Muni Update

August 19, 2019


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


Municipal Market Recap

Municipal prices were mixed on Monday and Tuesday. On both days the front-end was steady, while bonds maturing 10 years and longer strengthened. On Wednesday’s yields continued to fall which resulted in prices strengthening across the curve. On Thursday and Friday prices were steady across the curve. Issuance for the week is forecasted to be $6.35B, which is below last week’s forecasted level of $7.6B in issuance. This week’s level of projected new issue offerings, together with secondary market opportunities should provide market participants with a number of opportunities, especially given the continued strong demand in the municipal market. Driving this strong demand in the municipal market is the continuing combination of high-redemption flows and inflows into municipal bond mutual funds, which continues to be strong at this time.

Investors in municipal bond funds put cash into funds for a 32nd week, as weekly reporting funds experienced inflows of $1.625B, after experiencing inflows of $2.353B the week prior. The four-week moving average was a positive $1.592B, after being a positive $1.602B the week prior. Investors still facing low rates overseas continue to find higher-yielding U.S. assets attractive, especially since municipal bonds are off to their best start in five years. Municipal securities have been bolstered by low supply and strong demand. All these factors, should have both traditional and non-traditional market participants continuing to look for opportunities in the U.S. municipal market.

Last week the yields on the two-, 10-, and 30- maturities on the MMD Triple-A Scale were all unchanged from Thursday to Friday and they ended the week at 0.94%, 1.22%, and 1.87%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond fell one basis point (bp), while the yield on the 10-year GO bond fell 11 bps and the yield on the 30-year GO bond fell 12 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 1.04%, 1.48%, and 2.10%, respectively. Overall, week-over-week the yield on the two-year GO bond fell five bps, while the yield on the 10-year GO bonds fell nine bps and the 30-year GO bonds fell 10 bps.


New-Issue Volume is Forecasted to Be Just Over $6.35B for Trading Week

Total new issuance for the coming trading week per IHS Markit Ipreo is estimated to be $6.35B. This week’s trading calendar is comprised of $5.08B in negotiated offerings and $1.27B in competitive offerings. It also includes 17 deals scheduled for $100.0MM or larger in par.

The largest deal of the week comes from the short-term sector, as the State of Texas is scheduled to competitively sell $8.0B of tax-anticipation notes (TANs) on Wednesday. The TANs are rated MIG1 by Moody’s Investors Service (Moody’s), SP1+ by Standard and Poor’s Global Ratings (S&P), F1+ by Fitch Ratings (Fitch) and K1+ by Kroll Bond Rating Agency (KBRA).

The City of Houston, Texas, plans to offer a total of $1.27B of bonds in two deals this week. The first will come on Tuesday and be comprised of $785.0MM of combined utility system first lien revenue refunding featuring taxable and forward delivery bonds. The second will be on Thursday and be comprised of $483.5MM of public improvement refunding, including taxable and forward delivery bonds. Both offerings are rated Aa2 by Moody’ sand AA by S&P.

On Wednesday the Colorado Health Facilities Authority and Montana Facility Finance Authority plan to offers $545.95 of revenue refunding bonds for Sisters of Charity of Leavenworth Health System. The deal is rated Aa3 by Moody’s and AA- by both S&P and Fitch.


Municipal Bond Funds Post Inflows for a 32nd Week

Investors in municipal bond funds put cash into funds for a 32nd week, as weekly reporting funds experienced inflows of $1.625B in the latest week, after experiencing inflows of $2.353B the week prior. The four-week moving average was a positive $1.592B, after being a positive $1.602B the week prior.

Long-term municipal bond funds had inflows of $959.453MM in the latest week after experiencing inflows of $1.341B the week prior. Intermediate-term funds had inflows of $331.650MM after inflows of $413.956MM the week prior. National funds had inflows of $1.450B after experiencing inflows of $2.050B the week prior. High-yield municipal funds reported inflows of $383.715MM in the latest week, after inflows of $634.617MM the week prior. Exchange traded funds reported inflows of inflows of $123.479MM after inflows of $288.027MM the week prior.


Demand in the Bank Qualified (BQ) Market Remains Strong

BQ market participants expect demand to continue to outpace supply again this week and therefore will focus on opportunities in both the primary and secondary markets. BQ participants continue to have significant demand for municipal paper due in large part to having to replace rolloffs due to redemptions. BQ participants continue to find attractive opportunities, both in size and structure (15- to 30-year range) in both BQ and lately more and more in general market paper, due in part to the lower tax rates from tax reform and attractive yields.

We continue to encourage participants to utilize extension swaps, especially given the strong bids for short paper by retail investors in high tax states, as a way roll out the curve for more yield (3.0% of higher, if possible) with little to no drop-off in credit quality. We also encourage investors to continue to looking at credit clean-up of their portfolio in this current environment. Week-over-week, bank qualified spreads widen across the curve, with the largest widening occurring in the 30-year maturity, 16 bps.


