Muni Update

December 14, 2020

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

Municipal prices started the week steady, strengthened on Tuesday, were steady again on Wednesday and Thursday, and were mixed on Friday, 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;
New-issue offerings are forecasted to be about $8.93B for the trading week;
Municipal bond funds posted inflows for a fifth week in a row;
Demand in the Bank Qualified (BQ) market remains strong;
Day-by-day recap of activity in the General Market.

Municipal Market Recap

Municipal prices started the week steady across the curve. On Tuesday municipal prices strengthened across the curve. On Wednesday and Thursday municipal prices were once again steady across the curve. On Friday municipal prices were mixed, as the front-end was steady, while prices on bonds maturing 10 years and longer strengthened.

The projected level of new-issue offerings for the last full trading week of the year is $8.93B and coupled with secondary market offerings should provide market participants with various opportunities to fill their needs, as demand continues to outpace supply. The continued strong demand is due in part to continued, although reduced redemption activity from this summer, as evidenced by projected redemptions for the next thirty days of $20.0B, and overall strong inflows into funds.

Investors in municipal bond funds put cash into funds for the a fifth week, as evidenced by the latest tax-exempt weekly reporting funds data showing that funds experienced inflows of $992.0MM in the latest week, after experiencing inflows of $201.0MM the week prior. Long-term, intermediate-term, and high-yield funds also saw inflows. Investors still facing low or negative rates overseas continue to find positive-yielding U.S. assets attractive despite the recent outflows.

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 0.14%. Meanwhile the yield on the 10-year maturity on the MMD Triple-A Scale fell one basis point (bp) from Thursday to Friday, while the yield on the 30-year maturity on the MMD Triple-A Scale fell two bps from Thursday to Friday, and they ended the week at 0.70% and 1.38%, respectively. Overall, week-over-week the yield on the two-year General Obligation (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 four bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale was unchanged from Thursday to Friday and it ended the week at 0.27%. Meanwhile the yields on the 10- and 30-year maturities on the MMA Triple-A Scale each fell one bp from Thursday to Friday and they ended the ended the week at 1.09% and 1.63%, respectively. Overall, week-over-week the yield on the two-year GO bond was unchanged, while the yields on the 10- and 30-year GO bonds each fell two bps.

New-Issue Volume is Forecasted to be Around $8.93B for the Week

Total new-issue offerings for the last full trading week of the year before the holiday season kicks-in per IHS Markit Ipreo are estimated to be $8.93B. This week’s projected bond issuance is comprised of $5.69B in negotiated deals and $3.24B in competitive sales and offers investors several high yield deals. The biggest deal of the week will be the $1.5B offering of New York City of taxable GO bonds. Also, from New York, the New York City Health and Hospitals Corporation will price $330.0MM of health system revenue bonds. The deal is rated Aa3 by Moody’s Investors Service (Moody’s) and A+ by both Standard and Poor’s Global Ratings (S&P) and Fitch Ratings (Fitch). The Dutchess County Local Development Corporation will also price $250.0MM of Bard College project revenue bonds in two series. The deal is rated BB+ by S&P.

The Texas PAB Surface Transportation Corporation is set to price $1.18B of taxable LBJ Infrastructure Group LLC I-635 managed lane project senior lien revenue refunding bonds. The deal is rated Baa3 by Moody’s. The 2020C senior lien bond proceeds will be used to voluntarily repay about $1.1B of subordinate lien TIFIA loans. Also, from Texas, Harris County, Texas, plans to offer $437.0MM of toll road first lien revenue and refunding bonds. This deal is rated Aa2 by Moody’s and AA by S&P. The Frisco Independent School District will offer $200.0MM of Collin and Denton County unlimited tax school building and refunding bonds, insured by the Permanent School Fund Guarantee program, and thus rated triple-A by both Moody’s and S&P. The Frisco Independent School District will also price $109.0MM of taxable refunding bonds Tuesday.

Other notable deals this week include an offering of $800.0MM of GO refunding bonds from the State of Connecticut on Tuesday. The deal is rated A1 by Moody’s, A+ by S&P, and AA- by Fitch. The Illinois Finance Authority plans to offer $435.0MM of Illinois Clean Water Initiative revolving fund revenue green bonds. The deal is rated triple-A by S&P and Fitch. The City and County of Honolulu, Hawaii, plans to price $183.0MM of taxable wastewater system revenue refunding bonds on Tuesday. The deal is rated Aa2 by Moody’s and AA by Fitch. The Maryland Economic Development Corporation is set to price $133.0MM Port Covington Project special obligation bonds. Finally, the CSCDA Community Improvement Authority, California, plans to offer $116.0MM of essential housing revenue bonds.

