Muni Update

August 13, 2018



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

Municipal Market Recap

 

Prices on municipals were mixed on through Thursday. On Monday bonds maturing 10 years and in were steady, while the long-end strengthened. On Tuesday bonds maturing 10 years and in were again steady, while the long-end weakened. On Wednesday the front-end was steady, while bonds maturing 10 years and longer weakened. On Thursday the front-end was steady, while bonds maturing 10 years and longer strengthened. On Friday prices strengthened across the curve. Volume for the week is projected to be $11.8B, which is more than double last week’s $5.3B in revised issuance and this anticipated volume is the largest in 2018. This week’s level of new issue supply together with secondary market opportunities should provide market participants with a number of opportunities to fill their needs.

 

Municipal bond funds reported investors reversed course and put cash into funds last week, as weekly reporting funds experienced inflows of $622.556MM, after experiencing outflows of $368.853MM the week prior. The four-week moving average remained positive at $515.689MM, after being a positive $522.791MM the week prior. Investors still facing low rates overseas continue to find higher-yielding U.S. assets attractive. These factors, plus the high level of municipal redemptions over the next few months, should have both traditional and non-traditional market participants continuing to look for opportunities, especially if yields rise.

Last week the yields on the two-year maturity on the MMD Triple-A Scale fell one basis point (bp) from Thursday to Friday and ended the week at 1.63%.  Meanwhile the yields on the 10- and 30-year maturities on the MMDA Triple-A Scale each fell three bps from Thursday to Friday and they ended the week at 2.45% and 3.04%, respectively. Overall, week-over-week the yield on the two- and 30-year general obligation (GO) bonds each fell one bp, while the yield on the 10-year GO bond fell three bps.

 

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale each fell two bps from Thursday to Friday and they ended the week at 1.65%, 2.45% and 3.06%, respectively. Overall, week-over-week the yield on the two-year GO bonds fell one bp, while the yields on the 10- and 30-year GO bonds were unchanged week-over-week.

 

U.S. Treasuries prices were mixed on Monday, as the front-end weakened, while bonds maturing 10 years and longer strengthened. On Tuesday they weakened across the curve. On Wednesday they were steady across the curve. On Thursday and Friday they strengthened across the curve. Overall, week-over-week the yield on the 10-year maturity fell 11 bps and closed the week at 2.86%. Meanwhile the yield on the two-year maturity fell two bps week-over-week and closed the week at 2.61%. This resulted in a 2s/10s of 25 bps, nine bps tighter then last week’s 2s/10s spread of 34 bps. The yield on the 30-year maturity fell nine bps week-over-week and finished the week at 3.02%.

Volume to be $11.8B for the Trading Week

Total volume for the coming week is estimated to be $11.8B, well above the $5.3B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar is comprised of $11.1B in negotiated offerings and $726.0MM of competitive sales. Topping the new issue calendar this week is a $2.28B offering from the City and County of Denver of airport system subordinate revenue bonds on Tuesday. The offering consists of Series 2018A bonds subject to the alternative minimum tax (AMT) and Series 2018B non-AMT bonds. The deal is rated A2 by Moody’s Investors Service (Moody’s), A by S&P Global Ratings (S&P) and A+ by Fitch Ratings (Fitch). Also in the aviation sector, Miami-Dade County is coming to market with a $716.55MM of the aviation revenue refunding bonds on Wednesday, after a one-day retail order period. The offering consists of Series 2018A AMT bonds, Series 2018B non-AMT bonds and Series 2018C taxable bonds. The deal is rated A by S&P and Fitch.

Also on tap this week, the Allegheny County, Pennsylvania Hospital Development Authority plans to offer $915.0MM of Series 2018A revenue bonds for the Allegheny Health Network Obligated Group on Wednesday. The deal is rated A by S&P. Also on Wednesday, after a one-day retail the State of Connecticut plans to offer $889.135MM of GO bonds. The issue consists of Series 2018E GOs, Series 2018F refunding GOs, and Series 2018A taxable GOs. The deal is rated A1 by Moody’s, A by S&P, A+ by Fitch and AA- by Kroll Bond Rating Agency (Kroll).

Municipal Bond Funds Reversed Course and Posted inflows for the Week        

Municipal bond funds posted inflows, as market participants reversed course and put cash into funds for the week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $622.556MM, after experiencing outflows of $368.353MM the week prior. The four-week moving average remained positive at $515.689MM, after being a positive $522.791MM the week prior.

Long-term municipal bond funds had inflows of $369.991MM in the latest week after experiencing outflows of $294.317MM the week prior. Intermediate-term funds had inflows of $167.562MM after inflows of $60.620MM the week prior. National funds had inflows of $565.261MM after experiencing outflows of $268.958MM the week prior. High-yield municipal funds reported inflows of $263.825MM in the latest week, after outflows of $78.037MM the week prior. Exchange traded funds reported inflows of $43.513MM, after outflows of $115.709MM the week prior.

Demand in the Bank Qualified (BQ) Market Remains Strong

The BQ market continues to see good two – way flows with both buying and selling from market participants. For banks, the primary focus of activity over the past four months has been selling shorter (6 years and in) maturities with lower yields and reinvesting out on the curve (12+ years). This trade has worked extremely well for banks because of the higher tax rates out of retail investors who have been buying the shorter paper with extremely low take-out yields. Banks who have invested in certain high tax states (CA, NY or NJ) have seen take-out yields less than 70% of treasuries.

For this week, we expect to see a continuation of the extension swap. With August roll-off money to be reinvested, BQ participants will look to the longer-end of the curve to pick up yield. New issue supply this week is expected to be strong and when coupled with secondary market activity should provide opportunities for buyers of longer BQ paper. Certain structures such as 4% coupons with a 10-year call and a 15-year maturity have widened throughout this summer and have reached some attractive yields to the call date with 3% raw yields attainable with certain states. Week-over-week, bank qualified spreads widened across the curve, with the largest widening occurring in the five- and 10-year maturities, eight bps each.

Daily Overview of the General Market for the Week Ending August 10th

Last Monday prices on municipals were mixed, as market participants were eyeing the $7.5B supply slate for the week, as well as dealing with New York City’s $809.555MM GO offering that was being priced for retail. On the day, the yields on the two- and 10-year GO bonds were unchanged, while the yield on the 30-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, as U.S. stocks gained Monday, despite a drag from other global indexes, as internet retailers led the consumer discretionary sector to a first place finish and tech companies rallied to close right on their heels. On the day, the yield on the two-year maturity rose one bp, while the yields on the 10- and 30-year maturities each fell three bps. The 10-year municipal-to-Treasury ratio rose to 84.4% on Monday from last Friday’s level of 83.5%, while the 30-year municipal-to-Treasury ratio rose to 98.7% on Monday from last Friday’s level of 98.1%.

Last Tuesday prices on municipal bonds were mixed, as municipal participants in the primary market saw issues from New York, Wisconsin and California hit the market. On the day, the yields on the two- and 10-year GO bonds were steady, while the yields on the 30-year GO bond rose two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries weakened across the curve, as U.S. stocks joined the global rally and posted gains for the session. The Dow gained 0.5% and the S&P 500 and NASDAQ both added 0.3%. The energy sector closed atop the S&P 500 despite U.S. crude pulling back from intraday highs. On the day, the yields on the two- and 30-year maturities each rose four bps, while the yield on the 10-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 83.5% on Tuesday from Monday’s level of 84.4%, while the 30-year municipal-to-Treasury ratio fell to 98.1% on Tuesday from Monday’s level of 98.7%.

Last Wednesday prices on municipals were mixed, as market participants saw more supply hit the market on Wednesday, topped by New York City’s big GO bond offering. Also on Wednesday, CUSIP Global Services reported municipal CUSIP requests declined in July, after four straight months of increases. On the day the yield on the two-year GIO was steady, while the yield on the 10-year GO bond rose one bp and the yield on the 30-year GO bond rose two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were steady, as U.S. stocks posted mixed results for the session. On the day, the yields on the two-, 10- and 30-year maturities were unchanged. The 10-year municipal-to-Treasury ratio was bumped up to 83.8% on Wednesday from Tuesday’s level of 83.5%, while the 30-year municipal-to-Treasury ratio rose to 98.7% on Wednesday from Tuesday’s level of 98.1%.

Last Thursday prices on municipals were mixed, as the last of the week’s new issue opportunities were priced. 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.

U.S. Treasury prices finished the day stronger, as equity prices were mixed in the session. On the day, the yields on the two-, 10- and 30-year maturities each fell four bps. The 10-year municipal-to-Treasury ratio rose to 84.6% on Thursday from Wednesday’s level of 83.8%, while the 30-year municipal-to-Treasury ratio rose to 99.7% on Thursday from Wednesday’s level of 98.7%.

Last Friday prices on municipals strengthened, as market participants were looking ahead to the coming week’s $11.8B in new issuance offerings. On the day, the yields on the two-year GO bond fell one bp, while the yields on the 10- and 30-year GO bonds each fell three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day stronger, as U.S. stocks traded lower for the session. On the day, the yield on the two-year maturity fell three bps, while the yield on the 10-year maturity fell five bps and the yield on the 30-year maturity fell six bps. The 10-year municipal-to-Treasury ratio rose to 85.7% on Friday from Thursday’s level of 84.6%, while the 30-year municipal-to-Treasury ratio rose to 100.7% Friday from Thursday’s level of 99.7%.

Taxable Market








Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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