Muni Update

April 2, 2018


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

 

Municipal Market Recap

Prices on municipals in the front-end of the curve were steady for the week. On Monday bonds maturing 10 years and longer were also steady, while on Tuesday, Wednesday and Thursday bonds maturing 10 years and longer strengthened. Volume for the trading week is projected to be $7.85B, which is well above last week’s revised level of $3.4B in issuance. This week’s projected level of issuance is above the average weekly issuance level so far this year, which has been $4.3B.

Municipal bond funds reported investors put cash into funds for a third week, as weekly reporting funds experienced inflows of $37.0MM, after experiencing inflows of $445.450MM 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 economic calendar is packed with important reports, and kicks off the week this morning at 9:00 a.m. CT with the ISM Manufacturing Index and the February Construction Spending report. Tuesday will bring the March auto sales reports, which is likely to show a continuation of the 14-month trend of declining sales.  Wednesday will bring the ADP Employment Report, expected to portend another month of strong job growth, and the March ISM Non-Manufacturing Index. The final trade balance report for February will be released on Thursday and then the big data will hit on Friday, March’s jobs reports.  Nonfarm payrolls are expected to grow 189k, keeping the above-sustainable pace intact, and the unemployment rate is projected to fall from 4.1% to 4.0%. Perhaps most importantly, the average hourly earnings data is expected to show a 0.2% MoM increase in earnings, which would bring the YoY rate up to a cycle-best 2.8%.

Last week the yield on the two-year maturity on the MMD Triple-A Scale was unchanged from Wednesday to Thursday and it ended the week at 1.65%. Meanwhile, the yields on the 10- and 30-year maturities on the MMD Triple-A Scale each fell two basis points (bps) from Thursday to Friday and they ended the week at 2.42% and 2.95%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose one bp, while the yields on the 10- and 30-year GO bonds each fell five bps.

Last week the yields on the two- and 10-year maturities on the MMA Triple-A Scale each fell five bps from Wednesday to Thursday and they ended the week at 1.63% and 2.43%, respectively. Meanwhile the yield on the 30-year maturity on the MMA Triple-A Scale rose three bps from Wednesday to Thursday and it ended the week at 3.05%. Overall, week-over-week the yield on the two-year GO bond fell one bp, while the yield on the 10-year GO bond fell two bps and the yield on the 30-year GO bond fell three bps.

On Monday, prices on U.S. Treasuries were mixed, as bonds maturing 10 years and in weakened, while the long-end strengthened. On Tuesday prices strengthened across the curve. On Wednesday prices on the short-end weakened, while prices on bonds maturing 10 years and longer strengthened. On Thursday prices strengthened across the curve. Overall, week-over-week the yield on the 10-year maturity fell seven bps and closed the week at 2.75%. Meanwhile the yield on the two-year maturity fell one bp week-over-week and closed the week at 2.27%. This resulted in a week-over-week 2s/10s spread of 48 bps, six bps tighter than last week’s 2s/10s spread of 54 bps. The yield on the 30-year maturity fell 10 bps week-over-week and finished the week at 2.97%.

 

Volume to be $7.85B for the Trading Week

Total volume for the coming week is estimated to be $7.85B, which is above the $3.4B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $6.62B in negotiated deals and approximately $1.23B in competitive sales.

The largest deal of the week is the New Jersey Tobacco Settlement Financing Corporation’s $3.22B of Series 2018A senior and Series 2018B subordinate tobacco settlement bonds on Wednesday, after a one-day retail order period. The deal will refund all of the corporation’s outstanding tobacco bonds, which were issued in 2007. The San Diego County, California, Regional Transportation Commission plans to price $538.0MM of Series 2018A subordinate sales tax revenue short-term notes, limited tax bonds, due 2021, on Wednesday. Also on Wednesday, after a one day retail order period, the New York City Municipal Water Finance Authority plans to price $425.0MM of Fiscal 2018 Series EE water and sewer system second resolution revenue bonds.

In the competitive arena, the biggest deal of the week is coming from Albany County, New York. The County plans to sell $152.0MM of Series 2018 various purpose GO bonds on Wednesday.

 

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. This week’s new issue opportunities do pick up, so market participants should find opportunities in both primary offerings and secondary market opportunities to provide them the chance 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 and roll out to the 12-15-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 spreads on the one-year maturity tightened by one bp and spreads on maturities two-years and longer all widened week-over-week. The largest widening occurred in the five- and 30-year maturities, 16 bps each.

 

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

Last Monday prices on municipals were mixed, as market participants were eyeing the week’s limited holiday slate of new issues, dominated by taxable deals. 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 were unchanged, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed, as stocks went on a tear Monday. The Dow jumped 669 points, or 2.84%, enough to cover Friday’s losses more than one and a half times. The S&P 500 rebounded 70 points, or 2.72%, but the NASDAQ led with an impressive 228 point, or 3.26%, surge. On a combined basis, the gain for the three indexes was the largest single-day points’ gain since October 2008 and most potent percentage rally since August 2015. On the day, the yield on the two-year maturity rose five bps and the yield on the 10-year maturity rose two bps, while the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio fell to 87.0% on Monday from last Friday’s level of 87.6%, while the 30-year municipal-to-Treasury ratio bumped up to 98.0% on Monday from last Friday’s level of 97.7%, respectively.

Last Tuesday prices on municipals were mixed, as a few deals priced and market participants began digesting details about the huge New Jersey tobacco bond deal scheduled for this week. On the day the yield on the two-year GO bond was unchanged, 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 on the day, as another stock sell-off helped medium and longer maturities reach their lowest yield levels in more than a month. The NASDAQ sank almost 3.0% as the S&P dropped just over 1.7% and the Dow faltered 1.4%. On the day, the yield on the two-year maturity fell seven bps, while the yield on the 10-year maturity fell five bps and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 88.2% on Tuesday from Monday’s level of 87.0%, 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 market was winding up the holiday-shortened week on a tentative note and Connecticut offered its GO bonds to institutional investors. 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 two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were also mixed, as tech shares failed to recover on Wednesday. The NASDAQ fell for a ninth session out of the last 12 and extended its precipitous decline since it last peaked on March 12th. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity fell four bps. The 10-year municipal-to-Treasury ratio fell to 87.8% on Wednesday from Tuesday’s level of 88.2%, while the 30-year municipal-to-Treasury ratio fell to 98.7% on Wednesday from Tuesday’s level of 98.0%.

Last Thursday prices on municipals were mixed during the shortened trading day ahead of Friday’s holiday, as market participants were looking ahead to this week’s $7.85B new issue 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 fell two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger across the curve. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell four bps. The 10-year municipal-to-Treasury ratio bumped up to 88.0% on Thursday from Wednesday’s level of 87.8%, while the 30-year municipal-to-Treasury ratio rose to 99.3% on Thursday from Wednesday’s level of 98.7%.

 



 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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