Muni Update

August 21, 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 $586.766MM of inflows in the latest reporting week, after experiencing inflows of $631.216MM the week prior.  The four-week moving average was positive at $421.205MM, after being in the green at $349.152MM the week prior. High demand is expected to continue to outpace supply in the municipal market, as the market 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 weaker across the curve and they weakened further on Tuesday. On Wednesday and Thursday they strengthened across the curve. On Friday prices were mixed, as the front-end weakened and the intermediate and long-end were steady. Prices on municipals started the trading week mixed, as the two- and 10-year maturities were steady, while the price on the 30-year maturity fell. On Tuesday prices weakened across the curve. On Wednesday prices were mixed, as the short- and long-ends were steady, while the 10-year maturity weakened. On Thursday prices were mixed again, as the front and intermediate maturities were steady and the long-end strengthened. On Friday prices were mixed, as the front-end was steady and maturities 10 years and longer strengthened. Volume for the trading week is projected to be $4.02B, which is below last week’s revised level of $5.89B. 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/U.S Treasury ratios remain very rich in the front-end and the belly of the curve, as there is much demand for short-dated paper in light of the uncertainty investor’s face in the fall. 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 is light. The highlight of the week will be the July Durable Goods Orders report on Friday. The report is expected to show decent data on business investment. Given all of the uncertainty coming from Washington right now, the level of business investment will be a keen indicator of how resilient business leaders’ confidence is. On Wednesday and Thursday New and Existing Home Sales reports will be released and on Thursday the Kansas City’s Fed’s Jackson Hole Symposium will begin. Also this week features primary intrigue outside the U.S., as ECB President Mario Draghi is likely to speak and may discuss the future of the ECB’s QE program.  The program is scheduled to end at year-end but the ECB is generally expected to extend it at a slower pace (current pace is E60.0B per month).

Last week the yield on the two-year maturity on the MMD Triple-A Scale was unchanged from Thursday to Friday and ended the week at 0.86%. Meanwhile, the yields on the 10- and 30-year maturities each fell one basis point (bp) on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 1.91% and 2.76%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose one bp, while the yields on the 10- and 30-year GO bonds each rose three bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale was unchanged from Thursday to Friday and ended the week at 0.93%. Meanwhile, the yields on the 10- and 30-year maturities each fell one bp on the MMA Triple-A Scale from Thursday to Friday and they ended the week at 2.00% and 2.82%, respectively. Overall, week-over-week the yields on the two- and 10-year maturities were unchanged, while the yield on the 30-year maturity fell one bp.

Prices on U.S. Treasuries started last week weaker and weakened again on Tuesday. On Wednesday and Thursday they strengthened. On Friday prices were mixed, as the front-end weakened and the intermediate and long-end were steady.  Overall, week-over-week the yield on the 10-year maturity fell rose one bp and closed the week at 2.20%. Meanwhile the yield on the two-year maturity rose two bps week-over-week and closed the week at 1.31%. This resulted in a week-over-week 2s/10s spread of 89 bps, one bp tighter than last week’s 2s/10s spread of 90 bps. The yield on the 30-year maturity fell one bp week-over-week and finished the week at 2.78%.

New Issue Volume is Expected to be $4.02B

Total volume for the trading week is estimated to be $4.02B, which is below last week’s $5.89B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $3.38B in negotiated deals and approximately $638.0MM in competitive sales, according to data from Thomson Reuters.

The largest deal of the week is not a bond sale, it is a note sale that will be brought in the short-term sector, as the State of Texas will offer $5.4B of tax and revenue anticipation notes (TRANs) for sale on Tuesday. The TRANS carry the top ratings of MIG1 by Moody’s Investors Service (Moody’s), SP-1+ by S&P Global Ratings (S&P), F1+ by Fitch Ratings (Fitch) and K1+ by Kroll Bond Rating Agency (Kroll). As to bonds this week, there are 14 long-term bond sales larger than $100.0MM scheduled, with only one coming from the competitive route.

The largest bond sale of the week is also scheduled for Fargo on Tuesday, when the Washington Health Care Facilities Authority brings $265.895MM of bonds for the Virginia Mason Medical Center. The deal is expected to mature serially from 2025 through 2042 and is rated Baa2 by Moody’s and BBB by S&P. The South Dakota Health and Educational Facilities Authority plans to offer $210.0MM of revenue bonds for Regional Health also on Tuesday. The deal is rated A1 by Moody’s and A+ by Fitch.

On Thursday the Pennsylvania Housing Finance Agency will sell $207.0MM of single family mortgage revenue bonds. The offering will be comprised of both alternative minimum tax (AMT) and non-AMT bonds. The deal is rated Aa2 by Moody’s and AA+ by S&P.

The biggest competitive bond sale of the week will take place on Tuesday, when Bend La Pine School District No. 1, Oregon, auctions off $175.0MM of GO bonds. The deal is backed by the Oregon School Bond Guaranty and is rated Aa1 by Moody’s and AA+ by S&P.

Municipal Bond Funds Posted Inflows for the Week       

Municipal bond funds posted inflows for the fourth week, as market participants put cash into funds, according to the latest data from Lipper. The weekly reporters saw $586.766MM of inflows in the week of August 16, after inflows of $631.216MM the week prior.  The four-week moving average was positive at $421.205MM, after being in the green at $349.152MM the week prior.

