August 7, 2017
In this week’s Municipal Market Update, we highlight the following:
- Prices on municipals were stable on Monday and Tuesday, on Wednesday they were mixed, on Thursday they were stronger and on Friday they were unchanged, as reflected by weekly data for the Municipal Market Data (MMD) Triple-A Scale; also shown are the yields for the Municipal Market Advisors (MMA) Triple-A Scale and US Treasuries for the week;
- New issue volume for week is expected to be $7.32B;
- Municipal bond funds posted inflows for the week;
- Demand in the Bank Qualified (BQ) market remains strong;
- Day-by-day recap of activity in the General Market.
Municipal Market Recap
Municipal bond funds posted inflows for a third week, as weekly reporting funds experienced $143.847MM of inflows in the latest reporting week, after experiencing inflows of $322.992MM the week prior. The four-week moving average turned positive at $148.209MM, after being in the red at $2.329MM 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 is showing growth.
U.S. Treasury prices started the trading week steady across the curve. On Tuesday they strengthened, while on Wednesday they were mixed, as they weakened in the front-end, strengthened in the long-end, and were stable in the 10-year spot. On Thursday they strengthened across the curve. Prices ended the week weaker across the curve. Prices on municipals also started the trading week steady. On Tuesday, while some intermediate maturities weakened, the two, 10- and 30-year maturities were all steady. On Wednesday the two- and 10-year maturities strengthened, while the long-end was steady. On Thursday they strengthened across the curve. On Friday prices were mixed, as the front-end was steady and the intermediate and long-end weakened. Volume for the trading week is projected to be $7.32B, which is slightly above last week’s revised level of $7.02B.
We note that late summer is always a slow period, and this year is no exception. Rates are stuck in a narrow range, municipal ratios are still close to multi-year lows, and the yield curves are steep, though the long-end has finally started performing. Secondary trading remains subdued, as trading volume is at 18-month lows. Still, we expect this level of issuance coupled with secondary market opportunities should address the continued strong demand in the municipal markets due to the current period of high redemptions.
This week’s economic calendar is fairly light, and kicks off this afternoon with the June Consumer Credit report, which is expected to show credit growth drop from $18.4B in May to $15.3B. The big news of the week will be the July’s CPI inflation report due out Friday and a speech from New York Fed Bank President Dudley on Thursday. In addition to the light calendar this week, Congress is finally on summer break and the President is taking a working vacation in New Jersey, likely limiting the fiscal policy headlines for the next few weeks.
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 0.92%. Meanwhile the yields on the 10- and 30-year maturities on the MMD Triple-A Scale each rose one basis point (bp) from Thursday to Friday and ended the week at 1.93% and 2.72%, respectively. Overall, week-over-week the yields on the two-, 10- and 30-year general obligation (GO) bonds each fell two bps.
Last week the yield on the two-year maturity on the MMA Triple-A Scale rose one bp from Thursday to Friday and they ended the week at 0.95%, while the yields on the 10- and 30-year maturities on the MMA Triple-A Scale were each unchanged from Thursday to Friday and ended the week at 2.03% and 2.85%, respectively. Overall, week-over-week the yield on the two-year maturity fell two bps, while the yields on the 10- and 30-year maturities each fell four bps.
Prices on U.S. Treasuries started last week steady. On Tuesday they strengthened, while on Wednesday they were mixed. On Thursday they strengthened again, only to weaken to close the week. Overall, week-over-week the yield on the 10-year maturity fell three bps and closed the week at 2.26%. Meanwhile the yield on the two-year maturity was unchanged week-over-week and closed the week at 1.35%. This resulted in a week-over-week 2s/10s spread of 91 bps, three bps tighter than last week’s 2s/10s spread of 94 bps. The yield on the 30-year maturity fell five bps week-over-week and finished the week at 2.84%.
New Issue Volume is Expected to be $7.32B
Total volume for the trading week is estimated to be $7.32B, which is just slightly above last week’s $7.02B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $4.77B in negotiated deals and approximately $2.55B in competitive sales, according to data from Thomson Reuters. There are 19 scheduled sales larger than $100.0MM, with eight in the competitive arena. The calendar also features two issuers who are bringing roughly $2.5B between them.
