Muni Update

April 15, 2019



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

 

Municipal Market Recap

Municipal prices were mixed through Thursday. On Monday the front-end weakened while prices on bonds maturing 10 years and longer were steady. On Tuesday the front-end was steady, while process on bonds maturing 10 year and longer strengthened. On Wednesday and Thursday bonds maturing 10 years and in were steady, while the long-end strengthened. On Friday prices were steady across the curve. Issuance for the week is forecasted to be $6.7B, which is above last week’s revised level of $4.4B in issuance. This week’s projected level of issuance is $3.6B, which is below last week’s revised level of $4.2B in issuance, however, this lower level of volume is expected due to the holiday-shortened trading week. This week’s projected level of issuance combined with secondary market offerings should provide market participants with a number of opportunities in this holiday-shortened trading week, 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 a fourteenth week, as weekly reporting funds experienced inflows of $956.451MM after experiencing inflows of $713.606MM the week prior. The four-week moving average was a positive $1.157B, after being a positive $1.329B 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. In addition, municipal bonds are attracting investors from high-tax states, in a ripple effect from last year’s tax law, which may result in municipals outperform other fixed-income securities in the second quarter.

Last week the yield on the two-year maturity on the MMD Triple-A Scale was unchanged from Thursday to Friday and they ended the week at 1.55%. Meanwhile the yield on the 10-year maturity rose one basis point (bp) and the yield on the 30-year maturity rose two bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 1.93% and 2.68%, respectively.  Overall, week-over-week the yield on the two-year General Obligation (GO) bond rose two bps, while the yield on the 10-year GO bond rose was unchanged and the yield on the 30-year GO bond fell two bps.

Last week the yields on the two- and 10-year maturities on the MMA Triple-A Scale each rose one bp from Thursday to Friday and they ended the week at 1.55% and 2.14%, respectively. Meanwhile the yield on the 30-year maturity on the MMA Triple-A Scale rose two bps from Thursday to Friday and ended the week at 2.80%. Overall, week-over-week the yield on the two-year GO bond rose one bp, while the yield on the 10-year GO bond rose fell one bp and the yield on the 30-year GO bond was unchanged.

 

New Issue Volume is Forecasted to be $3.6B for Holiday-Shortened Trading Week

Total new issuance for the trading week per IHS Markit Ipreo is estimated to be $3.6B, which while below last week’s trading volume of $4.2B in issuance, according to revised data from Refinitiv is expected due to the holiday shortened trading week. This week’s trading calendar is comprised of $2.4B in negotiated offerings and $1.2B in competitive offerings. This week there are only four negotiated deals scheduled for $100.0MM or larger on the calendar.

The Tuscaloosa County Industrial Development Authority of Alabama plans to offer $612.0MM of non-rated Series 2019A tax-exempt Gulf Opportunity Zone refunding bonds for the Hunt Refining Co. The deal was postponed last week. Proceeds will refund all of the company’s outstanding GO Zone bonds issued from 2008 through 2012 in response to Hurricanes Katrina, Rita, and Wilma under the Gulf Zone Opportunity Act of 2005 that allowed non-AMT tax-exempts for new capital investment in Alabama, Louisiana, and Mississippi to spur recovery and economic development. The original bonds financed part of the company’s $1.0B investment in the Tuscaloosa oil refinery.

Also on tap this week is the $451.0MM multi-part hospital deal from the Cleveland Clinic Health System Obligated Group, rated Aa2 by Moody’s Investors Service (Moody’s) and AA by Standard and Poor’s Global Ratings (S&P). The deal will be broken down into $226.0MM of Series 2019A hospital revenue bonds for the Martin County Health Facilities Authority, Florida and $225 million of Series 2019B revenue bonds for the State of Ohio on Wednesday.

In Florida, Miami Beach plans to offer $153.0MM of Series 2019 GO bonds on Tuesday. The offering is rated Aa2 by Moody’s and AA+ by S&P. In California, the Anaheim Public Financing Authority plans to offer $176.0MM of tax-exempt and taxable revenue refunding bonds on Wednesday. The deal is rated A1 by Moody’s, A by S&P and AA- by Fitch Ratings (Fitch).

The biggest competitive sale coming this week will be from the California Department of Water Resources, as it plans to sell $306.35.0MM of Series BA revenue bonds on Tuesday. Proceed of the deal, which benefits the Central Valley Project Water System, will be used to retire some outstanding commercial paper notes. The deal is rated Aa1 by Moody’s and AAA by S&P.

