Muni Update

August 27, 2018


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

 

Municipal Market Recap

 

Prices on municipals were mixed on Monday, as bonds maturing 10 years and in were steady, while the long-end strengthened. They were mixed again on Tuesday, as the long-end was steady, while bonds maturing 10 years and in weakened. On Wednesday and Thursday they were steady across the curve. On Friday the front- and long-ends were steady, while intermediate maturities strengthened. Volume for the week is projected to be $3.9B, which is just above last week’s $3.7B in revised issuance. This lower level of issuance is expected, as this week is recognized as the last unofficial week of summer prior to the Labor Day Holiday next week. The current supply-demand imbalance (demand continues to outpace supply), should continue to prove favorable for municipal performance. This week’s level of new issue supply together with secondary market opportunities should provide market participants with opportunities to fill their needs.

 

Municipal bond funds reported investors put cash into funds for a third week in a row last week, as weekly reporting funds experienced inflows of $378.371.0MM, after experiencing inflows of $452.026MM the week prior. The four-week moving average remained positive at $271.150MM, after being a positive $314.068MM 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- and 30-year maturities on the MMD Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 1.64% and 3.00%, respectively. Meanwhile the yield on the 10-year maturity fell one basis point (bp) on the MMD Triple-A Scale from Thursday to Friday, and ended the week at 2.43%. Overall, week-over-week the yield on the two-year General Obligation (GO) bond rose one bp, while the yield on the 10-year GO bond was unchanged and the yield on the 30-year GO bond fell one bp.

 

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 3.03%, respectively. Overall, week-over-week the yields on the two- and 10-year GO bonds each were unchanged, while the yield on the 30-year GO bond fell one bp week-over-week.

 

U.S. Treasuries prices strengthened across the curve on Monday. On Tuesday they reversed course and weakened across the curve. On Wednesday they reversed course again and strengthened across the curve. On Thursday they were mixed, as the front-end weakened, while intermediate maturities were steady and the long-end strengthened. On Friday they were mixed again, as the front-end weakened, while bonds maturing 10 years and longer were steady. Overall, week-over-week the yield on the 10-year maturity fell four bps and closed the week at 2.82%. Meanwhile the yield on the two-year maturity rose two bps week-over-week and closed the week at 2.63%. This resulted in a 2s/10s spread of 19 bps, six bps tighter than last week’s 2s/10s spread of 25 bps. The spread between the two- and 10-year Treasury yields has now dropped to a new post-Great Recession low. The yield on the 30-year maturity fell six bps week-over-week and finished the week at 2.97%.

Weekly Bond Volume is Projected to be $3.9B for the Trading Week

Total volume for the coming week is estimated to be $3.9B, just above last week’s $3.7B in issuance, according to revised data from Thomson Reuters. This week’s calendar is comprised of $2.8B in negotiated offerings and $1.1B in competitive offerings. This week’s projected low level of issuance is expected, as this is the last unofficial week of summer ahead of next week’s Labor Day Holiday.

The Commonwealth of Massachusetts plans to price $727.145MM of GO and GO refunding bonds on Wednesday, after holding a one-day retail order period. The issue is tentatively structured as $500.0MM of Series E consolidated loan of 2018 GOs and $227.145MM of Series 2018C refunding GOs. Proceeds from the new money bonds will be used to finance authorized capital projects while the refunding bonds will be used to refund certain outstanding GOs. The deal is rated Aa1 by Moody’s Investors Service (Moody’s), AA by S&P Global Ratings (S&P) and AA+ by Fitch Ratings (Fitch). All three rating agencies assign stable outlooks to the credit. Also from the Commonwealth this week, the Massachusetts Clean Water Trust plans to offer $162.0MM of Series 21 state revolving fund green bonds on Tuesday. The deal is rated triple-A by Moody’s, S&P and Fitch.

The Texas Public Finance Authority plans to offer $300.0MM of Series 2018 taxable GO and refunding bonds on Tuesday. The deal is rated triple-A by Moody’s and S&P. The West Virginia Hospital Finance Authority plans to offer $260.0MM of hospital refunding and improvement revenue bonds for the Cabell Huntington Hospital Obligated Group on Tuesday. The issue consists of Series 2018A bonds and Series 2018B taxable bonds. The deal is rated Baa1 by Moody’s and BBB+ by S&P.