The Cleveland Clinic Health System plans to offer $1.0B of obligated group State of Ohio hospital refunding revenue bonds on Tuesday after a one-day retail order period. It is anticipated that the deal will feature $840.0MM of tax-exempts and $160.0MM of taxable bonds. The deal is rated Aa2 by Moody’s Investors Service (Moody’s) and AA by S&P Global Ratings (S&P). S&P raised the system’s rating to AA from AA- recently, as a result of expansion plans the system has in its U.S. and international operations.
The New York City Transitional Finance Authority (NYC TFA) is scheduled to competitively sell $1.35B of Fiscal 2018 Series A future tax secured tax-exempt and taxable subordinate bonds on Tuesday. The separate bond sales consist of $180.915MM of Subseries A-1 tax-exempts, $407.205MM of Subseries A-2 tax-exempts; $411.88MM of Subseries A-3 tax-exempts, $124.055MM of Subseries A-4 taxables, and $225.945MM of Subseries A-5 taxables. The NYC TFA also intends to reoffer about $162.0MM of Fiscal 2018 Series 1 fixed-rate tax-exempts via competitive bid to convert existing floating-rate bonds into fixed-rates.
Miami-Dade County, Florida plans to offer $647.785.0MM of aviation revenue and revenue refunding bonds on Thursday after a one-day retail order period. The transaction will feature both alternative-minimum tax bonds (AMT) and taxable bonds and is rated A by S&P and Fitch Ratings (Fitch) and AA- by Kroll Bond Rating Agency (Kroll). Philadelphia plans to offer $278.235MM of gas works revenue bonds, 15th series for 1198 General Ordinance on Tuesday. The deal is rated A3 by Moody’s, A by S&P and BB+ by Fitch.
Municipal Bond Funds Posted Inflows for the Week
Municipal bond funds posted inflows for the third week, as market participants put cash into funds, according to the latest data from Lipper. Weekly reporting funds reported $143.847MM of inflows for the most recent week. These followed inflows of $322.992MM the week prior, according to Lipper. The four-week moving average turned positive at $148.209MM, after being in the red at $2.329MM the week prior.
Long-term municipal bond funds had inflows of $118.150MM in the latest week after inflows of $229.732MM the week prior. Intermediate-term funds had inflows of $19.414MM after experiencing inflows of $70.336MM the week prior. National funds had inflows of $203.351MM after inflows of $431.650MM the week prior. High-yield municipal funds reported inflows of $73.549MM in the latest reporting week, after inflows of $188.672MM the week prior. Exchange traded funds saw inflows of $54.212MM, after inflows of $123.905MM 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-, 10-, 15- and 30-year maturities all tightened week-over-week, with the largest tightening occurring in the five-year maturity, six bps. The spreads on the two- and three-year maturities were unchanged week-over-week, while the spread on the 15-year maturity widened during the same time frame, four bps.
Daily Overview of the General Market for the Week Ending August 4th
Last Monday prices on municipals were steady, as participants positioned themselves for the upcoming trading week’s $7.16B in new issue supply. 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 last Monday were also steady, as U.S. stocks ended July unevenly. The S&P and NASDAQ faltered despite the Dow rising 0.3% to a new record high. The U.S. Dollar sank to its lowest level since May 2016 and closed out July down 2.9% for the month. Crude gained Monday on price-positive developments from OPEC to cap a 9.0% monthly gain for July. On the day, the yields on the two-, 10- and 30-year maturities were unchanged. The 10- and 30-year municipal-to-Treasury ratios were also both unchanged on Monday from the prior Friday’s levels of 85.2% and 94.8%, respectively.
Last Tuesday prices on most municipals were steady, as the first of the week’s big deals came to market, led by the Bay Area Toll Authority of California’s $1.4B deal. On the day the yields on the two-, 10- and 30-year GO bonds were steady, while some intermediate maturities weakened, according to the final read of the MMD Triple-A Scale.
Prices on U.S. Treasuries were stronger, as U.S. stocks rallied and the Dow recorded its fifth consecutive daily record close and the S&P and NASDAQ recovered from Monday’s losses. The Dow closed 24 points below its next major milestone, the 22,000 mark. U.S. crude prices fell back below $50 on reports OPEC production grew in July and the API indicated U.S. inventories likely rose for the first time in five months. The U.S. Dollar stabilized and recovered marginally from Monday’s 15-month low. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio rose to 86.3% on Tuesday from Monday’s level of 85.2%, while the 30-year municipal-to-Treasury ratio rose to 95.5% on Tuesday from Monday’s level of 94.8%.
