Muni Update

April 10, 2017


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

Municipal Market Recap

Municipal bond funds recorded outflows for the week, as weekly reporting funds experienced $287.201MM in outflows in the latest reporting week, after experiencing inflows of $265.041MM the week prior. The four-week moving average remained positive at $8.313MM, after being a positive $61.827MM the week prior. All other funds posted outflows except the high-yield fund, which posted its sixth week of inflows. Investors still facing negative rates overseas continue to find higher-yielding assets attractive. High demand is expected to continue to outpace supply, as reinvestment funds remain constant and traditional and non-traditional market participants continue to look for opportunities, especially if yields rise. Still, the uncertainly surrounding tax reform, infrastructure, and the pace of Fed tightening are causing some market participants to be observers more than buyers at this time.

U.S. Treasury prices started the trading week stronger across the curve. On Tuesday prices on maturities in the intermediate area of the curve were stable while prices on maturities in the front and long-ends of the curve were weaker. On Wednesday the front-end was stable while maturities 10-years and longer weakened. On Thursday U.S. Treasury prices strengthened across the curve and on Friday they weakened. Prices for municipals started the trading week weaker in the front-end and stronger 10-years and longer. On Tuesday the front-end was steady while bonds 10-years and longer strengthened again. On Wednesday and Thursday prices on municipal bonds strengthened across the curve. On Friday prices on the front-end were stable, while prices on bonds maturing 10-years and longer strengthened. Volume for this holiday shortened trading week (recommended early close on Thursday and a full market close on Friday) is projected to be $5.69B, which is above last week’s revised level of $5.48B. This week’s level of new issuance volume coupled with secondary market opportunities should provide market participants with opportunities as they replace rolloffs.

The economic calendar for this holiday-shortened trading week is full of information. Among the data to be released this week will be the small business optimism and the JOLTs job openings and labor turnover reports on Tuesday. Wednesday will have producer prices and Thursday will be consumer confidence. On Friday while the markets are closed, retail sales and CPI inflation reports will be released, which could lead to some volatility next Monday if there are any surprises in the reports.

Last week the yield on the two-year maturity on the MMD Triple-A Scale was unchanged from Thursday to Friday and ended the week at 1.00%. Meanwhile the yields on the 10- and 30-year maturities each fell two basis point (bps) on the MMD Triple-A Scale from last Thursday to Friday, and they finished the week at 2.17% and 2.97%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell two bps, while the yields on the 10- and 30-year GO bonds each fell eight bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale fell one bp from Thursday to Friday and ended the week at 1.07%. Meanwhile the yields on the 10- and 30-year maturities on the MMA Triple-A Scale each fell two bps from Thursday to Friday and they ended the week at 2.32% and 3.15%, respectively. Overall, week-over-week the yield on the two-year maturity fell two bps, while the yields on the 10- and 30-year maturities each fell five bps.

Prices on U.S. Treasuries started last week stronger across the curve. On Tuesday prices on maturities in the intermediate area of the curve were stable while prices on maturities in the front and long-ends of the curve were weaker. On Wednesday the front-end was stable while maturities 10-years and longer weakened. On Thursday U.S. Treasury prices strengthened across the curve and on Friday they reversed course and weakened. Overall, week-over-week the yield on the 10-year maturity fell three bps and closed the week at 2.37%. Meanwhile the yield on the two-year maturity rose three bps week-over-week and closed the week at 1.28%. This resulted in a week-over-week 2s/10’s spread of 109 bps, six bps tighter than last week’s 2s/10’s spread of 115 bps. The yield on the 30-year maturity fell two bps and finished the week at 3.00%.

 

New Issue Volume Jumps to an Estimated $5.69B

Total volume for the holiday shortened trading week is estimated to be $5.69B, which is just above the $5.48B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $3.23B in negotiated deals and approximately $2.46B in competitive sales. Headlining this week’s calendar is $1.1B in negotiated and competitive bond offerings from the New York City Transitional Finance Authority (NYC TFA).

Last Friday, the first of a two-day retail order period started for $840.0MM of future tax secured subordinated bonds ahead of the institutional pricing scheduled for Tuesday. The bonds are rated Aa1 by Moody’s Investors Service (Moody’s) and AAA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch).

The NYC TFA will competitively offer $300.0MM of taxable bonds in two separate sales on Tuesday. One sale will consist of $234.21MM of future tax secured subordinate bonds, Fiscal 2017, Subseries E-2, and the other will be in the amount of $65.79MM of future tax secured subordinate bonds, Fiscal 2017, Subseries E-3.

In the competitive arena, the State of California is set to sell $635.59MM of various purpose GO refunding bonds on Wednesday. The deal is rated Aa3 by Moody’s and AA- by S&P and Fitch. The State of California is the top municipal issuer through the first quarter of the year, having issued $16.48B in the first quarter of 2017.