Daily Overview of the General Market for the Week Ending August 16th

Last Monday prices on municipals were mixed, as market participants prepped for the $7.6B of new issue offerings scheduled for the trading week. On the day, the yield on the two-year GO was unchanged, 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.

Prices on U.S. Treasurys were stronger, as U.S. stocks posted losses on the session. The Dow dropped 400 points, or 1.6%, on Monday, while the S&P 500 and NASDAQ lost about 1.2% apiece. This market turmoil comes as investors brace for the U.S.-China trade war to deal more damage to the global economy. The yield on the two-year maturity fell five bps, while the yield on the 10-year maturity fell nine bps and the yield on the 30-year maturity fell 12 bps. The 10-year municipal-to-Treasury ratio rose to 79.4% on Monday from last Friday’s level of 76.4%, while the 30-year municipal-to-Treasury ratio rose to 92.1% on Monday from last Friday’s level of 88.1%.

Last Tuesday prices on municipals were mixed, as a number of deals came to market lead by deals from Texas and Virginia. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond fell one bp and the yield on the 30-year GO bond fell two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasurys weakened, as U.S. stocks posted gains for the session, after the United States delayed some tariffs on Chinese goods. The U.S. Trade Representative announced a delay in new tariffs on several categories of Chinese-made consumer goods until December 15th. Those goods include cell phones, laptop computers, video game consoles, certain toys, computer monitors, and certain items of footwear and clothing. On the day, the yield on the two-year maturity rose eight bps, while the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio fell to 77.4% on Tuesday from Monday’s level of 79.4%, while the 30-year municipal-to-Treasury ratio fell to 90.7% on Tuesday from Monday’s level of 92.1%.

Last Wednesday the rally in municipal prices continued, as a number of new deals hit the market. The yields on tax-free yields fell to their lowest levels, 1.22% for the 10-year and 1.87% for the 30-year. The prior record lows were set during the summer of 2016, according to MMD, when the 10-year hit 1.29% on June 27th and the 30-year fell to 1.93% on July 6th. On the day, the yield on the two-year GO bond fell one bp, while the yields on the 10- and 30-year GO bonds each fell eight bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasurys also strengthened, resulting in the yield on the 10-year U.S. Treasury bond yield falling below 1.6% in the morning, which was just below the yield of the two-year U.S. Treasury bond. It marked the first time since 2007 that the yield on the 10-year U.S. Treasury bond fell below yield on the two-year U.S. Treasury bond, which is a predicate of a possible recession. U.S. stocks fell throughout the session, as investors sold stock in companies and moved it into bonds. The Dow fell 3.05%, while the S&P 500 closed down 2.9% and the NASDAQ sank 3.0% Wednesday. It was the worst day for stocks in 2019. On the day, the yield on the two-year maturity fell eight bps, while the yield on the 10-year maturity fell nine bps and the yield on the 30-year maturity fell 12 bps. The 10-year municipal-to-Treasury ratio fell to 76.7% on Wednesday from Tuesday’s level of 77.4%, while the 30-year municipal-to-Treasury rose to 92.1% on Wednesday from Tuesday’s level of 90.7%.

Last Thursday prices on municipals were steady, as the last of the week’s offerings came to market and were easily digested, as demand continues to outpace supply. 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 stronger, as U.S. stocks, after yesterday’s losses, posted minimal gains for the session. The Dow rose 0.39%, while the S&P rose 0.25% and the NASDAQ was up 0.09%. On the day, the yield on the two-year maturity fell 10 bps, while the yield on the 10-year maturity fell seven bps and the yield on the 30-year maturity fell five bps. The 10-year municipal-to-Treasury ratio rose to 80.3% on Thursday from Wednesday’s level of 76.7%, while the 30-year municipal-to-Treasury ratio rose to 94.4% on Thursday from Wednesday’s level of 92.1%.

A wild week, that included and inverted yield curve (2s/10s) for the first time in 12 years, talk of a possible recession and the setting of record lows for municipal yields, as municipal prices closed the week on a steady note.  Market participants were looking ahead to the coming week’s $6.35B in new long-term debt offerings, as well as $8.0B in one short-term TAN offering from the State of Texas. 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.

U.S. Treasury prices finished the day mixed, as stocks posted gains for the session. On the day, the yield on the two-year maturity was unchanged, while the yields on the 10- and 30-year maturities each rose three bps. The 10-year municipal-to-Treasury ratio fell to 78.7% on Friday from Thursday’s level of 80.3%, while the 30-year municipal-to-Treasury ratio fell to 93.0% on Friday from Thursday’s level of 94.4%.


Taxable Market






Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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