Municipal Bond Funds Posted Inflows for a Fifth Week in a Row

Demand in the Bank Qualified (BQ) Market Remains Strong

BQ participants continue to be focused on the new-issue paper and the expected level of both BQ and general market (GM) new-issue paper this trading week, together with secondary market offerings should provide BQ market participants with some opportunities to fill their needs, as buyers continue to outpace sellers. BQ participants continue to have significant demand for municipal paper due in large part to having to replace rolloffs due to redemptions over the course of the year. Larger BQ participants (in particular C-Corps), continue to find attractive opportunities, both in size and structure in general market paper, due in part to the lower tax rates from tax reform, attractive spreads and lower costs of funds currently.

We encourage participants to continue to utilize extension swaps, to pick up more yield with little to no drop-off in credit quality, as well as to review their portfolio’s and look to replace weaker credits at this time. Week-over-week, BQ spreads were mixed, as the spread on the five-year maturity tightened, five bps. Meanwhile, the spreads on the one-, two-, three-, 10-, 15-, and 30- maturities all widened week-over-week, with the largest widening occurring in the 30-year maturity, 11 bps.

Daily Overview of the General Market for the Week Ending December 11^th

Last Monday municipals prices were steady, as the first of the trading week’s almost $9.0B in new-issue long-term debt was offered. Strong technicals and the overall lack of new-issue supply relative to redemption active continued to keep the municipal-to-Treasury ratios low. 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. Treasurys strengthened, as U.S. Stock prices were mixed for the session. The Dow finished down 148 points, or 0.5%, while the S&P was down 0.2% and the NASDAQ was up 0.5%. On the day, the yield on the two-year maturity fell two bps, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell four bps. The 10-year municipal-to-Treasury ratio rose to 76.6% on Monday from last Friday’s level of 74.2%, while the 30-year municipal-to-Treasury ratio rose to 84.0% on Monday from Last Friday’s level of 82.1%.

Last Tuesday municipals prices strengthened, as several deals came to market, including the institutional pricing of the $284.0MM University of Connecticut GO new-money and refunding bonds 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 fell two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasurys were mixed on Tuesday, as U.S. Stock prices rose for the session. The Dow finished up 104 points, or 0.4%, while the S&P was up 0.3% and the NASDAQ was up 0.5%. 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 77.2% on Tuesday from Monday’s level of 76.6%, while the 30-year municipal-to-Treasury ratio slipped to 83.8% on Tuesday from Monday’s level of 84.0%.

Last Wednesday municipals prices were steady, as a variety of new deals were priced, including $628.0MM of non-AMT Terminal 4 John F. Kennedy International Airport Project special facility revenue refunding bonds for the New York Transportation Development Corporation. 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. Treasurys weakened on Wednesday, as U.S. stocks fell for the session. The Dow finished down 105 points or 0.4%, while the S&P was down 0.8% and the NASDAQ was down 1.9%. 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 74.7% on Wednesday from Tuesday’s level of 77.2%, while the 30-year municipal-to-Treasury ratio fell to 82.8% on Wednesday from Tuesday’s level of 83.8%.

Last Thursday municipals prices were steady across the curve, as the last of the week’s new-issue offerings came to market. 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 strengthened on Thursday, as U.S. Stocks were mixed for the session. The Dow finished down 70 points or 0.2%, while the S&P was barely down 0.1% and the NASDAQ was up 0.5%. On the day, the yield on the two-year maturity fell two bps, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell four bps. The 10-year municipal-to-Treasury ratio rose to 77.2% on Thursday from Wednesday’s level of 74.7%, while the 30-year municipal-to-Treasury ratio rose to 84.9% on Thursday from Wednesday’s level of 82.8%.

Last Friday prices on municipals were mixed, as market participants started looking ahead to the $8.93B in expected new-issue offerings in the last full trading week of the year. On the day, the yield on the two-year GO bond was unchanged, while the yield on the 10-year GO bond fell one bp and the yield on the 30-year GO bond fell two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices strengthened last Friday, while U.S. stocks prices were mixed for session. The Dow finished up 47 points, or 0.2%, while the S&P was barely down 0.1% and the NASDAQ was down 0.2%. On the day, the yield on the two-year maturity fell three bps, while the yields on the 10- and 30-year maturities each fell two bps. The 10-year municipal-to-Treasury ratio rose to 77.8% on Friday from Thursday’s level of 77.2%, while the 30-year municipal-to-Treasury slipped to 84.7% on Friday from Thursday’s level of 84.9%.

Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP