Muni Update

August 14, 2017


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

 

Municipal Market Recap

Municipal bond funds posted inflows for a fourth straight week, as weekly reporting funds experienced $631.216MM of inflows in the latest reporting week, after experiencing inflows of $143.847MM the week prior. The four-week moving average remained positive at $349.152MM, after being in the green at $148.209MM the week prior. High demand is expected to continue to outpace supply in the municipal market, as the sector is in a period of the heaviest volume of called and maturing bonds in any given year. This year the annual occurrence, which began June 1st, is expected to be record-breaking with over $100.0B of called and maturing bond proceeds, excluding coupon payments, slated to arrive into investors’ accounts over a three-month span. In addition, investors still facing negative 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 if yields rise. While the uncertainty surrounding tax reform, infrastructure, and the pace of Fed tightening is causing some market participants to continue to be observers more than buyers at this time, retail participation remains strong.

U.S. Treasury prices started the trading week steady. On Tuesday they weakened across the curve, while on Wednesday they strengthened across the curve. On Thursday they were mixed, as prices in the front-end were steady, while 10 years and longer they strengthened. On Friday prices were mixed again, as the front and intermediate maturities strengthened while the long-end was steady. Prices on municipals started the trading week mixed, as the front-end strengthened. The 10-year spot was steady and the long-end weakened. On Tuesday prices were mixed again, as prices on the two-, 10- and 30-year maturities repeated Monday’s action. On Wednesday and Thursday prices strengthened across the curve. On Friday prices were mixed, as the front-end strengthened and 10 years and longer prices were steady. Volume for the trading week is projected to be $6.73B, which is above last week’s revised level of $5.37B. We note that late summer is always a slow period, and this year is no exception. Rates are stuck in a narrow range and municipal ratios are still close to multi-year lows. Secondary trading remains subdued, as trading volume is at 18-month lows. Still, we expect this level of issuance coupled with secondary market opportunities to address the continued strong demand in the municipal markets due to the current period of high redemptions.

This week’s economic calendar will include several key economic reports, and the data will kick off in a big way tomorrow with July’s retail sales. The July report is projected to show a much needed bounce in consumer spending. Retail sales at the core level fell short of estimates in May and June and have shown weaker momentum in each month since March. Also on Tuesday, the NAHB’s home builder confidence index is expected to hold at 64, the lowest level since November. Wednesday morning’s data will be heavy on the housing sector. Finally, on Friday’s the consumer confidence index from the University of Michigan is expected to show only a modest improvement in August.

Last week the yield 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 0.85%. Meanwhile, the yields on the 10- and 30-year maturities were each unchanged on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 1.88% and 2.73%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell seven bps, while the yield on the 10-year GO bond fell five bps and the yield on the 30-year GO bond rose one bp.

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale were all unchanged from Thursday to Friday and they ended the week at 0.93%, 2.00% and 2.83%, respectively. Overall, week-over-week the yields on the two- and 30-year maturities each fell two bps, while the yield on the 10-year maturity fell three bps.

Prices on U.S. Treasuries started last week steady. On Tuesday they weakened, while on Wednesday they strengthened. On Thursday and Friday prices were mixed. Overall, week-over-week the yield on the 10-year maturity fell seven bps and closed the week at 2.19%. Meanwhile the yield on the two-year maturity fell six bps week-over-week and closed the week at 1.29%. This resulted in a week-over-week 2s/10s spread of 90 bps, one bp tighter than last week’s 2s/10s spread of 91 bps. The yield on the 30-year maturity fell five bps week-over-week and finished the week at 2.79%.

 

New Issue Volume is Expected to be $6.73B

Total volume for the trading week is estimated to be $6.73B, which is above last week’s $5.57B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $4.29B in negotiated deals and approximately $2.44B in competitive sales, according to data from Thomson Reuters. There are 15 sales scheduled larger than $100.0MM, with four coming in the competitive arena.

The State of Maryland plans to issue $1.34B in two competitive offerings. The GO State and Local Facilities Lloans of 2017 bonds will include $550.0MM of Series Aand $792.825MM of Series B bonds. Both deals will carry a triple A rating by Moody’s Investors Service (Moody’s), S&P Global Ratings (S&P) and Fitch Ratings (Fitch).

The largest negotiated deal of the week will come from the City and County of Honolulu, Hawaii, when they issue $411.0MM of GO bonds that will feature new money tax-exempts, both tax-exempt and taxable refundings, and a taxable green bond. The deal is rated Aa1 by Moody’s and AA+ by S&P and is scheduled to price on Wednesday, after a one-day retail order period.

The State of Louisiana plans to offer $368.0MM of gasoline and fuels tax revenue refunding bonds on Wednesday. The Series B bonds for $61.0MM are rated Aa2 by Moody’s and the $307.0MM of second lien Series C bonds are rated Aa3 by Moody’s.  The Commonwealth of Kentucky Property and Buildings Commission plans to offer $233.5MM of revenue backed refunding and taxable bonds on Tuesday. The deal is rated A1 by Moody’s and A+ by Fitch.

The Colorado Health Facilities Authority will offer $226.0MM of health facilities revenue and revenue refundings bonds for the Evangelical Lutheran Good Samaritan Society Project on Thursday. The deal is rated BBB by S&P.

 

Municipal Bond Funds Posted Inflows for the Week       

Municipal bond funds posted inflows for the third week, as market participants put cash into funds, according to the latest data from Lipper. Weekly reporting funds reported $631.216MM of inflows for the most recent week. These followed inflows of $143.847MM the week prior, according to Lipper. The four-week moving average remained positive at $348.152MM, after being in the green at $148.209MM the week prior.

Long-term municipal bond funds had inflows of $406.426MM in the latest week after experiencing inflows of $118.150MM the week prior. Intermediate-term funds had inflows of $137.827MM after inflows of $19.414MM the week prior. National funds had inflows of $615.734MM after inflows of $203.351MM the week prior. High-yield municipal funds reported inflows of $148.092MM in the latest reporting week, after experiencing inflows of $73.549MM the week prior. Exchange traded funds saw inflows of $160.401MM, after inflows of $54.212MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The new issue calendar remains steady and, together with strong bid lists, should contribute to meeting market participants continued demand, as they search for opportunities and prep for coming redemptions. In addition, the attractive slope of the BQ yield curve has participants continuing to utilize swaps to extend out the curve. Week-over-week spreads across the curve widened, with the largest widening occurring in the five-, 10- and 15-year maturities, as each maturity widened by seven bps.

 

Daily Overview of the General Market for the Week Ending August 11th

Last Monday prices on municipals were mixed, as the first of the week’s big new issues came to market and were priced for retail, before being offered to institutional buyers on Tuesday. On the day the yield on the two-year GO bond fell three bps, while the yield on the 10-year GO bond was steady and the yield on the 30-year GO bond rose one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries last Monday were steady, as U.S. stocks climbed. On the day, the Dow’s 0.1% gain trailed the 0.2% progress for S&P and a 0.5% rise for the NASDAQ. Energy faltered as oil prices slipped in a volatile session surrounding reports that Libya’s largest oil field was back to normal production and several oil producers were meeting to discuss compliance with the OPEC production cut agreement. The U.S. Dollar edged back Monday, paring only a small portion of Friday’s post-payroll jump. On the day, the yields on the two-, 10- and 30-year maturities were unchanged. The 10-year municipal-to-Treasury ratio was unchanged on Monday from the prior Friday’s level of 85.4%, while the 30-year municipal-to-Treasury ratio rose to 96.1% on Monday from the prior Friday’s level of 95.8%.

Last Tuesday prices on most municipals were mixed, as a New York City issuer sold over $1.5B in six competitive offerings. On the day the yield on the two-year GO bond fell one bp, while the yield on the 10-year GO bond was steady and the 30-year GO bond rose two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker across the curve, as the Dow’s recent record-run ended Tuesday as geopolitical tensions between the U.S. and North Korea flared. The major stocks indices reached their intraday lows just before the close and just after President Trump issued a grim warning to North Korea. The Dow slipped 0.2% to break its 10-day win streak, which included nine new record highs. The tensions also gave gold a modest boost. The U.S. Dollar also responded positively to the JOLTS data and was hardly impacted by the President’s comments. On the day, the yield on the two-year maturity rose one bp, while the yields on the 10- and 30-year maturities each rose two bps. The 10-year municipal-to-Treasury ratio fell to 84.7% on Tuesday from Monday’s level of 85.4%, while the 30-year municipal-to-Treasury ratio was unchanged on Tuesday from Monday’s level of 96.1%.

Last Wednesday prices on municipals finished the day stronger, as a few more deals were priced. On the day, the yields on the two- and 30-year GO bonds each fell one bp, while the yield on the 10-year GO bond fell three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day stronger, as the Dow fell 0.2% and the S&P managed to finish the day essentially unchanged (-0.04%). As a result of the fears over Korea, the VIX index, which tracks expectations of future equity volatility, closed at its daily lows after spiking earlier to the highest level in more than a month. Gold climbed to close at the highest level since June 8th. 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 four bps. The 10-year municipal-to-Treasury ratio was essentially unchanged at 84.8% on Wednesday from Tuesday’s level of 84.7%, while the 30-year municipal-to-Treasury ratio rose to 97.2% on Wednesday from Tuesday’s level of 96.1%.

Last Thursday prices on municipals finished the day stronger, as the last of the week’s deals priced. On the day, the yields on the two- and 30-year GO bonds each fell one bp, while the yield on the 10-year GO bond fell two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were mixed on the day and U.S. stocks sold off sharply Thursday, as the markets’ uneasiness about tensions between the U.S. and North Korea continued to accelerate. Markets were on edge all of Thursday but the risk-off sentiment peaked after President Trump’s latest retort to North Korea’s plan for a potential strike on Guam, as they fell even further to close at their daily lows. The Dow fell 0.9%, the S&P tumbled 1.5%, and the NASDAQ plunged 2.1%; all were the worst performances since May 17th, the day after a New York Times (NYT) article alleged the President had asked former FBI Director Comey to call off an investigation into Michael Flynn. On the day, the yield on the two-year maturity was steady, while the yields on the 10- and 30-year maturities each fell three bps. The 10-year municipal-to-Treasury ratio rose to 85.1% on Thursday from Wednesday’s level of 84.8%, while the 30-year municipal-to-Treasury ratio rose to 97.9% on Thursday from Wednesday’s level of 97.2%.

Last Friday prices on municipals finished the week mixed, as market participants prepped for the estimated $6.73B in new issue paper expecting to come to market. On the day, the yield on the two-year maturity fell one bp, 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. Treasuries also finished the day mixed, as the front and intermediate maturities strengthened and the long-end was steady. On the day, the yield on the two-year maturity fell four bps, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity was unchanged. The 10-year municipal-to-Treasury ratio rose to 85.8% on Friday from Thursday’s level of 85.1%, while the 30-year municipal-to-Treasury ratio on Friday was unchanged from Thursday’s level of 97.9%.

 

 




Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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