Muni Update

April 9, 2018



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

 

Municipal Market Recap

On Monday prices on bonds in the front-end were steady, while prices on bonds maturing 10 years and longer were stronger. On Tuesday prices in the short-end were steady, while prices on bonds maturing 10 years and longer weakened. On Wednesday prices in the front-end weakened, while prices on bonds maturing 10 years and longer were steady.  On Thursday prices weakened across the curve. On Friday prices in the front-end weakened, while bonds maturing 10 years and longer strengthened. Volume for the trading week is projected to be $4.8B, which is below last week’s revised level of $7.59B 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 pulled cash out of funds last week, as weekly reporting funds experienced outflows of $247.111MM, after experiencing inflows of $36.792MM the week prior. The four-week moving average was a positive $143.568MM, after being a positive $307.034MM 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 this week is fairly light, with no reports on Monday.   Tuesday will bring the NFIB Small Business Confidence report, while the University of Michigan Consumer Confidence report is scheduled for Friday. Both are expected to pull back fractionally from very strong levels. The big news of the week, however, will be Wednesday’s data on CPI inflation and the March FOMC Minutes. Core CPI YoY is expected to rise from 1.8% to 2.1%. As for the FOMC’s Minutes, this meeting was Chair Powell’s first meeting as Chair. More importantly, after such a hawkish result, the Minutes from the meeting will be dissected to see if there are any concerns by participants regarding the recent market volatility.

Last week the yield on the two-year maturity on the MMD Triple-A Scale rose two basis points (bps) from Thursday to Friday and ended the week at 1.71%. Meanwhile, the yields on the 10- and 30-year maturities on the MMD Triple-A Scale each fell two bps from Thursday to Friday and they ended the week at 2.43% and 2.96%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose six bps, while the yields on the 10- and 30-year GO bonds each rose one bp.

Last week the yield on the two-year maturity on the MMA Triple-A Scale rose one bp from Thursday to Friday, ending the week at 1.67%. Meanwhile, the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity was steady on the MMA Triple-A Scale fell from Thursday to Friday, and they ended the week at 2.43% and 3.05%, respectively. Overall, week-over-week the yield on the two-year GO bond rose four bps, while the yields on the 10- and 30-year GO bonds were each unchanged.

On Monday, prices on U.S. Treasuries were stronger across the curve. On Tuesday prices reversed action and weakened across the curve. On Wednesday prices in the front-end were steady, while prices on bonds maturing 10 years and longer weakened. On Thursday prices weakened across the curve, and on Friday they reversed course and strengthened across the curve. Overall, week-over-week the yield on the 10-year maturity rose two bps and closed the week at 2.77%. Meanwhile the yield on the two-year maturity was unchanged week-over-week and closed the week at 2.27%. This resulted in a week-over-week 2s/10s spread of 50 bps, two bps wider than last week’s 2s/10s spread of 48 bps. The yield on the 30-year maturity rose five bps week-over-week and finished the week at 3.02%.

 

Volume to be $4.8B for the Trading Week

Total volume for the coming week is estimated to be $4.8B, which is below the $7.59B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $3.98B in negotiated deals and approximately $820.0MM 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. Three deals carry top-tier ratings and, unlike most weeks this year, the deal sizes are more consistent.

New York City has two offerings scheduled for this week, both on Wednesday. The first is an $850.0MM negotiated offering of GO bonds and the other is a competitive offering of $250.0MM of taxable GO bonds. The offerings are rated Aa2 by Moody’s Investors Service (Moody’s) and AA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch).

Clark County, Nevada is scheduled to price $647.955MM of GO limited tax stadium improvement bonds, additionally secured with pledged revenues on Wednesday. The deal is for the future home of the Raiders in Las Vegas and is rated Aa1 by Moody’s and AA+ by S&P.

 

Municipal Bond Funds Posted Outflows for the Week      

Municipal bond funds posted outflows last week, as market participants pulled cash out of funds, according to the latest data from Lipper. The weekly reporters saw outflows of $247.111MM, after experiencing inflows of $36.792MM the week prior. The four-week moving average was a positive $143.568MM, after being a positive $307.034MM the week prior.

