of municipal bond funds and head of municipal strategy, sees a benefit to staying away from muni debt maturing in 12 years or less, which is where separately-managed accounts and exchange-traded funds tend to dominate.

“If you run a portfolio or have the ability to go out 15 to 20 years, you’ll see better allocation,” he said.

For those looking to expand beyond the new issue market, finding opportunities in the secondary space takes some extra elbow-grease. The muni market has approximately 50,000 issuers and 1 million unique securities.

However, remaining active in the primary market can be a prerequisite for being able to source bonds from dealers in the more illiquid secondary market, said Chris Eustance, a portfolio manager at Morgan Stanley Investment Management. “We want to be that first phone call from other dealers when opportunities arise,” Eustance said.

Given the crowded market, DWS Group is favoring cash and muni closed-end funds. Chad Farrington, co-head of municipal bond investment strategy at DWS, noted investor frustration about the crowded market meaning they may receive small allocations of new deals.

ADVERTISEMENT

“The only solace is that sitting in cash isn’t as much of a drag as it used to be given higher short rates,” Farrington said in an emailed statement.

--With assistance from Claire Boston.

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.