Muni Update

August 20, 2018


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

Municipal Market Recap

 

Prices on municipals were steady on Monday and Tuesday. On Wednesday they were mixed, as the front-end was steady, while bonds maturing 10 years and longer strengthened. On Thursday and Friday they were steady again across the curve. Overall volume for the week is expected to be well over last week’s 11.0B in revised issuance, however, only $4.5B will be long-term bond volume, the rest will be short-term notes to include a $7.2B offering by the State of Texas in Tax and Revenue Anticipation Notes (TRANs) and $1.5B in Commonwealth of Massachusetts GO backed Revenue Anticipation Notes (RANs). Therefore, with the majority of issuance this week comprised of short-term borrowings, municipal participants looking for longer dated bonds will have to rely more heavily on secondary market opportunities to meet their demand and fulfill their needs.

 

Municipal bond funds reported investors put cash into funds for a second week in a row last week, as weekly reporting funds experienced inflows of $452.026MM, after experiencing inflows of $622.556MM the week prior. The four-week moving average remained positive at $314.068MM, after being a positive $515.689MM 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-, 10- and 30-year maturities on the MMD Triple-A were all unchanged from Thursday to Friday and they ended the week at 1.63%, 2.43% and 3.01%, respectively. Overall, week-over-week the yield on the two-year General Obligation bond was unchanged, while the yield on the 10-year GO bond fell two Basis points (bps) and the yield on the 30-year GO bond fell three bps.

 

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale were each unchanged from Thursday to Friday and they ended the week at 1.64%, 2.44% and 3.04%, respectively. Overall, week-over-week the yields on the two- and 10-year GO bonds each fell one bp, while the yield on the 30-year GO bond fell two bps week-over-week.

 

U.S. Treasuries prices were mixed on Monday, as the front-end was steady, while bonds maturing 10 years and longer weakened. On Tuesday they weakened across the curve. On Wednesday they reversed course and strengthened across the curve. Thursday and Friday were an exact repeat of Tuesday and Wednesday’s price actions. Overall, week-over-week the yield on the 10-year maturity was unchanged and closed the week at 2.86%. Meanwhile the yield on the two-year maturity was also unchanged week-over-week and closed the week at 2.61%. This resulted in a week-over-week unchanged 2s/10s spread of 25 bps. The yield on the 30-year maturity rose one bp week-over-week and finished the week at 3.03%.

Weekly Bond Volume is Projected to be $4.5B for the Trading Week

Total volume for the coming week is estimated to be well above last week’s $11.0B in issuance, according to revised data from Thomson Reuters. However, the bond portion of this week’s calendar is just $4.5B and will be comprised of $3.4B in negotiated offerings and $1.1B in competitive offerings. The remaining portion of this week’s issuance is comprised of $7.2B State of Texas, TRANs and $1.5B of Commonwealth of Massachusetts RANs.

As mentioned above, Texas is expected to selling $7.2B of Series 2018 TRANs on Wednesday in the short-term competitive market. The notes will cover uneven cash flow to the state’s 1,031 school districts over the course of the fiscal year that runs from September 1st to August 31st. Texas is one of the largest issuers of the notes among the states. The deal is rated SP1+ by S&P Global Ratings (S&P), F1+ by Fitch Ratings (Fitch) and K1+ by Kroll Bond Rating Agency (Kroll).

On Thursday, the Commonwealth of Massachusetts will sell $1.5B of GO revenue RANs in three sales consisting of $500.0MM each of Series 2018A, Series 2018B and Series 2018C RANs. The deal is rated MIG1 by Moody’s Investors Service (Moody’s), SP1+ by S&P and F1+ by Fitch.

Topping the bond slate, the State of Illinois plans to price $920.0MM of Series of September 2018AB GO refunding bonds. Proceeds of the sale will be used to shed the state’s $600.0MM of floating rate paper and cover the $74.0MM cost of swaps that synthetically fixed the 2003 issue. The deal is rated Baa3 by Moody’s, BBB- by S&P and BBB by Fitch.

Municipal Bond Funds Posted inflows for a Second Week        

Municipal bond funds posted inflows, as market participants put cash into funds for the week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $452.026MM, after experiencing inflows of $622.556MM the week prior. The four-week moving average remained positive at $314.068MM, after being a positive $515.689MM the week prior.