Long-term municipal bond funds had inflows of $85.357MM in the latest week, after inflows of $131.694MM the week prior. Intermediate-term funds had outflows of $29.999MM, after experiencing inflows of $8.581MM the week prior. National funds had outflows of $166.142MM, after inflows of $132.287MM the week prior. High-yield municipal funds reported inflows of $186.428MM in the latest week, after inflows of $153.850MM the week prior. Exchange traded funds reported inflows of $25.411MM, after inflows of $36.581MM 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. Some BQ participants (C-Corps) are finding 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 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 the spread on the one-year maturity widened by four bps and the spread on the two year was unchanged. Spreads on all other maturities tightened week-over-week, with the largest tightening occurring in the 30-maturity, five bps.

 

Daily Overview of the General Market for the Week Ending April 6th

Last Monday prices on municipals were mixed, as market participants were eyeing the week’s $7.85B slate of new issues, which would be dominated by the New Jersey Tobacco Settlement Financing Corporation’s $3.2B offerings in the middle of the week. 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 across the curve, as U.S. stocks continued their selloff, technology companies continued to face difficulties, and China moved forward with duties on certain U.S. imports. The NASDAQ fell 2.74% to lead the declines, while the S&P 500 dropped a smaller 2.24% and the Dow slid 1.90%. On the day, the yield on the two-year maturity fell two bps, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 88.6% on Monday from last Thursday’s level of 88.0%, while the 30-year municipal-to-Treasury ratio was unchanged on Monday from last Thursday’s level of 99.3%.

Last Tuesday prices on municipals were mixed, as a number of new deals priced and retail market participants began digesting the huge New Jersey tobacco bond deals. 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 rose two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker on the day, as U.S. equities rebounded, partially erasing Monday’s drop. The day’s trading wasn’t one-directional, and while the Dow held in positive territory for the entire session, the S&P and NASDAQ moved in and out of negative territory several times as tech shares remained volatile. On the day, the yield on the two-year maturity rose three bps, while the yields on the 10- and 30-year maturities each rose six bps. The 10-year municipal-to-Treasury ratio fell to 87.4% on Tuesday from Monday’s level of 88.6%, while the 30-year municipal-to-Treasury ratio fell to 98.0% on Tuesday from Monday’s level of 99.3%.

Last Wednesday prices on municipals were mixed again, as the New Jersey Tobacco Settlement Financing Corporation priced its Series 2018A senior and Series 2018B subordinate tobacco settlement bonds for institutions, after holding a one-day retail order period. On the day, the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year GO bonds were each steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were also mixed, as equities made an impressive turnabout Wednesday as investors overcame, at least for now, amplified concerns about a tit-for-tat tariff battle between the U.S. and China. On the day, the yield on the two-year maturity was steady, while the yields on the 10- and 30-year maturities each rose one bp. The 10-year municipal-to-Treasury ratio slipped to 87.1% on Wednesday from Tuesday’s level of 87.4%, while the 30-year municipal-to-Treasury ratio fell to 97.7% on Wednesday from Tuesday’s level of 98.0%.

Last Thursday prices on municipals were weaker, 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 bonds each rose two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day weaker across the curve, as U.S. equities edged up for a third day and market angst around trade tariffs eased further. On the day, the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year maturities each rose four bps. The 10-year municipal-to-Treasury ratio fell to 86.6% on Thursday from Wednesday’s level of 87.1%, while the 30-year municipal-to-Treasury ratio fell to 97.1% on Thursday from Wednesday’s level of 97.7%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to this week’s $4.8B new issue calendar. 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 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 three bps, while the yields on the 10- and 30-year maturities each fell five bps. The 10-year municipal-to-Treasury ratio rose to 87.7% on Friday from Thursday’s level of 86.6%, while the 30-year municipal-to-Treasury ratio rose to 98.0% on Friday from Thursday’s level of 97.1%.

 




 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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