Muni Update

April 30, 2018


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

 

Municipal Market Recap

Prices on municipal bonds weakened daily through Wednesday. On Thursday and Friday prices on bonds were mixed, and on both days the front-end was steady, while bonds maturing 10 years and longer strengthened. Volume for the trading week is projected to be $4.26B, which is below last week’s revised level of $7.95B in issuance. The drop in issuance this week is not unusual given the Federal Open Market Committee scheduled for this week, though no interest rate increase is expected. Last week’s new issue volume was the largest of the year and, last week was also the most heavily traded week of the year. With almost $66.0B in municipals changing hands, it was the third consecutive week of increasing secondary market volume.

Municipal bond funds reported investors put cash into funds last week, as weekly reporting funds experienced inflows of $229.481MM, after experiencing outflows of $515.154MM the week prior. The four-week moving average was a negative $194.379MM, after being a negative $242.552MM 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.

Last week the yield on the two-year maturity on the MMD Triple-A Scale was steady from Thursday to Friday and ended the week at 1.87%. Meanwhile, the yield on the 10-year maturity fell two basis points (bps) and the yield on the 30-year maturity fell three bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 2.51% and 3.11%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose eight bps, while the yield on the 10-year GO bond rose six bps and the yield on the 30-year GO bond rose nine bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale was unchanged from Thursday to Friday and ended the week at 1.78%. Meanwhile, the yields on the 10- and 30-year maturities each fell one bp on the MMA Triple-A Scale from Thursday to Friday and they ended the week at 2.54% and 3.11%, respectively. Overall, week-over-week the yield on the two-year GO bond rose three bps, while the yield on the 10-year maturity rose six bps and the yield on the 30-year maturity rose seven 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 on the front-end strengthened, while prices on bonds maturing 10 years and longer weakened. On Wednesday prices weakened across the curve. On Thursday and Friday prices on bonds were mixed, and on both days the front-end was steady, while bonds maturing 10 years and longer strengthened. Overall, week-over-week the yield on the 10-year maturity rose one bp and closed the week at 2.96%. Meanwhile the yield on the two-year maturity rose three bps week-over-week and closed the week at 2.49%. This resulted in a week-over-week 2s/10s spread of 47 bps, two bps tighter than last week’s 2s/10s spread of 49 bps. The yield on the 30-year maturity fell one bp week-over-week and finished the week at 3.13%.

 

Volume to be $4.26B for the Trading Week

Total volume for the coming week is estimated to be $4.26B, which is below the $7.95B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $2.89B in negotiated deals and approximately $1.37B in competitive sales. This week’s offerings include 11 transactions $100.0MM or larger, with two of them on the competitive side.

Topping this week’s slate are two deals from the Dormitory Authority of the State of New York (DASNY a conduit issuer) totaling $931.0MM. The first is a $606.0MM offering of Series 2018A tax-exempt and Series 2018B taxable revenue bonds for New York University (NYU) on Thursday. The other is a $325.0MM offering of revenue bonds for Columbia University, also on Tuesday after a one-day retail order period. All offerings are rated triple-A by Moody’s Investors Service (Moody’s) and S&P Global Ratings (S&P).

In the competitive arena, Prince George’s County, Maryland is set to sell $417.0MM of GO consolidated public improvement bonds, also on Tuesday. The deal is rated triple-A by Fitch Ratings.

 

Municipal Bond Funds Reverse Course and Post Inflows       

Municipal bond funds posted inflows last week, as market participants put cash back into funds, according to the latest data from Lipper for a third week. The weekly reporting saw inflows of $229.481MM, after experiencing outflows of $515.154MM the week prior. The four-week moving average was a negative $194.379MM, after being a negative $242.552MM the week prior.