Long-term municipal bond funds had inflows of $322.370MM in the latest week after experiencing inflows of $369.991MM the week prior. Intermediate-term funds had inflows of $128.601MM after inflows of $167.562MM the week prior. National funds had inflows of $445.582MM after experiencing inflows of $565.261MM the week prior. High-yield municipal funds reported inflows of $244.232MM in the latest week, after inflows of $263.825MM the week prior. Exchange traded funds reported inflows of $63.628MM, after inflows of $43.513MM 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 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 U.S. Treasuries, in effect allowing them to purchase U.S. Treasuries and achieve similar tax-exempt yields to the municipal debt.

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 in both the BQ and general market (GM) segments of the municipal market. Especially given that the GM opportunities present numerous chances to pick up 5.0% and higher coupons. Week-over-week, bank qualified spreads were mixed, as the spreads on the two, three and five-year maturities were all unchanged. Meanwhile the spreads on the one, 10-, 15- and 30-year maturities all tightened week-over-week, with the largest tightening occurring in the one-year maturity, three bps.

Daily Overview of the General Market for the Week Ending August 17th

Last Monday prices on municipals were steady, as market participants were eyeing the $11.8B supply slate for the week. On the day, the yields on the two-, 10- and 30-year GO bonds were all unchanged, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as U.S. stocks posted losses for the session. On the day, the yield on the two-year maturity was steady, while the yield on the 10-year maturity rose two bps and the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 85.1% on Monday from last Friday’s level of 85.7%, while the 30-year municipal-to-Treasury ratio fell to 99.7% on Monday from last Friday’s level of 100.7%.

Last Tuesday prices on municipal bonds were steady again, as several big deals were priced in the primary market, and were led by a multi-billion dollar airport offering. 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 weakened across the curve, as U.S. stocks recovered to close up on the day, despite European equities giving up overnight gains by the close. 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 one bp. The 10-year municipal-to-Treasury ratio slipped to 84.8% on Tuesday from Monday’s level of 85.1%, while the 30-year municipal-to-Treasury ratio fell to 99.4% on Tuesday from Monday’s level of 99.7%.

Last Wednesday prices on municipals were mixed, as a wave of new issue supply swept in, led by issuers in Connecticut, Pennsylvania, Hawaii, and New York. In the secondary front, Puerto Rico Sales Tax Financing Corporation issues were trading mostly weaker on Wednesday, after the Official Committee of Unsecured Creditors indicated in court that the restructuring deal announced earlier this month lacks support from some key parties. On the day the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond fell two bps and the yield on the 30-year GO bond fell three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices strengthened on Wednesday, as U.S. stocks posted losses for the session. On the day, the yield on the two-year maturity fell two bps, while the yields on the 10- and 30-year maturities each fell four bps. The 10-year municipal-to-Treasury ratio rose to 85.3% on Wednesday from Tuesday’s level of 84.8%, while the 30-year municipal-to-Treasury ratio bumped up to 99.7% on Wednesday from Tuesday’s level of 99.4%.

Last Thursday prices on municipals were steady, as the last of the week’s big new issue opportunities were priced, led by a tax-exempt offering from the Port Authority of New York and New Jersey, a green bond deal from the New York Metropolitan Transportation Authority, and a taxable sale from Connecticut.  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 weaker, as U.S. equities rose during the session, led by the DOW which posted a gain of 1.6%, its best day since April. On the day, the yields on the two- and 10-year maturities each rose two bps, while the yield on the 30-year maturity rose four bps. The spread between the two- and 10-year maturities on the U.S Treasury curve flattened for a seventh consecutive session. The 10-year municipal-to-Treasury ratio fell to 84.7% on Thursday from Wednesday’s level of 85.3%, while the 30-year municipal-to-Treasury ratio fell to 98.7% on Thursday from Wednesday’s level of 99.7%.

Last Friday prices on municipals were steady again, as market participants were looking ahead to the coming week’s $4.5B in weekly bond volume and an additional almost $9.0B in short-term note paper by two issues. 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 also finished the day stronger, as U.S. stocks traded lower for the session. On the day, the yields on the two- and 30-year maturities each fell two bps, while the yield on the 10-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 85.0% on Friday from Thursday’s level of 84.7%, while the 30-year municipal-to-Treasury ratio rose to 99.3% Friday from Thursday’s level of 98.7%.

Taxable Market







Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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