Muni Update

August 28, 2017


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

 

Municipal Market Recap

Municipal bond funds posted inflows for a fifth straight week, as weekly reporting funds experienced $750.500MM of inflows in the latest reporting week, after experiencing inflows of $586.766MM the week prior.  The four-week moving average was positive at $528.082MM, after being in the green at $421.205MM 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 stronger across the curve. On Tuesday they reversed course and weakened across the curve. On Wednesday they strengthened again, and on Thursday they weakened. On Friday prices in the front-end were stable and bonds 10 years and longer strengthened. Prices on municipals started the trading week mixed, as the two-year maturity was steady, while prices on the 10- and 30-year maturities rose. On Tuesday prices were steady. On Wednesday prices were mixed, as the short-end was steady, and bonds 10 years and longer strengthened. On Thursday and Friday prices were steady across the curve. Volume for the trading week is projected to be $6.87B, which is well above last week’s revised level of $4.37B. 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/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 investors face in the fall. Still, we expect this level of issuance coupled with secondary market opportunities will address the continued strong demand in the municipal markets due to the current period of high redemptions.

This week’s economic calendar is very busy. While we will get some key economic reports before Friday, including the June S&P CoreLogic Case-Shiller 20-City home price index, the first revision to 2Q GDP and Personal consumption data including July’s PCE inflation data, which will remain the biggest driver of expectations for future Fed tightening, and finally the pending home sales data, the week’s biggest focus, will be on Friday. First, the BLS payroll data is expected to show 180k total jobs were added in August. The unemployment rate is expected to hold at 4.3%, its lowest level since 2001. However, assuming the headline hiring number is close to expectations, the major focus will be on the earnings data. Average hourly earnings are expected to have risen 0.2% in August, enough to push the YoY rate back to 2.6% for the first time since March. Following the labor reports, the August ISM manufacturing index is expected to have improved slightly. Consumer confidence is expected to ease in the University of Michigan’s August survey. Construction spending is expected to have rebounded slightly in July and auto sales are expected to have remained softer in August.

Last week the yields on the two-, 10- and 30- year maturities on the MMD Triple-A Scale were all unchanged from Thursday to Friday and ended the week at 0.86%, 1.88% and 2.73%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond was unchanged, while the yields on the 10- and 30-year GO bonds each fell three basis points (bps).

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 ended the week at 0.93%, 1.98% and 2.79%, respectively. Overall, week-over-week the yield on the two-year maturity was unchanged, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell three bps.

Prices on U.S. Treasuries started last week stronger. On Tuesday prices weakened, while on Wednesday they strengthened. Thursday saw prices weaken again, and on Friday they were steady in the front-end, and stronger 10 years and longer. Overall, week-over-week the yield on the 10-year maturity fell three bps and closed the week at 2.17%. Meanwhile the yield on the two-year rose two bps week-over-week and closed the week at 1.33%. This resulted in a week-over-week 2s/10s spread of 84 bps, five bps tighter than last week’s 2s/10s spread of 89 bps. The yield on the 30-year maturity fell three bps week-over-week and finished the week at 2.75%.

 

New Issue Volume is Expected to be $6.87B

Total volume for the trading week is estimated to be $6.87B, which is well above last week’s $4.37B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $5.77B in negotiated deals and approximately $1.10B in competitive sales, according to data from Thomson Reuters. The majority of action this week is scheduled to take place on Tuesday and it includes the four largest deals and eight of the top 10 deals of the week.

For the second time this year, the State of California is scheduled to sell $2.5B of various purpose GO and refunding bonds. The deal is expected to price for institutions on Tuesday following a one-day retail order period. The deal is rated Aa3 by Moody’s Investors Service (Moody’s) and AA- by S&P Global Ratings (S&P) and Fitch Ratings (Fitch).

The Greater Orlando Aviation Authority will offer $950.0MM of priority subordinated airport facilities revenue alternative minimum tax bonds (AMT) on Tuesday. The deal has been accelerated from its planned sale date in early September because of market conditions and the upcoming Labor Day holiday. The deal, which carries S&P Global Ratings’ first U.S. airport authority “Green Evaluation” score, is expected to be structured with serial maturities between 2023 and 2037, and term bonds in 2042, 2047 and 2052. It is rated A1 by Moody’s and A+ by S&P and Fitch. Also on Tuesday the Illinois Finance Authority plans to offer $558.0MM of state clean water initiative revolving fund revenue bonds after a one-day retail order period. The deal is rated triple-A by S&P and Fitch.

The largest competitive sale will also take place on Tuesday, when Prince George’s County, Maryland offers two separate sales of $366.46MM and $114.385MM of GO consolidated public improvement and refunding bonds. Both deals are rated triple-A by Moody’s, S&P and Fitch

 

Municipal Bond Funds Posted Inflows for the Week       

Municipal bond funds posted inflows for the fifth week, as market participants put cash into funds, according to the latest data from Lipper. The weekly reporters saw $750.500MM of inflows in the week of August 16, after inflows of $586.766MM the week prior. The four-week moving average was positive at $528.082MM, after being in the green at $421.205MM the week prior.

