Muni Update

April 16, 2018


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

 

Municipal Market Recap

On Monday prices on bonds 10 year and in weakened, while the long-end was steady. On Tuesday prices on maturities in the short- and long-ends of the curve were steady, while the intermediate area strengthened. On Wednesday prices in the front-end were steady, while prices on bonds maturing 10 years and longer strengthened.  On Thursday prices on bonds maturing 10 years and in were steady, while the long end weakened. On Friday prices on maturities in the short- and long-ends of the curve were steady, while the intermediate area strengthened. Volume for the trading week is projected to be $7.45B, which is above last week’s revised level of $4.46B in issuance.  Average weekly volume in 2017 has been about $4.5B, off sharply from 2017’s average of over $6.0B a week.

Municipal bond funds reported investors pulled cash out of funds for a second week in a row, as weekly reporting funds experienced outflows of $244.735MM, after experiencing outflows of $247.111MM the week prior. The four-week moving average turned to a negative $2.401MM, after being a positive $143.568MM 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, especially as yields rise.

The most important economic report of the week came this morning, March’s retail sales. Headline sales rose 0.6% MoM, beating expectations by 0.2%. The headline figure was distorted by a stellar month for auto sales, up 2.0% MoM in the strongest month for auto sales since the cycle peaked in December 2016 (excluding the September 2017 data which was distorted by the hurricanes). Gasoline sales fell 0.3% MoM, freeing up more disposable income for other items. Building material sales were notably weak, down 0.6% MoM.  Some of this weakness is likely the result of the weather patterns (warmer February and blizzards in March distorting the seasonal adjustment). At the core level, retail sales rose an as-expected 0.4% MoM on strength in furniture sales, health and personal care sales, and on-line sales. This report affirms the Fed’s and private economists’ expectations that the soft 1Q data will turn stronger.

Last week the yields on the two- and 30-year maturities on the MMD Triple-A Scale were both steady from Thursday to Friday and ended the week at 1.73% and 2.94%, respectively. Meanwhile, the yield on the 10-year maturity on the MMD Triple-A Scale fell one basis point (bp) from Thursday to Friday and ended the week at 2.39%. 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 fell four bps and the yield on the 30-year GO bond fell two bps.

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale were all steady from Thursday to Friday and they ended the week at 1.68%, 2.42% and 3.01%, respectively. Overall, week-over-week the yield on the two-year GO bond rose one bp, while the yield on the 10-year maturity fell one bp and the yield on the 30-year GO bond fell four bps.

On Monday, prices on U.S. Treasuries were mixed, as bonds maturing 10 years and in weakened, while the long-end was steady. On Tuesday prices in the front-end weakened, while prices on bonds maturing 10 years and longer were steady. On Wednesday prices in the front-end were steady, while prices on bonds maturing 10 years and longer strengthened. On Thursday prices weakened across the curve and on Friday they were mixed. Bonds in the short-end weakened, while bonds maturing 10 years and longer strengthened. Overall, week-over-week the yield on the 10-year maturity rose five bps and closed the week at 2.82%. Meanwhile the yield on the two-year maturity rose 10 bps week-over-week and closed the week at 2.37%. This resulted in a week-over-week 2s/10s spread of 45 bps, five bps tighter than last week’s 2s/10s spread of 50 bps. The yield on the 30-year maturity rose one bp week-over-week and finished the week at 3.03%.

 

Volume to be $7.45B for the Trading Week

Total volume for the coming week is estimated to be $7.45B, which is above the $4.46B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $5.59B in negotiated deals and approximately $1.86B in competitive sales. This week’s offerings include 12 transactions $100.0MM or larger, with a few taxable deals mixed in with both the competitive and negotiated offerings this week.

The State of California’s $2.2B sale of taxable GO bonds will be in the spotlight this Tuesday. The proceeds from the sale will refund debt and provide funding for 2,600 projects including high-speed rail, stem cell research and affordable housing. The offerings are rated Aa3 by Moody’s Investors Service (Moody’s) and AA- by S&P Global (S&P) and Fitch Ratings (Fitch). Also out of California, Sacramento Airport plans to offer $588.0MM of airport system revenue refunding bonds on Thursday.

In the competitive arena, Memphis, Tennessee plans to offer $315.0MM of Series 2018 GO improvement bonds on Tuesday. The deal is rated Aa2 by Moody’s and AA by S&P.

 

Municipal Bond Funds Posted Outflows for a Second Week as Tax Day Approaches      

Municipal bond funds posted outflows last week, as market participants pulled cash out of funds, according to the latest data from Lipper for a second week. The weekly reporters saw outflows of $244.735MM, after experiencing outflows of $247.111MM the week prior. The four-week moving average turned negative at -$2.401MM, after being a positive $143.568MM the week prior.

