Muni Update

April 1, 2019


In this week’s Municipal Market Update, we highlight the following:

 

Municipal Market Recap

Municipal prices were stronger across the curve on Monday. On Tuesday prices were steady across the curve. On Wednesday they again strengthened across the curve. On Thursday and Friday prices were steady across the curve. Issuance for the week is forecasted to be $5.5B, which is below last week’s revised level of $7.5B in issuance. This week’s projected level of issuance combined with secondary market offerings should provide market participants with a number of opportunities, especially given the current demand in the municipal market. Driving this strong demand in the municipal market is a combination of high redemption flows and inflows into municipal bond mutual funds.

Investors in municipal bond funds put cash into funds for an twelfth week, as weekly reporting funds experienced inflows of $1.532B after experiencing inflows of $1.425B the week prior. The four-week moving average was a positive $1.350B, after being a positive $1.393B the week prior. Investors still facing low rates overseas continue to find higher-yielding U.S. assets attractive. These factors should have both traditional and non-traditional market participants continuing to look for opportunities in the U.S. municipal market. According to Bloomberg, “The raging bond-market rally is propelling state and local-government debt to the best quarterly return in five years, amid surging demand for tax-exempt income and concerns about a slowdown in global growth. Municipal bonds have returned 1.56% since the beginning of March, marking the biggest monthly gain since May 2017, according to the Bloomberg Barclays benchmark index. That brings the first quarter return to 2.87%, the most since early 2014.

Last week the yields on the two-, 10-, and 30-year maturities on the MMD Triple-A Scale were all unchanged from Thursday to Friday and they ended the week at 1.49%, 1.86%, and 2.60%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond fell four basis points (bps), while the yield on the 10-year GO bond fell six bps and the yield on the 30-year GO bond fell seven bps.

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 1.58%, 2.12%, and 2.76%, respectively. Overall, week-over-week the yield on the two-year GO bond rose two bps, while the yields on the 10- and 30-year GO bonds each fell six bps.

 

New Issue Volume is Forecasted to be $5.5B for the Week

Total new issuance for the trading week per IHS Markit Ipreo is estimated to be $5.5B, which is well below last week’s trading volume of $7.5B in issuance, according to revised data from Refinitiv. This week’s trading calendar is comprised of $4.2B in negotiated offerings and $1.3B in competitive offerings.

Kicking off the week is the Anne Arundel County, Maryland, (Aa1/AAA/NR) will offer $302.0MM of GOs in two sales consisting of $224.05MM of consolidated general improvement GOs and $78.32MM of consolidates water and sewer GOs. Proceeds will be used finance various capital improvements and to refund certain outstanding debt. The deal is rated Aa1 by Moody’s Investors Service, AAA by Standard and Poor’s Global Ratings.

The Illinois Finance Authority (IFA) will sell its first state revolving fund bonds with a green bond designation. The IFA will takes retail orders on Tuesday ahead of the institutional pricing on its State Revolving Fund clean water initiative deal on Wednesday. The offering is rated AAA by S&P. Also on Wednesday the Michigan Finance Authority (MFA) plans to offer $300.0MM of taxable school loan revolving fund term rate revenue bonds. The offering is rated Aa2 by Moody’s and AA+ by S&P.

Also on tap this week will be a $197.0MM green bond deal from the Arizona Board of Regents, rated Aa2 by Moody’s and AA+ by S&P. Lee Memorial Health System in Florida plans to offer $250.0MM of fixed-rates and R-FLOATS, rated A2 by Moody’ and A+ by S&P. Finally, the New York City Housing Development Corporation (NYCHDC) plans to offer $312.0MM of multi-family sustainable neighborhood revenue bonds. The offering is rated Aa2 by Moody’s and AA+ by S&P.

 

Municipal Bond Funds Post Inflows for a Twelfth Week

Investors in municipal bond funds put cash into funds for a twelfth week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $1.532B, after experiencing inflows of $1.425B the week prior. The four-week moving average was a positive $1.350B, after being a positive $1.393B the week prior.

Long-term municipal bond funds had inflows of $1.129B in the latest week after experiencing inflows of $1.102B the week prior. Intermediate-term funds had inflows of $318.839MM after inflows of $307.389MM the week prior. National funds had inflows of $1.339B after experiencing inflows of $1.427B the week prior. High-yield municipal funds reported inflows of $491.916MM in the latest week, after inflows of $480.331MM the week prior. Exchange traded funds reported inflows of $290.529MM, after inflows of $168.827MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

Last week, the BQ market had good activity, due in part to opportunities in both BQ and general market (GM) new issue and secondary market bid lists. With rolloffs expected to continue at a brisk pace, BQ participants will continue to have significant demand for BQ paper. This week’s projected level of new issue BQ paper, together with GM opportunities in both the primary and secondary markets should provide BQ market participants with additional chances to address their needs, while picking up attractive structures (3.0% coupons and higher), especially those in the long-end of the curve (15+ years). Participants should also continue to utilize extension swaps, as the bid side for municipals continues to remain strong. Week-over-week, bank qualified spreads were mixed, as the one-year maturity widened five bps. All other maturities tightened week-over-week, with the largest tightening occurring in the 10-year maturity, 13 bps.

