Muni Update

August 6, 2018


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


Municipal Market Recap


Prices on municipals were mixed on Monday and Tuesday. On Monday the front-end was steady, while bonds maturing 10 years and longer weakened. On Tuesday bonds maturing in the front-end weakened, while bonds maturing 10 years and longer were steady. On Wednesday prices weakened across the curve. On Thursday and Friday prices were steady across the curve. Volume for the week is projected to be $7.5B, which is above last week’s $4.1B in revised issuance. August brings an estimated $51.0B in redemptions. 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 pulled cash out of funds last week, as weekly reporting funds experienced outflows of $368.353MM, after experiencing inflows of $550.041B the week prior. The four-week moving average remained positive at $522.791MM, after being a positive $567.565MM 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.

 

Economic data this week is very quiet, particularly relative to last week’s deluge of reports and central bank decisions. Tuesday will bring the June JOLTs report which continues to show more job openings than unemployed persons. The focus for this week’s economic calendar will be Friday’ July CPI report which is expected to show Core CPI hold at 2.3% YoY.

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 they ended the week at 1.64%, 2.48% and 3.05%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose three basis points (bps), while the yield on the 10-year GO bond rose four bps and the yield on the 30-year GO bond rose five 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 1.66%, 2.45% and 3.06%, respectively. Overall, week-over-week the yield on the two-year GO bonds rose three bps, while the yield on the 10-year GO bond rose two bps and the yield on the 30-year GO bond rose four bps.

 

U.S. Treasuries prices were mixed through Wednesday. On Monday the front-end strengthened, while bonds maturing 10 years and longer weakened. On Tuesday the front-end weakened, while bonds maturing 10 years and longer strengthened. On Wednesday the front-end was steady, while bonds maturing 10 years and longer weakened. On Thursday and Friday prices strengthened across the curve. Overall, week-over-week the yield on the 10-year maturity rose three bps and closed the week at 2.97%. Meanwhile the yield on the two-year maturity fell four bps week-over-week and closed the week at 2.63%. This resulted in a 2s/10s of 34 bps, five bps wider then last week’s 2s/10s spread of 29 bps. The yield on the 30-year maturity rose three bps week-over-week and finished the week at 3.11%.


Volume to be $7.5B for the Trading Week


Total volume for the coming week is estimated to be $7.5B, which is above the $4.1B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar is comprised of $5.8B in negotiated offerings and $1.7B of competitive sales.

The Wisconsin Health and Educational Facilities Authority plans to offer $1.23B for the Advocate Aurora Health Credit Group on Tuesday. 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).

New York City (NYC) plans to offer almost $869.555MM of GO bonds in two offerings. The first deal consist of $809.555MM of Fiscal 2019 Series A and B, Fiscal 1994 Series M and Subseries H3 GOs and is slated to be priced on Wednesday after a two-day retail order period. The other offering by NYC will be a competitive pricing of $60.0MM of taxable Fiscal 2018 Series C GOs, also on Wednesday. The deals are rated Aa2 by Moody’s and AA by S&P and Fitch.

The Hawaii Airport System plans to offer $413.62MM of revenue bonds on Thursday, consisting of Series 2018A subject to the alternative minimum tax (AMT) and Series 2018B non-AMT bonds. The deal is rated A1 by Moody’s, AA- by S&P and A+ by Fitch.

In the competitive arena, besides the NYC deal mention above, Minnesota is offering $619.37MM of GOs in three sales consisting of $397.37MM of Series 2018 various purpose bonds, $206.0MM of Series 2018B trunk highway bonds and $16.0MM of Series 2018C taxable various purpose bonds. The deals, which are selling on Tuesday, are rated AAA by S&P and Fitch. Michigan is selling $149.2MM of environmental program GOs also on Tuesday. The deal is rated Aa1 by Moody’s and AA by S&P and Fitch.


Municipal Bond Funds Posted Outflows for the Week       


Municipal bond funds posted outflows, as market participants pulled cash put of funds for the week, according to the latest data from Lipper. The weekly reporting funds saw outflows of $368.353MM, after experiencing inflows of $550.041MM the week prior. The four-week moving remained positive at $522.791MM, after being a positive $567.565MM the week prior.