Long-term municipal bond funds had inflows of $78.278MM in the latest week, after inflows of $85.357MM the week prior. Intermediate-term funds had outflows of $10.979MM, after experiencing outflows of $29.999MM the week prior. National funds had outflows of $184.593MM, after outflows of $166.142MM the week prior. High-yield municipal funds reported inflows of $172.574MM in the latest week, after inflows of $186.428MM the week prior. Exchange traded funds reported inflows of $126.962MM, after inflows of $25.411MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The BQ market continues to see good activity, even with the lower level of new issue supply so far this year, which has contributed to secondary market bid lists being well received. BQ participants continue to have significant demand for BQ paper due in part to having to replace rolloffs due to redemptions. BQ participants (C-Corps) continue to find attractive opportunities, both size and structure in general market paper, due in part to the lower tax rates from tax reform and attractive spreads. Other market participants continue to find opportunities in both primary offerings and secondary market BQ opportunities to provide them additional chances to address their needs, especially those seeking attractive structures in the long-end of the curve. We continue to encourage participants to utilize extension swaps (sell short paper eight-years and in, and roll out to the 12-year maturity area of the curve or longer), as a way to pick up more yield with little to no drop-off in credit quality. Week-over-week, bank qualified spreads were mixed, as the spreads on the one-, 10- and 15-year maturities widened, with the largest widening occurring in the 15-year maturity, two bps. Spreads on all other maturities tightened week-over-week, with the largest tightening occurring in the three-year maturity, four bps.

 

Daily Overview of the General Market for the Week Ending April 13th

Last Monday prices on municipals were mixed, as market participants were eyeing the week’s $4.8B slate of new issues planned for the week. On the day, the yield on the two-year GO bond rose two bps, while the yield on the 10-year GO bond rose one bp and the yield on the 30-year GO bond was unchanged, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed, as stocks rebounded in the morning, but as the day progressed the rally was pared significantly by the close. The Dow rose 46 points (0.2%) but was up 441 points (1.8%) just after lunch. The S&P 500 added 0.3% after earlier rising as much as 1.9%. On the day, the yields on the two- and 10-year maturities each rose two bps, while the yield on the 30-year maturity was steady. The 10-year municipal-to-Treasury ratio slipped to 87.5% on Monday from last Friday’s level of 87.7%, while the 30-year municipal-to-Treasury ratio was unchanged on Monday from last Friday’s level of 98.0%.

Last Tuesday prices on municipals were mixed, as a number of new deals priced and retail market participants digested for a second day the New York City bond offerings, ahead of their institutional pricing on Wednesday. On the day the yields on the two- and 30-year GO bonds were both unchanged, while the yield on the 10-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed and, unlike Monday’s result, stocks managed to sustain early positive momentum through to the close. Trade tensions have eased this week as comments from U.S. and Chinese officials have toned down the rhetoric around a potential tariff battle. Crude prices surged in response to the broadly better tone for risk assets and after reports indicated Saudi Arabia has an $80 price target per barrel of crude. Brent crude closed above $71 per barrel and at its highest level since 2014. On the day, the yield on the two-year maturity rose three bps, while the yields on the 10- and 30-year maturities were each steady. The 10-year municipal-to-Treasury ratio fell to 87.1% on Tuesday from Monday’s level of 87.5%, while the 30-year municipal-to-Treasury ratio was unchanged on Tuesday from Monday’s level of 98.0%.

Last Wednesday prices on municipals were mixed again, as the lion’s share of the week’s deals came to market, topped by offerings from New York City and Clark County, Nevada. On the day, the yield on the two-year maturity was steady, while the yields on the 10- and 30-year GO bonds each fell by three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were also mixed, as U.S. stocks experienced another choppy day of trading Wednesday, as geopolitical woes weighed on sentiment. The S&P 500 fell 0.5% and finished near its daily low. The heightened tensions in the Middle East boosted oil prices and overshadowed a surprise weekly build in U.S. inventories and another week of record production. On the day, the yield on the two-year maturity was steady, while the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio slipped to 86.3% on Wednesday from Tuesday’s level of 87.1%, while the 30-year municipal-to-Treasury ratio was unchanged on Wednesday from Tuesday’s level of 98.0%.

Last Thursday prices on municipals were mixed, as the last of the week’s new issue offerings hit the market. On the day, the yields on the two- and 10-year GO bonds were steady, while the yield on the 30-year GO bond rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day weaker across the curve, as equities leapt at the open after the President walked back his previous day’s indication that a missile attack on Syria was a coming certainty. A brief downturn mid-day proved brief, as stocks bounced back, ignoring a headline that Saudi Arabia had intercepted another missile. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity rose six bps and the yield on the 30-year maturity rose five bps. The 10-year municipal-to-Treasury ratio fell to 84.5% on Thursday from Wednesday’s level of 86.3%, while the 30-year municipal-to-Treasury ratio fell to 96.7% on Thursday from Wednesday’s level of 98.0%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to this week’s $7.45B new issue calendar. On the day, the yields on the two- and 30-year GO bonds were each steady, while the yield on the 10-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 84.8% on Friday from Thursday’s level of 84.5%, while the 30-year municipal-to-Treasury ratio rose to 97.0% on Friday from Thursday’s level of 96.7%.

 

 






Bond Insurance

According to Bloomberg, the contraction in debt sales by state and local governments hasn’t been good for the “already struggling municipal-bond insurance industry.” Just 5.2% of the market’s long-term sales were insured in 1Q18, the weakest start to a year since 2015. The par amount of deals insured totaled about $2.8B, down from $4.7B in the first quarter of 2017, the data show. In the first quarter of 2006 (prior to The Great Recession), about 57.0% of deals were insured as the insurers carried Aaa/AAA ratings.



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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