 

Daily Overview of the General Market for the Week Ending March 29th

Last Monday prices on municipals were stronger, as the two-day retail order period on the New York City Transitional Finance Authority’s (NYC TFA) $850.0MM tax-exempt offering came to a close, ahead of its institutional pricing on Tuesday. On the day, the yields on the two-year GO bond fell one bp, while the yields on the 10- and 30-year GO bonds each fell two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger for third time in the last four sessions, and the three major U.S. stock averages see-sawed up and down during the day, only to gradually recover and close basically unchanged on the session. On the day, the yield on the two-year maturity fell five bps, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury fell slipped to 78.2% on Monday from last Friday’s level of 78.7%, while the 30-year municipal-to-Treasury ratio fell to 92.3% on Monday from last Friday’s level of 92.7%.

Last Tuesday prices on municipals were steady, as a number of new issue offerings came to market, including the negotiated institutional pricing of the NYC TFA offering. On the day, the yields on the two-, 10-, and 30-year GO bonds were steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger, as U.S. stocks posted gains for the session. On the day, the yields on the two- and 10-year maturities each fell two bps, while the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 78.8% on Tuesday from Monday’s level of 78.2%, while the 30-year municipal-to-Treasury ratio rose to 92.7% on Tuesday from Monday’s level of 92.3%.

Last Wednesday prices on municipals were stronger, as new issue supply continued to hit the market and retail investors got their first crack at the tax-exempt portion of a $850.0MM Connecticut GO bond offering. On the day, the yield on the two-year GO bond fell three bps, while the yield on the 10-year old  GO bond fell four bps and the yield on the 30-year GO bond five bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also stronger, as U.S. stock markets closed slightly down for the session, as worries about the global economy continued to weigh on investor sentiment. On the day, the yields on the two- and 10-year maturities each fell two bps, while the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio fell to 77.8% on Wednesday from Tuesday’s levels of 78.8%, while the 30-year municipal-to-Treasury ratio fell to 91.9% on Wednesday from Tuesday’s level of 92.7%.

Last Thursday prices on municipals were steady, as Connecticut’s $750.0MM competitive offering of GO bonds hit the market, as municipal participants snapped up the last of the week’s sizeable deals. On the day, the yields on the two-, 10-, and 30-year GO bond were steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed, as U.S. stocks finished the session up. The Dow and S&P posted gains of 0.36%, while the NASDAQ was up 0.34%. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity was steady and the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio was unchanged on Thursday from Wednesday’s level of 77.8%, while the 30-year municipal-to-Treasury rose to 92.5% on Thursday from Wednesday’s level of 91.9%.

Last Friday, prices on municipals were steady, as market participants were looking ahead to the coming trading week’s $5.5B in new issue offerings. On the day, the yields on the two-, 10-, and 30-year GO bonds were unchanged, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed, as each of the three major U.S. indices posted gains for the session. On the day, the yield on the two-year maturity rose four bps, while the yield on the 10-year maturity rose two bps and the yield on the 30-year maturity was steady. The 10-year municipal-to-Treasury fell to 77.2% on Friday from Thursday’s level of 77.8%, while the 30-year municipal-to-Treasury ratio was unchanged on Friday from Thursday’s level of 92.5%.

 

Taxable Market



 


 


Municipal Volume Resumes its Slide (The Bond Buyer)

Municipal bond issuance fell 7.0% in March, as the market adjusts to an environment without advanced refundings. Volume ended the month at $24.25B on 616 transactions, down from $26.08B on 745 deals in March 2018, according to data from Refinitiv.

Although volume slipped for the month year-over-year, it is up 14.4% for the quarter. After the first three months, volume sits at $75.03B on 1,869 deals, compared with $65.56B on 1,889 sales in the same period last year.

Negotiated deal volume dropped by 4.9% to $15.84B for the month, while competitive sales dipped 2.4% to $8.14B. Taxable bond volume jumped by 58.5% to $2.95B, while tax-exempt issuance decreased by 10.6% to $20.97B. Issuance of bonds with interest subject to the Alternative Minimum was 56.3% lower to $332.MM. Deals wrapped by bond insurance for the month dropped 33.5% to $1.09B on 100 deals from $1.65B on 109 transactions the same time the prior year.

Four sectors gained from year-earlier levels, while issuance by the rest of the sectors declined at least 7.7%. General purpose municipal sales increased 21.3% to $10.07B from $8.29B; housing deals increased 76.1% to $1.82B from $1.03B; public facilities issuance was up to $953.0MM from $949.0MM, environmental facilities deals increased to $177.0MM from $29.5MM.

Three types of issuers increased volume, led by cities and towns which sold $3.93B, up from $3.52B. Districts increased sales to $4.93B from $4.45B, and colleges and universities sales were up to $679.0MM from $452.0MM.

California continued to lead all states in terms of municipal bond issuance. Issuers in the California have sold $14.31B of municipal bonds so far this year; New York moved up to second with $8.39B; Texas dropped down to third with $7.65B; Massachusetts was next with $3.41B; and Illinois rounded out the top five with $2.90B.



Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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