Long-term municipal bond funds had inflows of $378.696MM in the latest week after experiencing inflows of $406.42MM the week prior. Intermediate-term funds had inflows of $158.569MM after inflows of $137.827MM the week prior. National funds had inflows of $555.401MM after inflows of $615.734MM the week prior. High-yield municipal funds reported inflows of $185.562MM in the latest reporting week, after experiencing inflows of $148.092MM the week prior. Exchange traded funds saw inflows of $99.484MM, after inflows of $160.401MM the week prior.

Demand in the Bank Qualified (BQ) Market Remains Strong

The new issue calendar drops this week, so market participants will be looking to strong bid lists to meet their growing 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. Last week the spreads on the one-, two-, three- and five-year maturities each tightened week-over-week, with the largest tightening occurring it the five-year maturity, two bps. Meanwhile spreads on the 10- and 15-year maturities week-over-week were unchanged, while the spread on the 30-year maturity week-over-week widened, one bp.

Daily Overview of the General Market for the Week Ending August 18th

Last Monday prices on municipals were mixed, as market participants prepped for the $6.7B in new issue offerings scheduled for the week. On the day the yields on the two- and 10-year GO bonds were steady, while 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 weaker, as equities rebounded strongly and investors raced to take advantage of last week’s sell-off. The NASDAQ also bounced back 1.3%, the best day since June 28th, after falling 1.5% last week. The S&P recovered 1.0%, its best day since April 24th, after falling 1.5% last week in the worst weekly performance since March. Finally, the Dow underperformed, but did gain a solid 0.6%. On the day, the yield on the two-year maturity rose two 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 84.7% on Monday from the prior Friday’s level of 85.8%, while the 30-year municipal-to-Treasury ratio was unchanged on Monday from the prior Friday’s level of 97.9%.

Last Tuesday prices on municipals weakened, as several large competitive deals sold in the primary market, led by a high-quality offering from Mecklenburg County, North Carolina. On the day the yield on the two-year GO bond rose one bp, while the yield on the 10-year GO bond rose three bps and the yield on the 30-year GO bond rose four bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also weaker across the curve, as U.S. stocks closed mixed and hardly changed Tuesday after multiple intraday swings in and out of positive territory. The U.S. Dollar clung to daily gains, but almost completely pared the big jump following the retail sales report yesterday. On the day, the yields on the two-, 10- and 30-year maturities each rose four bps. The 10-year municipal-to-Treasury ratio slipped to 84.5% on Tuesday from Monday’s level of 84.7%, while the 30-year municipal-to-Treasury ratio was unchanged on Tuesday from Monday’s level of 97.9%.

Last Wednesday prices on municipals finished the day mixed, as the State of Maryland just about $1.3B of GO bonds in two separate competitive offerings. On the day, the yields on the two- and 30-year GO bonds were each steady, while the yield on the 10-year GO bond rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as turmoil in Washington D.C.  stirred markets even before the Fed released the Minutes from its July meeting. The announcement of additional resignations from the President’s Manufacturing Council preceded an announcement that the entire Council, along with the Strategic and Policy Forum, would be disbanded. Whatever the cause, the effect was a swift market response around lunch. The U.S. Dollar dropped, as stocks and Treasury yields moved to their daily lows. After the Fed released the cautious July Minutes these moves strengthened further. Stocks managed to recover from their lows to close positive for the day, but the U.S. Dollar ended near its daily low. 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 three bps. The 10-year municipal-to-Treasury ratio rose to 86.1% on Wednesday from Tuesday’s level of 84.5%, while the 30-year municipal-to-Treasury ratio rose to 98.9% on Wednesday from Tuesday’s level of 97.9%.

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

U.S. Treasury prices were stronger on the day, as U.S. stocks sold off sharply and steadily during the entire session. Investors’ flight out of riskier assets pushed the VIX, known as the equity fear index and measures expected future volatility, up 32.0%. The Dow dropped 1.2% as the S&P tumbled 1.5% and the NASDAQ sank nearly 2.0%; the second worst day for the Dow and S&P since last September. The U.S. Dollar was relatively stable but the Yen benefited from the heightened uncertainty. The ever-increasing tensions in Washington continue to call into question the viability of achieving any aspect of the Republican’s agenda. On the day, the yields on the two-, 10- and 30-year maturities each fell three bps. The 10-year municipal-to-Treasury ratio rose to 87.3% on Thursday from Wednesday’s level of 86.1%, while the 30-year municipal-to-Treasury ratio rose to 99.6% on Thursday from Wednesday’s level of 98.9%.

Last Friday prices on municipals finished the week mixed, as market participants prepped for the estimated $4.02B in new issue paper expecting to come to market. On the day, the yield on the two-year maturity 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. Treasuries also finished the day mixed, as the front-end weakened and maturities 10-years and longer were steady. On the day, the yield on the two-year maturity rose one bp, while the yields on the 10- and 30-year maturities were unchanged. The 10-year municipal-to-Treasury ratio fell to 86.8% on Friday from Thursday’s level of 87.3%, while the 30-year municipal-to-Treasury ratio fell to 99.3% on Friday, from Thursday’s level of 99.6%.

Taxable Market





Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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