 

Municipal Bond Funds Post Inflows for a Fourteenth Week

Investors in municipal bond funds put cash into funds for a fourteenth week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $956.451MM, after experiencing inflows of $713.606MM the week prior. The four-week moving average was a positive $1.157B, after being a positive $1.329B the week prior.

Long-term municipal bond funds had inflows of $906.806MM in the latest week after experiencing inflows of $430.864MM the week prior. Intermediate-term funds had inflows of $362.119MM after inflows of $296.500MM the week prior. National funds had inflows of $849.176MM after experiencing inflows of $648.963MM the week prior. High-yield municipal funds reported inflows of $366.867MM in the latest week, after inflows of $320.861MM the week prior. Exchange traded funds reported inflows of $123.407MM, after inflows of $73.425MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

Last week, the BQ market had good activity, due to opportunities in both BQ and general market (GM) new issue and secondary market bid lists. With rolloffs continuing 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 (20 to 25 year range). 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 10- and 15-year maturities was unchanged week-over-week, while the rest tightened, with the largest tightening occurring in the three-, five-, and 30-year maturities, seven bps each.

 

Daily Overview of the General Market for the Week Ending April 12th

Last Monday prices on municipals were mixed, as the New York City Municipal Water Finance Authority’s $500.0MM of tax-exempt fixed-rate second general resolution revenue bonds was priced for retail investors, ahead of its institutional pricing on Tuesday. On the day, the yield on the two-year GO bond rose two bps, while the yields on the 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 weaker, as U.S. stocks posted mixed results for the session. The Dow posted a 0.32% decline, while the S&P and NASDAQ posted gains of 0.10% and 0.19%, respectively. On the day, the yield on the two-year maturity rose one bp, while the yields on the 10- and 30-year maturities each rose two bps. The 10-year municipal-to-Treasury ratio fell to 76.6% on Monday from last Friday’s level of 77.2%, while the 30-year municipal-to-Treasury ratio fell to 92.2% on Monday from last Friday’s level of 92.8%.

Last Tuesday prices on municipals were mixed again, as the New York City Municipal Water Finance Authority’s $500.0MM deal of tax-exempt fixed-rate second general resolution revenue bonds was priced for institutional investors and a premarketing wire on California’s $2.0B GO bond offering was circulated by the underwriters. 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 fell one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger, as U.S. stocks finished the session down. The Dow was down 0.72%, while the S&P was down 0.31% and the NASDAQ finished down 0.56%. On the day, the yields on the two-, 10-, and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio slipped to 76.5% on Tuesday from Monday’s level of 76.6%, while the 30-year municipal-to-Treasury ratio slipped to 92.1% on Tuesday from Monday’s level of 92.2%.

Last Wednesday prices on municipals were mixed, as the State of California  offered $2.0B of GO bonds to retail investors, ahead of the institutional pricing on Thursday. On the day, the yields on the two- and 10-year GO bonds were steady, while 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 stronger, as U.S. stocks started the day in the red but clawed themselves back into positive territory to finish slightly up for the session. The Dow was up 0.03%, while the S&P was up 0.35% and the NASDAQ was up 0.69%. On the day, the yield on the two-year maturity rose fell four bps, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio rose to 77.4% on Wednesday from Tuesday’s levels of 76.5%, while the 30-year municipal-to-Treasury ratio was unchanged on Wednesday from Tuesday’s level of 92.1%.

Last Thursday prices on municipals were mixed, as the last of the week’s new issue offerings hit the market and the $2.0B GO offering from California was priced for institutional buyers. On the day, the yields on the two- and 10-year GO bonds were unchanged, while the yield on the 30-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished weaker, as U.S. finished the session mixed. The Dow and NASDAQ posted minimal losses of 0.05% and 0.21%, respectively, while the S&P finished up 0.11%. On the day, the yields on the two- and 30-year maturities each rose four bps, while the yield on the 10-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 76.5% on Thursday from Wednesday’s level of 77.4%, while the 30-year municipal-to-Treasury ratio fell to 90.5% on Thursday from Wednesday’s level of 92.1%.

Last Friday, prices on municipals were mixed, as market participants were looking ahead to the coming holiday shortened trading week’s $3.6B in new issue offerings. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond rose one bp and the yield on the 30-year GO bond rose two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day weaker, as U.S. stocks posted gains for the session. On the day, the yields on the two- and 10-year maturities each rose five bps, while the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 75.4% on Friday from Thursday’s level of 76.5%, while the 30-year municipal-to-Treasury ratio slipped to 90.2% on Friday from Thursday’s level of 90.5%.

 

Taxable Market



 




Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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