Muni Update

December 11, 2017



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

 

Municipal Market Recap

Municipal bond funds reported investors pulled cash out of funds last week, as weekly reporting funds experienced outflows of $807.203MM in the latest reporting week, after experiencing inflows of $100.434MM the week prior. The four-week moving average was positive at $92.547MM, after being in the green at $410.109MM the week prior. Investors still facing very low 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 should rise as we head into year-end. The municipal market was again volatile last week, as yields fell for the first three days, then stabilized on Thursday and were mostly higher on Friday. The recent drop-off in yields has also resulted in a significant spread tightening, especially as the intermediate and long parts of the municipal curves have flattened. In addition, the 10- and 30-year municipal to Treasury ratios are back to their lows for the past year. Market participants are starting to question how much lower they can go and where the value lies.

U.S. Treasury prices started the week weaker across the curve. They were mixed on Tuesday, as the front-end weakened and bonds ten years and longer strengthened. On Wednesday they strengthened across the curve. On Thursday they weakened across the curve. On Friday they were mixed, as the front-end strengthened and bonds 10 years and longer were steady. Prices on municipals started the week mixed, as the front-end was steady and bonds 10 years and longer strengthened. On Tuesday and Wednesday they strengthened across the curve. On Thursday they were mixed: the front-end strengthened, while intermediate maturities were stable and the long-end weakened. On Friday they were mixed again, as the front-end was steady, while bonds 10 years and longer weakened. Volume for the trading week is projected to be $22.88B, which is above last week’s revised level of $13.9B. The rise in supply is due to the potential sunset of certain municipal issue options due to potential tax reform. This increased supply level, together with secondary market opportunities, should address the continued strong demand for municipal bonds and the upcoming January redemptions.

This week’s economic calendar brings several important reports, with three very significant releases. November’s CPI inflation report is scheduled for Wednesday and is expected to show core CPI remaining at 1.8%. CPI inflation has stabilized in recent months after dropping from 2.3% to 1.7% in the first half of the year.  November’s Retail Sales report is scheduled for Thursday and will be the first good look at how the holiday shopping season is progressing. Given the early Thanksgiving holiday and earlier-than-normal retailer discounts, November’s sales make up a disproportionately large portion of holiday sales. As such, Thursday’s report could bring an upside surprise. Finally, the biggest event of the week will be Wednesday’s FOMC decision.  The markets are now pricing in a 98% likelihood of a third rate hike for 2017. Another hike will bring the target fed funds range to 1.25-1.50%.  The markets would be shocked if the Fed does not hike, something the Fed wants to avoid.

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 1.43%. Meanwhile, the yields on the 10- and 30-year maturities each rose seven basis points (bps) on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 1.95% and 2.56%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell 10 bps, while the yields on the 10- and 30-year GO bonds each fell 12 bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale rose one bp from Thursday to Friday and ended the week at 1.23%. Meanwhile, the yield on the 10-year maturity rose five bps and the yield on the 30-year maturity rose six bps on the MMA Triple-A Scale from Thursday to Friday and they ended the week at 2.07% and 2.77%, respectively. Overall, week-over-week the yield on the two-year GO maturity fell six bps, while the yield on the 10-year maturity fell eight bps and the yield on the 30-year maturity fell 11 bps.

Prices on U.S. Treasuries were weaker on Monday. They were mixed on Tuesday, and stronger on Wednesday. On Thursday they were weaker again and on Friday they were mixed. Overall, week-over-week the yield on the 10-year maturity rose two bps and closed the week at 2.38%. Meanwhile the yield on the two-year maturity rose three bps week-over-week and closed the week at 1.80%. This resulted in a week-over-week 2s/10s spread of 58 bps, one bp tighter than last week’s 2s/10s spread of 59 bps. The yield on the 30-year maturity rose one bp and finished the week at 2.77%.

 

New Issue Volume for the Week is Estimated to be $22.88B

Total volume for the coming week is estimated to be $22.88B, which is above last week’s $13.9B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $19.54B in negotiated deals and approximately $3.34B in competitive sales, according to data from Thomson Reuters. There are 49 deals on the calendar that are $100.0MM.

The Empire State Development Corporation is set to bring $1.78B of New York State urban development corporation state personal income tax revenue general purpose bonds via five separate competitive sales on Thursday, two of which will be taxable and three will be tax-exempt. Also on Thursday, the Partners Healthcare System of Massachusetts plans to bring $1.2B of revenue bonds.

Staying on the east coast, the New Jersey Turnpike Authority plans to offer $795.0MM of revenue bonds on Tuesday. The deal is rated A2 by Moody’s Investors Service (Moody’s), A+ by S&P Global Ratings (S&P) and A by Fitch Ratings (Fitch). Philadelphia plans to offer $721.0MM in airport revenue and refunding bonds on Tuesday. The deal is rated A1 by Moody’s and A by S&P and Fitch.

Allen County, Ohio plans to offer $724.15MM of hospital facilities revenue and taxable bonds for Mercy Health on Tuesday. The deal is rated A2 by Moody’s, A+ by S&P and AA- by Fitch.