Long-term muni bond funds had inflows of $464.851MM in the latest week after inflows of $378.696MM in the previous week. Intermediate-term funds had outflows of $133.969MM after inflows of $158.569MM in the prior week. National funds had outflows of $384.236MM after experiencing inflows of $555.401MM the week prior. High-yield municipal funds reported inflows of $235.522MM in the latest week, after inflows of $185.562MM the week prior. Exchange traded funds reported inflows of $126.924MM, after inflows of $99.484MM the week prior. Ex-EFTs, municipal funds saw $623.576MM of inflows, after inflows of $487.282MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The new issue calendar for the week picks up from last week’s lighter calendar. This, 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 were mixed. The one-year maturity was flat, while the two- and three-year maturities tightened week-over-week, with the largest tightening occurring in the two-year maturity, three bps. Meanwhile spreads on the five-, 10-, 15- and 30-year maturities all widened over the same time frame, with the largest widening occurring in the 15- and 30-year maturities, three bps each.

 

Daily Overview of the General Market for the Week Ending August 25th

Last Monday prices on municipals were mixed, as market participants prepped for both the $4.0B in new bond issue offerings and the $5.4B in short-term debt by the State of Texas. On the day, the yield on the two-year GO bond was unchanged, 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.

Prices on U.S. Treasuries last Monday were stronger, as a last minute rally helped the Dow and S&P eclipse last Friday’s closing levels by 0.1% and overshadow a 0.05% loss for the NASDAQ. The U.S. Dollar was the worst performing currency Monday, falling in every major pairing. 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 two bps. The 10-year municipal-to-Treasury ratio rose to 87.2% on Monday from the prior Friday’s level of 86.8%, while the 30-year municipal-to-Treasury ratio was unchanged on Monday from the prior Friday’s level of 99.3%.

Last Tuesday prices on municipals were steady, as all eyes were on the $5.4B State of Texas tax and revenue anticipation notes (TRANs) offering that was priced. 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.

Prices on U.S. Treasuries were weaker across the curve, as stocks jumped early as futures had predicted and climbed almost ceaselessly throughout the day. All three major U.S. indices closed near session highs. The Dow rallied 196 points, or 0.90%, to notch its best day since late-April. The S&P added 24 points, or 0.99%, 0.01% shy of its best day over the same period. The NASDAQ outperformed, by gaining 1.4% in its best session since the end of June. The U.S. Dollar rallied and completely erased Monday’s sharp loss. With a quiet economic calendar, and in the absence of anything significant on the geopolitical front, the optimism was attributed to a Politico report describing positive developments on the tax-reform front. On the day, the yields on the two- and 30-year maturities each rose two bps, while the yield on the 10-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 86.0% on Tuesday from Monday’s level of 87.2%, while the 30-year municipal-to-Treasury ratio fell to 98.6% on Tuesday from Monday’s level of 99.3%.

Last Wednesday prices on municipals finished the day mixed, as issuers in Indiana and Florida pumped in some supply. On the day, the yield on the two-year GO bond was steady, 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.

U.S. Treasury prices finished the day stronger, as stocks remained underwater for the entire session. Industrials led losses within the S&P and just three sectors managed to remain positive. The energy sector gained as crude prices bounced on reported draws in crude and gasoline inventories. The U.S. Dollar’s roller coaster of a week continued and the currency closed near its lowest levels of the day. 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 to 86.6% on Wednesday from Tuesday’s level of 86.0%, while the 30-year municipal-to-Treasury ratio rose to 99.3% on Wednesday from Tuesday’s level of 98.6%.

Last Thursday prices on municipals finished steady, as a number of the week’s deals priced. 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 were weaker on the day, as U.S. stocks fell for a second day, further trimming weekly gains accumulated in Tuesday’s rally. Crude prices fell, while gasoline rallied on concerns that hurricane Harvey could shutter refiners for a period. The divergence sent the gasoline crack spread to its widest since February. On the day, the yields on the two-, 10- and 30-year maturities each rose two bps. The 10-year municipal-to-Treasury ratio fell to 85.8% on Thursday from Wednesday’s level of 86.6%, while the 30-year municipal-to-Treasury ratio fell to 98.6% on Thursday from Wednesday’s level of 99.3%.

Last Friday prices on municipals finished the week steady, as market participants prepped for the estimated $6.87B in new issue paper expecting to come to market. On the day, the yields on the two-, 10- and 30-year maturities were unchanged, according to the final read of the MMD Triple-A Scale.

U.S. Treasuries prices finished the day mixed, as the front-end was steady and bonds 10 years and longer strengthened. On the day, the yield on the two-year maturity was unchanged, while the yields on the 10- and 30-year maturities each fell two bps. The 10-year municipal-to-Treasury ratio rose to 86.6% on Friday from Thursday’s level of 85.8%, while the 30-year municipal-to-Treasury ratio rose to 99.3% on Friday, from Thursday’s level of 98.6%.






 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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