 

Municipal Bond Funds Reversed Course and Reported Outflows for the Week  

Municipal bond funds reversed course and posted outflows, as market participants pulled cash out of funds, according to the latest data from Lipper. Weekly reporting funds reported $287.201MM of outflows for the most recent week. These followed inflows of $265.041MM the week prior, according to Lipper. The four-week moving average was still in the green at positive $8.313MM, after being in the green at a positive $61.827MM the week prior.

Long-term municipal bond funds also had outflows, losing $166.361MM in the latest week after rising $271.561MM the week prior. Intermediate-term funds had outflows of $79.763MM after outflows of $15.992MM the week prior. National funds had outflows of $135.789MM after experiencing inflows of $358.965MM the week prior. High-yield muni funds reported inflows of $68.334MM in the latest reporting week, after inflows of $277.761MM the week prior. Exchange traded funds saw inflows of $81.089MM, after inflows of $141.468MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong 

As has been the story so far this year, new issue BQ paper has been light, so participants continue to keep an eye on the secondary market to fill inquiries, especially those with the preferred structures. BQ spreads were tighter for maturities three years and in on the curve and wider five years and longer last week. The one-year maturity saw the largest tightening, four bps, while the 15-year maturity saw the largest widening, two bps.

 

Daily Overview of the General Market for the Week Ending April 7th

Last Monday prices on municipal bonds finished weaker in the front-end and stronger 10-years and longer, as participants positioned themselves for the upcoming week’s new issue supply. On the day, the yield on the two-year GO bond rose 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 across the curve, as stocks trimmed steep early morning losses to nearly nil by the end of the day. Consumer discretionary shares finished at the bottom of the S&P thanks to a more-than-two percent loss for auto related companies. According to Ward’s Automotive Group, auto sales cooled for a third month in March to the slowest sales pace in two years. On the day, the yield on the two-year maturity was down one bp, while the yield on the 10-year maturity fell five bps and the yield on the 30-year maturity fell four bps. The 10-year municipal-to-Treasury ratio rose to 94.9% on Monday from the prior Friday’s level of 93.8%, while the 30-year municipal-to-Treasury ratio rose to 101.7% on Monday from the prior Friday’s level of 101.0%.

Last Tuesday prices on municipal bonds were steady in the front-end and stronger 10 years and longer, as the first wave of new issue supply hit the market. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond fell one bp and the yield on the 30-year GO bond fell two bps,  according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as energy companies boosted the major stock indices to daily gains Tuesday. On the day, the yields on the two- and 30-year maturities each rose one bp, while the yield on the 10-year maturity was steady. The 10-year municipal-to-Treasury ratio fell to 94.5% on Tuesday from Monday’s level of 94.9%, while the 30-year municipal-to-Treasury ratio fell to 100.7% on Tuesday from Monday’s level of 101.7%.

Last Wednesday prices on municipals finished stronger across the curve, as large deals from issuers in New Jersey and California hit the market. On the day, the yields on the two- and 30-year GO bonds each fell one bp, while the yield on the 10-year GO bond fell two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished last Wednesday mixed, as the yield on the two-year maturity was steady, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio fell to 93.2% on Wednesday, from Tuesday’s level of 94.5%, while the 30-year municipal-to-Treasury ratio fell to 99.7% on Wednesday from Tuesday’s level of 100.7%.

Last Thursday prices on municipals finished stronger, as the last big deals of the week hit the market, led by the institutional pricing of Massachusetts and California offerings. On the day, the yield on the two-year GO bond fell two bps, while the yields on the 10- and 30-year GO bonds each fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished stronger on the day, as major equity averages managed daily gains but were well off of session highs by the time trading closed. On the day, the yield on the two-year maturity fell one bp, while the yields on the 10- and 30-year maturities each fell two bps. The 10-year municipal-to-Treasury ratio rose to 93.6% on Thursday, from Wednesday’s level of 93.2%, while the 30-year municipal-to-Treasury ratio rose to 100.0% on Thursday, from Wednesday’s level of 99.7%.

Last Friday prices on municipals finished mostly stronger, as market participants began prepping for next week’s new issue supply calendar. On the day, the yield on the two-year GO bond was steady, while the yields on the 10- and 30-year GO bonds each rose two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices closed out the week weaker across the curve. On the day, the yield on the two-year maturity rose four bps, while the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio fell to 91.6% on Friday, from Thursday’s level of 93.6%, while the 30-year municipal-to-Treasury ratio fell to 99.0% on Friday, from Thursday’s level of 100.0%.

 

 

 

 

 

 

 

 

 

 

 

Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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