Issuance, geopolitics weigh on muni market participants

As May begins, municipal bond market participants face a larger new-issue calendar and lighter reinvestment amid continued geopolitical tensions in the Middle East.

Tax-exempts should "do fine" this month, but if rate volatility returns on the back of Iran-US tensions, the going will "get harder," Barclays (BCS) strategists said.

"The lack of clarity on a more permanent and longer-term solution to the Iran conflict and restricted movement of oil vessels across the Strait of Hormuz" could potentially impact the muni market and credit, said Mohammed Murad, head of municipal credit research at PT Asset Management.

"I don't think there is a meaningful impact on municipal credit at this time, but any persistent rise in oil prices may create an environment of added pressure on credit, especially airports and toll-roads," he said.

With continued geopolitical tensions and surging oil prices, things could change on a dime, said Sweta Singh, founding partner and portfolio manager at City Different Investments.

Even good news, like a temporary peace agreement, could "skew things," though that scenario would be a positive for the muni market, leading muni yields to rally, she noted.

The nonfarm payrolls report will be released Friday, showing how the labor market has performed over the past month.

"It's not going to include all of what we've likely been seeing, especially with the geopolitical risk, but it's going to give us a better taste than what we've had over the last couple of weeks," said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities.

May is expected to be "choppier on rate vol and technicals, with lighter reinvestment and heavier issuance implying around $20 billion of tax-exempt net supply," around the past four months' net supply of $26 billion compressed into one month, said J.P. Morgan strategists.

The first full week of May sees a large new-issue calendar, setting the month up to surpass the 10-year average of $36.499 billion by a wide margin.

Issuance this week is an estimated $12.207 billion, with $9.972 billion of negotiated deals on tap and $2.235 billion of competitives.

Chicago leads the negotiated calendar with $814.14 million of water revenue bonds.

The competitive calendar is led by Washington state with $786.245 million of GOs in three series.

Most of the deals this week are high-grade names. There should be strong demand, even if ratios cheapen up a little bit, said Peter Block, managing director of credit strategy at Ramirez.

People are cautious on credit, and they are looking for solid names, because "it doesn't pay to buy yieldier names because you're not getting [compensated] because spreads are pretty tight," he said.

The size of the new-issue calendar appears "robust" over the coming weeks, but deals may need to "offer modest concessions and will see strong subscription levels," Birch Creek strategists said.

To absorb the supply and keep the market near "fully valued levels," sustained inflows are necessary, said J.P. Morgan strategists.

"If outflows emerge, we think the market will need to cheapen to draw bank and insurance demand, and we would look to add exposure on any resulting dips ahead of stronger summer reinvestment," they said.