NEW YORK With supplies of new municipal bonds running well below forecasts for this year, California's return to the market in the second half of the year could exert quite an impact.
Ronald Schwartz, a managing director for StableRiver Capital Management in Orlando, told Reuters in an interview: "When they finally do come back, it might be a tremendous volume and just overwhelm the market."
California, whose lawmakers are still struggling to reach a budget agreement with Democratic Governor Jerry Brown, plans to save money by delaying general obligation sales until after the start of a new fiscal year on July 1.
If the pause in general obligation sales continues until a possible $5.76 billion offering this autumn, it would be the first time California has not sold general obligations in the Spring since at least 1988, according to the state Treasury.
New issuance in the municipal bond market shrank to an 11-year low in the first quarter, partly because issuers sold billions of dollars of taxable Build America Bonds before this form of debt expired last year, and experts have repeatedly cut their volume predictions for this year.
Schwartz cited a range of forecasts from $210 billion to $265 billion to $275 billion. Municipal bond prices might firm if the lowest estimate proves accurate but the higher estimates "might pressure the market slightly," he said.
Meanwhile, municipal bonds from the tornado-devastated Southern United States showed no changes to price levels, partly because the damage was done so swiftly, unlike the months-long hurricane season.
"During hurricane season, you may see some movement in bond levels," said Randy Smolik, Municipal Market Data's Senior Analyst. "But tornadoes are just too pinpoint to have any affect on trading."
Municipal bond prices on Thursday kept their winning streak alive as prices finished higher for the 12th straight session.
Muni yields fell by as much as 5 basis points, according to Municipal Market Data's scale of AAA-rated debt. Yields on 10-year bonds declined 5 basis points to 2.86 percent, while 30-year yields dropped 1 basis point to 4.60 percent, according to MMD, which is part of Thomson Reuters.
Also Thursday, tax-exempt municipal bond funds saw outflows moderate in March, according to the Investment Company Institute. ICI said that muni funds saw $2.67 billion of redemptions in March versus outflows of $4.3 billion in February. Withdrawals from taxpayers who faced an April 18 tax deadline are nearly over.
"Over the next few weeks, I think we'll see elevated outflows out of municipal bond funds, and that's pretty much because people are paying their taxes," said Christopher Ryan, a managing director at Thornburg Investment Management.
Outflows should soon subside. "I think that as some of the fear of credit risk subsides and investors look at the attractiveness of the municipal market as opposed to other fixed-income markets, we'll begin to see inflows," he added.
(Additional reporting by Chip Barnett and Edith Honan; Editing by James Dalgleish; )