 

Municipal Bond Funds Posted Outflows for the Week       

Municipal bond funds posted outflows for the week, as market participants pulled cash out of funds, according to the latest data from Lipper. The weekly reporters saw $807.203MM of outflows, after experiencing inflows of $100.434MM the week prior. The four-week moving average was positive at $92.547MM, after being in the green at $410.109MM the week prior.

Long-term municipal bond funds had outflows of $140.663MM in the latest week after inflows of $185.461MM the week prior. Intermediate-term funds had outflows of $285.641MM after experiencing inflows of $18.641MM the week prior. National funds had outflows of $637.093MM after inflows of $136.295MM the week prior. High-yield municipal funds reported outflows of $236.365MM in the latest week, after inflows of $71.670MM the week prior. Exchange traded funds reported inflows of $127.808MM, after inflows of $61.076MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

With January 1st and January 15th being large rolloff dates, BQ participants continue to have significant demand for BQ paper. The continued substantial pick up in new issue paper this week, together with secondary opportunities, should provide market participants the chance to address their needs while picking up attractive structures, especially those in the long-end of the curve. Participants should also continue to utilize extension swaps and perform portfolio cleanup, as the bid side for municipals continues to remain strong. The short-end, despite the recent tightening in the 2’s/10’s spread, continues to perform well enough that extension swaps remain attractive and provide an opportunity to increase yields in a portfolio. Week-over-week, bank qualified spreads tightened in all maturities except the 30 year, which was steady week-over-week. The largest tightening occurred in the one-year maturity, five bps.

 

Daily Overview of the General Market for the Week Ending December 8th

Last Monday prices on municipals were mixed, as market participants kept one eye on all the new deals staring to hit the market and the other on all the latest news coming out of Washington on tax reform. 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.

Prices on U.S. Treasuries were weaker, as the tumble in tech shares was too much for the major indices to absorb Monday. The NASDAQ was the day’s worst performer, and the S&P edged just below Friday’s final tick. The U.S. Dollar managed to hold a rebound and crude prices fell the most in three weeks on fears the OPEC deal from last week may not go far enough to fend off increased production from the U.S. shale. The modest 0.1% gain for the Dow was offset by similarly modest losses for the S&P and NASDAQ. The U.S. Dollar recovered against most currencies except the Yen and closed near its highest level of the day. On the day, the yield on the two-year maturity rose four bps, while the yield on the 10-year maturity rose two bps and the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio fell to 86.1% on Monday from Friday’s level of 87.7%, while the 30-year municipal-to-Treasury ratio fell to 96.0% on Monday from Friday’s level of 97.1%.

Last Tuesday prices on municipals strengthened, as New York City sold $950.0MM of GO bonds after retail buyers flocked to the deal, as changes to tax laws loom in Washington. On the day the yield on the two-year GO bond fell three bps, while the yield on the 10-year GO bond fell six bps and the yield on the 30-year GO bond fell eight bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as tech shares outperformed most other sectors, but a broad loss in momentum in the second half of trading left the three major indices moderately lower. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio fell to 84.3% on Tuesday from Monday’s level of 86.1%, while the 30-year municipal-to-Treasury ratio fell to 94.2% on Tuesday from Monday’s level of 96.0%.

Last Wednesday prices on municipals were once again stronger across the curve, as issuers flooded the market ahead of the coming tax reform. On the day the yield on the two-year GO bond fell six bps, while the yield on the 10-year GO bond fell 11 bps and the yield on the 30-year GO bond fell 12 bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also strengthened on the day, as equity investors remained unconvinced as to what to make of the recent trading patterns, as the Dow dropped, the S&P held essentially unchanged, and the NASDAQ moved up 0.21%. 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 fell to 80.7% on Wednesday from Tuesday’s level of 84.3%, while the 30-year municipal-to-Treasury ratio fell to 90.8% on Wednesday from Tuesday’s level of 94.2%.

Last Thursday prices on municipals were mixed, as billions in new issue paper hit the market. On the day, the yield on the two-year GO bond fell one bp, while the  yield on the 10-year GO bond was unchanged and the yield on the 30-year GO bond rose three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished weaker, as U.S. stocks recovered from a mid-morning slip and the S&P managed to end its four-day losing streak. The NASDAQ led gains, as tech companies improved for a second day. The Dow and S&P both moved up and were led by the industrials and materials sector. The U.S. Dollar continued to quietly strengthen to a more than two-week high against the Euro and a three-week high against the Yen. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity rose five bps and the yield on the 30-year maturity rose six bps. The 10-year municipal-to-Treasury ratio fell to 79.0% on Thursday from Wednesday’s level of 80.7%, while the 30-year municipal-to-Treasury ratio fell to 89.9% on Thursday from Wednesday’s level of 90.8%.

Prices on municipals last Friday finished the day mixed, as market participants prepped for the estimated $22.88B in new issue paper expected 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 seven bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mixed. On the day, the yield on the two-year maturity fell one bp, while the yields on the 10- and 30-year maturities were each steady. The 10-year municipal-to-Treasury ratio rose to 81.9% on Friday from Thursday’s level of 79.0%, while the 30-year municipal-to-Treasury ratio rose to 92.4% on Friday from Thursday’s level of 89.9%.

 



 

 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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