Long-term municipal bond funds had inflows of $88.923MM in the latest week, after outflows of $83.861MM the week prior. Intermediate-term funds had inflows of $67.332MM, after experiencing inflows of $16.059MM the week prior. National funds had inflows of $257.056MM, after outflows of $421.893MM the week prior. High-yield municipal funds reported inflows of $177.482MM in the latest week, after inflows of $45.728MM the week prior. Exchange traded funds reported outflows of $12.637MM, after outflows of $60.766MM 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- and two-year maturities tightened, with the largest tightening occurring in the one-year maturity, four bps. Meanwhile spreads on 10-, 15- and 30-year maturities widened week-over-week, with the largest widening occurring in the 30-year maturity, two bps. Finally, spreads on the three and five-year maturities were unchanged, week-over-week.

 

Daily Overview of the General Market for the Week Ending April 27th

Last Monday prices on municipals were weaker, as market participants were eyeing the $7.78B supply slate for the week, dominated by the New York Transportation Development Corporation’s issue for Delta’s redevelopment at LaGuardia Airport. 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 rose three bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as U.S. stocks finished little changed after an up-and-down day of trading. The S&P 500 gained a grand total of 0.01%, or 0.15 points and the Dow was only slightly more active, falling 14 points, or 0.06%. The Dow had slipped in four consecutive sessions since interest rates began their most recent climb last Wednesday. On the day, the yield on the two-year maturity rose three 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 ratio rose to 83.5% on Monday from last Friday’s level of 83.1%, while the 30-year municipal-to-Treasury ratio rose to 97.1% on Monday from last Friday’s level of 96.2%.

Last Tuesday prices on municipals were mixed, as a number of new deals priced, including the New York Transportation Development Corporation’s $1.4B issue for Delta’s redevelopment at LaGuardia Airport. On the day the yields on the two- and 10-year GO bonds each rose two bps, while the yield on the 30-year GO bond rose three bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as a confluence of factors sent equities sliding Tuesday. Tech companies, industrials, and materials led the S&P 500 down 1.3%. After disappointing earnings guidance, the index’s biggest loser, Freeport-McMoRan, led losses for materials while 3M and Caterpillar weighed on industrials. The latter two companies were also two of the three biggest Dow losers, taking the index down for a fifth consecutive session for the first time since March 2017. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio rose to 83.9% on Tuesday from Monday’s level of 83.5%, while the 30-year municipal-to-Treasury ratio was unchanged on Tuesday from Monday’s level of 97.1%.

Last Wednesday prices on municipals weakened again, as a number of deals came to market including $500.0MM of Illinois GO bonds in two competitive sales. On the day, the yields on the two- and 10-year maturities each rose five bps, while the yield on the 30-year GO bond rose eight bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices weakened across the curve, as stocks kept it together even as the 10-year Treasury yield pushed to its highest close since 2013. The major indexes managed to bounce back from an early morning drop and end the day mixed. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity rose five bps and the yield on the 30-year maturity rose four bps. The 10-year municipal-to-Treasury ratio rose to 84.2% on Wednesday from Tuesday’s level of 83.9%, while the 30-year municipal-to-Treasury ratio rose to 98.4% on Wednesday from Tuesday’s level of 97.1%.

Last Thursday prices on municipals were mixed, as the last of the week’s new issue offerings hit the market. 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 also finished the day mixed, as positive earnings boosted sentiment and yields pulled back to provide less of a headwind for U.S. equities. The S&P 500 gained just over 1.0% Thursday, as shares of technology companies rallied to lead a day of broad-based gains. On the day, the yield on the two-year maturity was steady, while the yield on the 10-year maturity fell four bps and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio rose to 84.6% on Thursday from Wednesday’s level of 84.2%, while the 30-year municipal-to-Treasury ratio bumped up to 98.7% on Thursday from Wednesday’s level of 98.4%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to this week’s $4.26B new issue calendar. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond fell two bps and the yield on the 30-year GO bond fell three bps, 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 was steady, while the yield on the 10-year maturity dropped three bps and the yield on the 30-year maturity fell five bps. The 10-year municipal-to-Treasury ratio bumped up to 84.8% on Friday from Thursday’s level of 84.6%, while the 30-year municipal-to-Treasury ratio rose to 99.4% on Friday from Thursday’s level of 98.7%.

 





Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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