Long-term municipal bond funds had outflows of $294.317MM in the latest week after inflows of $408.358MM the week prior. Intermediate-term funds had inflows of $60.620MM after inflows of $117.106MM the week prior. National funds had outflows of $268.958MM after experiencing inflows of $494.716MM the week prior. High-yield municipal funds reported outflows of $78.037MM in the latest week, after inflows of $216.171MM the week prior. Exchange traded funds reported outflows of $115.709MM, after inflows of $130.955MM 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 out 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 treasuries.

For this week, we expect to see a continuation of the extension swap. With July roll-off money to be reinvested, BQ participants will look to the longer-end of the curve to pick up yield. New issue supply this week is expected to remain somewhat light so look to the secondary market to provide opportunities for buyers of longer BQ paper. Certain structures such as 4% coupons with a 10-year call and a 15-year maturity have widened throughout this summer and have reached some attractive yields to the call date with 3% raw yields attainable with certain states. Week-over-week, bank qualified spreads were mixed, as the spreads on the one- and 30-year maturities tightened, one bp each. Meanwhile the spreads on two, three, five, 10- and 15-year maturities all widened week-over-week, with the largest widening occurring in the two- and three-year maturities three bps each.


Daily Overview of the General Market for the Week Ending August 3rd


Last Monday prices on municipals were mixed, as market participants were eyeing the $4.4B supply slate for the week, as well as dealing with end of month issues. 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 rose one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed, as stocks slumped throughout the morning session with the S&P 500 twice touching its daily bottom just before and after the lunch hour. The index closed off its lows but down 0.6% after stabilizing during afternoon trading. The energy sector rose 0.8% after U.S. WTI added more than 2% on a weaker Dollar and concerns about certain global supply outlets being cut off for now. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio nudged up to 82.5% on Monday from last Friday’s level of 82.4%, while the 30-year municipal-to-Treasury ratio slipped to 97.1% on Monday from last Friday’s level of 97.4%.

Last Tuesday prices on municipal bonds were mixed, as municipal participants in the primary market saw issues from Texas, Florida, and West Virginia hit the market.  In addition, secondary market Puerto Rico issues staged a rally on reports that the island’s electric company struck a preliminary agreement with bondholders to restructure its debts in an effort to emerge from bankruptcy. On the day, the yield on the two-year GO bond rose one bp, while the yields on the 10- and 30-year GO bonds were steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed, as stocks posted gains for the session. The Dow rose 0.4%, while the NASDAQ added a stronger 0.6%. Industrials outperformance was tied in large part to headlines that hit just minutes before the opening bell showing the U.S. and China were hoping to rekindle conversations in an attempt to avoid a trade war. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio bumped up to 82.8% on Tuesday from Monday’s level of 82.5%, while the 30-year municipal-to-Treasury ratio rose to 97.7% on Tuesday from Monday’s level of 97.1%.

Last Wednesday prices on municipals weakened, as municipal participants bought up the issues that came to market, as demand stayed strong, though the tone remained cautions as Federal Reserve policy makers met in Washington. On the day the yield on the two-year GO bond rose two bps, 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.

U.S. Treasury prices were mixed, as U.S. stocks were mostly weaker despite a Facebook-led tech rally. On the day, the yield on the two-year maturity was unchanged, while the yield on the 10-year maturity rose four bps and the yield on the 30-year maturity rose five bps. The 10-year municipal-to-Treasury ratio was relatively unchanged on Wednesday from Tuesday’s level of 82.8%, while the 30-year municipal-to-Treasury ratio slipped to 97.4% on Wednesday from Tuesday’s level of 97.7%.