In the competitive arena, the State of Washington plans to sell $502.13MM of GOs in three offerings on Wednesday. The deals are comprised of $262.915MM of Series 2019A various purpose GOs, $145.78MM of Series 2019T taxable GOs and $93.435MM of Series 2019B motor vehicle fuel tax GOs. The deals are rated Aa1 by Moody’s and AA+ by S&P and Fitch. Also on Wednesday, Dallas is selling $155.66MM of Series 2018C waterworks and sewer system revenue refunding bonds. The deal is rated AAA by S&P and AA+ by Fitch.

Municipal Bond Funds Posted inflows for a Third 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 $378.371MM, after experiencing inflows of $452.026MM the week prior. The four-week moving average remained positive at $271.150MM, after being a positive $314.068MM the week prior.

Long-term municipal bond funds had inflows of $348.356MM in the latest week after experiencing inflows of $322.370MM the week prior. Intermediate-term funds had inflows of $90.321MM after inflows of $128.601MM the week prior. National funds had inflows of $338.960MM after experiencing inflows of $455.582MM the week prior. High-yield municipal funds reported inflows of $240.718MM in the latest week, after inflows of $244.232MM the week prior. Exchange traded funds reported inflows of $82.831MM, after inflows of $63.628MM 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. The primary reason is that GM opportunities still present chances to pick up 5.0% and higher coupons. Week-over-week, bank qualified spreads were mixed, as the spreads on the two, three, five and 30-year maturities all tightened, with the largest tightening occurring in the three-year maturity, six bps. Meanwhile the spreads on the 10- and 15-year maturities all widened week-over-week, with the largest widening occurring in the 15-year maturity, six bps. Finally, the spread on the one-year maturity was unchanged week-over-week.

Daily Overview of the General Market for the Week Ending August 24th

Last Monday prices on municipals were mixed, as market participants were eyeing the $4.5B long-term bond supply 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 fell one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries strengthened on Monday, as U.S. stocks posted gains for the session. On the day, the yield on the two-year maturity fell one bp, while the yields on the 10- and 30-year maturities each fell four bps. The 10-year municipal-to-Treasury ratio rose 86.2% on Monday from last Friday’s level of 85.0%, while the 30-year municipal-to-Treasury ratio rose to 100.3% on Monday from last Friday’s level of 99.3%.

Last Tuesday prices on municipal bonds were mixed again, as a number of new offerings came to market, led by a Denver City and County deal. On the day, the yields on the two- and 10-year GO bonds each rose one bp, while the yield on the 30-year GO bond was 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 posted gains for the session. On the day, the yield on the yields on the two- and 30-year maturities each rose one bp, while the yield on the 10-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 85.6% on Tuesday from Monday’s level of 86.2%, while the 30-year municipal-to-Treasury ratio slipped to 100.0% on Tuesday from Monday’s level of 100.3%.

Last Wednesday prices on municipals were steady, as Illinois came to market with almost $1.0B offering of bonds and Texas sold a massive note deal in the competitive arena. 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 strengthened on Wednesday, as U.S. stocks posted losses for the session. On the day, the yields on the two- and 30-year maturities each fell one bp, while the yield on the 10-year maturity fell three bps. The 10-year municipal-to-Treasury ratio rose to 86.5% on Wednesday from Tuesday’s level of 85.6%, while the 30-year municipal-to-Treasury ratio bumped up to 100.3% on Wednesday from Tuesday’s level of 100.0%.

Last Thursday prices on municipals were steady once again, as new issue offerings from New York and Massachusetts led the last of the week’s supply to market. 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 prices on U.S. equities were mixed to mostly lower for the session. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity was steady and the yield on the 30-year maturity fell two bps. The yield curve continued to flatten throughout the trading day, falling to 20.58 bps, a new cycle low. The 10-year municipal-to-Treasury ratio fell was unchanged on Thursday from Wednesday’s level of 86.5%, while the 30-year municipal-to-Treasury ratio rose to 101.0% on Thursday from Wednesday’s level of 100.3%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to the coming week’s $3.9B in weekly bond volume. On the day, the yields on the two- and 30-year GO bonds were unchanged, while the yield on the 10 year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mixed, as U.S. stocks traded higher for the session. On the day, the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year maturities were steady. The 10-year municipal-to-Treasury ratio slipped to 86.2% on Friday from Thursday’s level of 86.5%, while the 30-year municipal-to-Treasury ratio was unchanged on Friday from Thursday’s level of 101.0%.


Taxable Market







Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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