Muni Update

April 8, 2019



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

 

Municipal Market Recap

Municipal prices were weaker across the curve on Monday. On Tuesday prices were steady across the curve. On Wednesday they again weakened across the curve. On Thursday and 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 combined with secondary market offerings should provide market participants with a number of opportunities, especially given the current demand in the municipal market. Driving this strong demand is a combination of high redemption flows, inflows into municipal bond mutual funds and a lack of substantial levels of new issue supply.

 

Investors in municipal bond funds put cash into funds for a thirteenth week, as weekly reporting funds experienced inflows of $713.606MM after experiencing inflows of $1.532B the week prior. The four-week moving average was a positive $1.329B, after being a positive $1.350B 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 yields on the two-, 10-, and 30-year maturities on the MMD Triple-A Scale were all unchanged from Thursday to Friday and they ended the week at 1.53%, 1.93%, and 2.70%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond rose four basis points (bps), while the yield on the 10-year GO bond rose seven bps and the yield on the 30-year GO bond rose 10 bps.

 

Last week the yields on the two-, 10-, and 30-year maturities on the MMA Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 1.54%, 2.15%, and 2.80%, respectively. Overall, week-over-week the yield on the two-year GO bond rose two bps, while the yield on the 10-year GO bond rose three bps and the yield on the 30-year GO bond rose four bps.

 

New Issue Volume is Forecasted to be $6.7B for the Week

Total new issuance for the trading week per IHS Markit Ipreo is estimated to be $6.7B, which is above last week’s trading volume of $4.4B in issuance, according to revised data from Refinitiv. With plenty of cash looking to go to work, investors are not loving this week’s calendar or what small allocations they will be allotted as we draw near the end of tax season.

Still, this week many market participants will be focused on the State of California’s $2.1B of GO bonds. This deal is set for a retail order period on Wednesday, followed by institutional pricing on Thursday. The deal is rated Aa2 by Moody’s Investors Service (Moody’s), and AA- by S&P Global Ratings (S&P) and Fitch Ratings (Fitch).

Also this week the Tuscaloosa County Industrial Development Authority plans to offer $612.0MM for the Hunt Refining Company project. The deal is non-rated.  The New York City Municipal Water Finance Authority plans to offer $450.0MM of tax-exempt fixed rate Second General Resolution Revenue Bonds for retail investors on Monday with institutional pricing on Tuesday. About $150.0MM of bond proceeds will be used to fund capital projects and the remaining will refund certain outstanding bonds. The deal is rated Aa1 by Moody’s and AA+ by S&P and Fitch. After these deals, the next seven biggest deals range from $100-$194.0MM.

 

Municipal Bond Funds Post Inflows for a Thirteenth Week

Investors in municipal bond funds put cash into funds for a thirteenth week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $713.606MM, after experiencing inflows of $1.532B the week prior. The four-week moving average was a positive $1.329B, after being a positive $1.350B the week prior.

Long-term municipal bond funds had inflows of $430.864MM in the latest week after experiencing inflows of $1.129B the week prior. Intermediate-term funds had inflows of $296.500MM after inflows of $318.839MM the week prior. National funds had inflows of $ 648.963MM after experiencing inflows of $1.339B the week prior. High-yield municipal funds reported inflows of $320.861MM in the latest week, after inflows of $491.916MM the week prior. Exchange traded funds reported inflows of $73.425MM, after inflows of $290.529MM 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 (15 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 tightened across the curve, with the largest tightening occurring in the two-year maturity, 14 bps.

 

Daily Overview of the General Market for the Week Ending April 5th

Last Monday prices on municipals were weaker, as market participants prepped for the $5.5B in new issue offerings scheduled for the week. On the day, the yield on the two-year GO bond rose three bps, while the yield on the 10-year GO bond rose four bps and the yield on the 30-year GO bond rose five bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also weaker, as the three major U.S. posted gains on the session. The Dow posted a 1.27% gain, while the S&P and NASDAQ posted gains of 1.16% and 1.29%, respectively. On the day, the yield on the two-year maturity rose six bps, while the yields on the 10- and 30-year maturities each rose eight bps. The 10-year municipal-to-Treasury ratio fell to 76.3% on Monday from last Friday’s level of 77.2%, while the 30-year municipal-to-Treasury ratio fell to 91.7% on Monday from last Friday’s level of 92.5%.

Last Tuesday prices on municipals were steady, as a number of new issue offerings came to market, including the negotiated pricing of the $1.75B non-rated Florida Development Finance Corporation’s Series 2019A bonds. The issue, which was sold to qualified institutional buyers under Rule 144A of the Securities Act of 1933 as a private activity placement, was increased in size from the originally planned $1.5B. On the day, the yields on the two-, 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 stronger, as U.S. stocks were mixed for the session. The Dow was down 0.30%, while the S&P was relatively unchanged and the NASDAQ finished up 0.25%. On the day, the yield on the two-year maturity fell three bps, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio bumped up to 76.6% on Tuesday from Monday’s level of 76.3%, while the 30-year municipal-to-Treasury ratio bumped up to 92.0% on Tuesday from Monday’s level of 91.7%.

Last Wednesday prices on municipals were weaker, as new issue supply continued to hit the market, including the Illinois Finance Authority’s $450.0MM state revolving fund green bond offering. On the day, the yield on the two-year GO bond rose one bp, while the yield on the 10-year old  GO bond rose three bps and the yield on the 30-year GO bond rose five bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also weaker, as disappointing U.S. economic data kept U.S. stocks from closing near their peaks, but Wednesday’s modest 0.2% gain was enough to extend the S&P 500’s recent win streak and land the index at its highest level since October 9th. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose four bps and the yield on the 30-year maturity rose five bps. The 10-year municipal-to-Treasury ratio was unchanged on Wednesday from Tuesday’s levels of 76.6%, while the 30-year municipal-to-Treasury ratio bumped up to 92.2% on Wednesday from Tuesday’s level of 92.0%.

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

U.S. Treasury prices finished mixed, as did U.S. stocks for the session. The Dow and S&P posted gains of 0.64% and 0.21%, respectively, while the NASDAQ was down a minimal, 0.05%. The S&P 500 recorded its second consecutive 0.21% improvement and salvaged its recent string of gains. Thursday’s positive finish was its sixth in a row, matching the longest win streak since October 2017, and pushed the index to near a six-month high. On the day, the yield on the two-year maturity was unchanged, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio bumped up to 76.9% on Thursday from Wednesday’s level of 76.6%, while the 30-year municipal-to-Treasury bumped up to 92.5% on Thursday from Wednesday’s level of 92.2%.

Last Friday, prices on municipals were steady again, as market participants were looking ahead to the coming trading week’s $6.7B in new issue offerings. On the day, the yields on the two-, 10-, and 30-year GO bonds were unchanged, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed, as U.S. stocks posted minimal gains for the session. On the day, the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio bumped up to 77.2% on Friday from Thursday’s level of 76.9%, while the 30-year municipal-to-Treasury ratio bumped up to 92.8% on Friday from Thursday’s level of 92.5%.

 

Taxable Market



 




Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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