Last Thursday prices on municipals were steady, as the last of the week’s new issue opportunities were priced and participants awaited the release of the July employment report on Friday morning. On the day, the yields on the two-, 10- and 30-year GO bonds were all steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as equity prices dropped at the open but made a quick turn higher in the afternoon. Thursday’s near 3.0% rally was enough to make Apple the first U.S. Company to achieve a market capitalization of at least $1.0 trillion. The NASDAQ tracked Apple’s path and outperformed the other major indexes with a 1.2% gain. The S&P 500’s tech sector rose 1.4% and led the overall index up 0.5% despite smaller drags from four other sectors. Energy companies fell for a third day despite oil prices rallying on the decline in Cushing inventories. The industrials and materials sectors also dropped and continued to be weighed down by resurgent trade concerns. On the day, the yields on the two-, 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio bumped up to 82.9% on Thursday from Wednesday’s level of 82.7%, while the 30-year municipal-to-Treasury ratio rose to 97.8% on Thursday from Wednesday’s level of 97.4%.

Last Friday prices on municipals were steady once again, as market participants were looking ahead to the coming week’s $7.5B in new issuance offerings. 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 stronger, as U.S. stocks traded mixed for the session. On the day, the yield on the two-year maturity fell three bps, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 83.5% on Friday from Thursday’s level of 82.9%, while the 30-year municipal-to-Treasury ratio rose to 98.1% on Friday from Thursday’s level of 97.8%.





Volume Beats Last Year’s Level (The Bond Buyer)

For the first time this year, the municipal bond market generated more volume than it did in the same month in 2017, as July issuance climbed 1.3%. July 2018 volume inched up to $25.31B, from $24.97B a year earlier, according to Thomson Reuters data.

Issuers completed 610 transactions, off from the 733 in July 2017. However, monthly volume fell below $30.0B for the first time since March as summer doldrums took hold. July’s year-over-year gain comes after volume fell 53.5% in January, 36.1% in February, 23.7% in March, 3.9% in April, 20.1% in May, and 19.4% in June, as the market adjusted to a ban on advance refunding bonds under the new tax law. Even as issuance declined from year-earlier levels, capital improvement issuance has accelerated since the beginning of the year. Natalie Cohen, managing director at Wells Fargo Securities said, “without advance refundings most of the borrowing now is for projects and while refundings have receded dramatically, new money is up nearly 67.0% this month over last year; and this is much higher than earlier months following a slow start to the year.”

Some of the decline in volume earlier in the year was a period of absorption following historically heavy December issuance, when market participants thought both private activity bonds and advance refundings would be eliminated. “This shows up in the Q1 drop of almost 30.0%,” she said. “But in Q2 there was a much smaller drop in borrowing and month-to-date, some growth.”

New-money issuance in July increased 66.3% to $17.86B on 498 deals, from $10.74B on 451 deals a year earlier. “If you take away the comparison from last year, volume numbers are down compared to recent months,” said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management. Volume is thin and investors pre-refunded or called their issues, effectively taking bonds away, making the pie, or number of bonds to potentially buy, smaller, he said.

Heckman said demand has been over-whelming on the short-end, and soon investors will have to readjust and move further out in maturity, making the al-locations for all even less of what they have been. “It has also made the short-end so expensive,” he said. “The municipal curve has stayed steep compared to Treasury curve, but we think that will change here soon.”

Refunding volume fell to $4.20B on 81 deals, from $8.25B on 209 deals a year earlier. Combined new-money and refunding issuance dropped 45.7% to $3.24B, while issuance of revenue bonds rose 15.4% to $18.11B and GO bond sales fell to $7.19B from $9.28B.

Negotiated deal volume was up to $18.35B and competitive sales increased by 2.9% to $6.58B. Taxable bond volume gained to $2.14B from $1.62B, while tax-exempt issuance increased by 3.2% to $22.46B. Minimum tax bond issuance sank to $707.0MM from $1.59B. Deals wrapped by bond insurance rose 3.8% to $1.29B on 88 deals from $1.24B on 97 transactions the same time the prior year.

California continues to have the most issuance among states so far in 2018. California has issued $29.62B; New York is second with $25.47B; Texas is third with $19.43B; Pennsylvania is next with $8.90B followed by New Jersey with $6.86B.



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

 

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