Last Wednesday prices on municipals finished the day mixed, as a big North Carolina bond deal priced and Massachusetts sold several large note offerings. On the day, the yields on the two- and 10-year GO bonds each fell one bp, while the yield on the 30-year GO bond was steady, according to the final read of the MMD Triple-A Scale.
U.S. Treasury prices finished the day mixed, as the Dow managed to close above 22,000 and record its sixth consecutive record close. However, the milestone was met on weak breadth with more than half of the stocks within the index closing down on the day. The U.S. Dollar slipped again and returned to its 15-month low set on Monday. On the day, the yield on the two-year maturity rose two bps, while the yield on the 30-year maturity fell three bps and the yield on the 10-year maturity was steady. The 10-year municipal-to-Treasury ratio fell to 85.8% on Wednesday from Tuesday’s level of 86.3%, while the 30-year municipal-to-Treasury ratio rose to 96.5% on Wednesday from Tuesday’s level of 95.5%.
Last Thursday prices on municipals finished the day stronger, as the last of the week’s deals priced. On the day, the yield on the two-year GO Bond fell one bp, 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 were also stronger on the day, as the Bank of England left its policy unchanged but cut its forecast for economic growth and wage gains. Yields in the U.K. dropped the most and led a global rally in sovereign debt. A softer than expected ISM non-manufacturing report didn’t help the mood. However, the second notable shift lower followed a report that Special Counsel Mueller had impaneled a grand jury in conjunction with his probe into Russia’s involvement with the U.S. election and possible ties to the Trump administration. 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 Thursday from Wednesday’s level of 85.8%, while the 30-year municipal-to-Treasury ratio was unchanged on Thursday from Wednesday’s level of 96.5%.
Last Friday prices on municipals finished the week mixed, as market participants prepped for the estimated $7.32B in new issue paper expecting to come to market. 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 rose one bp, according to the final read of the MMD Triple-A Scale.
U.S. Treasuries finished the day weaker across the curve. On the day, the yield on the two-year maturity rose one bp, while the yields on the 10- and 30-year maturities each rose three bps. The 10-year municipal-to-Treasury ratio fell to 85.4% on Friday from Thursday’s level of 86.1%, while the 30-year municipal-to-Treasury ratio fell to 95.8% on Friday from Thursday’s level of 96.5%.
Municipal volume dries up as Refundings take a free-fall (The Bond Buyer)
Municipal bond volume entered the summer doldrums, falling 20.1% in July as refundings plummeted and an increase in new-money deals wasn’t enough to pick up the slack.
July volume fell to $23.39B on 635 transactions from $29.29B on 1,014 deals in July of 2016, according to data from Thomson Reuters. Refundings dropped 52.8% from a year earlier to $6.13B on 157 deals from $12.99B on 395 deals. New money issuance increased 9.5% to $12.03B on 414 transactions from $10.98B on 542 deals in July 2016. The value of combined new-money and refunding deals for the month dipped to $5.24B from $5.32B a year earlier. Issuance of revenue bonds declined 26.8% to $13.54B, while general obligation bond sales fell 8.6% to $9.85B.
Negotiated deals dropped 18.1% to $16.76B, and competitive sales decreased by 5.7% to $6.73B. Taxable bond volume dipped to $1.48B from $2.11B, while tax-exempt issuance decreased by 23.3% to $20.42B. Minimum tax bonds more than doubled to $1.49B from $542.0MM. Deals wrapped by bond insurance were down 6.3% year over year to $1.33B on 95 transactions from $1.42B on 111 deals.
Only four out of 10 sectors saw year-over-year increases. Education was up 10.3% to $7.11B from $6.45B. Environmental facilities finished the month up to $156.0MM from $66.0MM, transportation was up 30.5% to $5.05B from $3.87B and general purpose nudged up to $7.48B from $7.41B. The other six sectors saw a decrease of at least 39.7%, with electric power posting the biggest drop for the second month in a row, this time down 84.7% to $108.0MM from $702.0MM. Health care issuance dropped 72.8% to $1.17B from $4.31B and public facilities declined to $206.0MM from $1.37B.
The State of California remained the largest issue of debt with $39.78B so far this year. New York is second with $27.52B, followed by Texas with $21.44B. Pennsylvania is next with $9.64B and Wisconsin rounds out the top five with $7.26B.
Senior Vice President
Vining Sparks IBG, L.P.