Muni Update

December 16, 2019


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


Municipal Market Recap

Municipal prices strengthened across the curve on Monday and Tuesday. For the rest of the week on a daily basis municipal prices were mixed. On Wednesday the front-end was steady, while bonds maturing 10 years and longer strengthened. Also on Wednesday, the Federal Open Markets Committee (FOMC) concluded its final meeting of the year and in unanimous vote, the panel made no change to their overnight target rate and kept the range between 1.50% and 1.75%, and the interest rate on excess reserves steady at 1.55%. On Thursday the front-end was steady, while bonds maturing 10 years and longer weakened. On Friday, municipal price action was a repeat of Wednesday’s. Issuance for the last full trading week of the year is forecasted to be $6.0B. This week’s projected issuance together with secondary market opportunities should provide market participants with numerous opportunities to meet demand, especially given the continued strong demand in the municipal market. Driving this strong demand in the municipal market is the continuing combination of high redemption flows and inflows into municipal bond mutual funds, which continues to be strong at this time.

The total size (measured in par amount) of the municipal bond market shrank in the third quarter of 2019 (3Q19) by $3.7B to $3.8T. It was the fifth-consecutive quarter in which the market contracted, according to new data from the Federal Reserve. However, due to the rally in prices in 3Q19, the aggregate market value of the market increased by $24.3B or 0.6% (the Price Return of the ICE BofAML Municipal Bond Index in 3Q19 was 0.59%; the total return for the Index was 1.62%).

Investors in municipal bond funds put cash into funds for a 49th week, as weekly reporting funds experienced inflows of $1.558B after experiencing inflows of $614.882MM the week prior. The four-week moving average was a positive $1.553B, after being in the green at $1.625B the week prior. Investors still facing low or negative rates overseas continue to find higher-yielding U.S. assets attractive. Municipal securities have been bolstered by lower supply and strong demand. All these factors, including investors plowing billions into municipal-bond mutual funds, as investors seek to reduce their tax burden should have both traditional and non-traditional market participants continuing to look for opportunities in the U.S. municipal market.

While individual investors remain the largest class of owners in the municipal bond market, in 3Q19 they shifted a portion of that exposure from direct ownership of individual bonds to indirect ownership via funds. The market value of direct Household ownership of individual bonds declined by $7.8B in 3Q19 but are still up by almost $31.0B for the year. The Household category includes bonds held in brokerage accounts as well as in professionally-managed separate accounts. Between direct ownership of bonds and indirect ownership via funds, individual investors control 69% of the overall market.

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 1.05%. Meanwhile the yields on the 10- and 30-year maturities on the MMD Triple-A Scale from Thursday to Friday each fell two basis points (bps) and they ended the week at 1.42% and 2.04%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell two bps, while the yield on the 10-year GO bond fell six bps and the yield on the 30-year GO bond fell three bps.

Last week the yield on the two-year maturities on the MMA Triple-A Scale was unchanged from Thursday to Friday and ended the week at 1.17%. Meanwhile, the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity fell two bps on the MMA Triple-A Scale from Thursday to Friday and they ended the week at 1.54% and 2.16%, respectively. Overall, week-over-week the yield on the two-year GO bond was unchanged, while the yield on the 10-year GO bond fell three bps and the yield on the 30-year GO bond fell four bps.


New-Issue Volume is Forecasted to be $6.0B for Trading Week

Total new issuance for the last full trading week of the year per IHS Markit Ipreo is estimated to be $6.0B. The Dormitory Authority of the State of New York (DASNY) will dominate the new-issue slate this week with its sale of $3.2B of general purpose personal income tax (PITs) revenue bonds. The deal consists of $1.997B of tax-exempt Series 2019D and Series 2019E PITs and $1.269B of taxable Series 2019F PITs. The bonds are scheduled to be priced on Tuesday, and are rated Aa1 by Moody’s Investors Service (Moody’s) and AA+ by Fitch Ratings (Fitch). Also on Tuesday the Massachusetts Institute of Technology will offer $300.0MM of Series F taxable corporate CUSIP bonds and $137.0MM of Massachusetts Development Finance Series 2020P revenue bonds. The bonds are rated Triple-A by Moody’s and Standard and Poor’s Global Ratings (S&P).


Municipal Bond Funds Post Inflows for a 49th Week

Investors in municipal bond funds put cash into funds for a 49th week, as weekly tax-exempt weekly reporting funds experienced inflows of $1.558B in the latest week, after experiencing inflows of $614.882MM the week prior. The four-week moving average was a positive $1.553B, after being in the green at $1.625B the prior week.

Long-term municipal bond funds had inflows of $ 1.052B in the latest week after experiencing inflows of $464.451MM the week prior. Intermediate-term funds had inflows of $296.005MM after inflows of $84.099MM the week prior. National funds had inflows of $1.372B after experiencing inflows of $504.030MM the week prior. High-yield municipal funds reported inflows of $453.630MM in the latest week, after inflows of $171.625MM the week prior. Exchange traded funds reported inflows of $159.285MM after inflows of $203.703MM the week prior.


Demand in the Bank Qualified (BQ) Market Remains Strong

BQ market participants expect demand, despite the jump in issuance the past few weeks to continue to outpace supply, and therefore will focus on opportunities in both the primary and secondary markets. BQ participants continue to have significant demand for municipal paper due in large part to having to replace monthly rolloffs due to redemptions. BQ participants continue to find attractive opportunities in the new-issue market both in size and structure (15- to 20-year maturity range) in both BQ and in general market paper, due in part to the lower tax rates from tax reform and attractive yields on general market paper due to the sell-off last week.

We continue to encourage participants to utilize extension swaps, especially given the strong bids for short paper by retail investors in high tax states, as a way roll out the curve for more yield with little to no drop-off in credit quality. Also participants should be looking at credit clean-up of their portfolio in this current environment. Week-over-week, bank qualified spreads tightened, with the largest tightening occurring in the two-year maturity, 12 bps.


Daily Overview of the General Market for the Week Ending December 13th

Last Monday prices on municipals strengthened, as the first of the week’s new-issue offerings came to market. On the day, the yield on the two-year GO bond fell one bp, 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. Treasurys were mixed, as U.S. stock posted losses for the session on renewed trade worries, halting the post-jobs report rally. The Dow was down 0.38%, while the S&P was down 0.32% and the NASDAQ was down 0.40%. Also this week the FOMC is meeting in Washington to decide on interest rates. While the Fed is not expected to lower rates, market participants will be looking at the dot plot data to provide any signs of easing next year. On the day, the yield on the two-year maturity rose two bps, 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 fell to 79.8% on Monday from last Friday’s level of 80.4%, while the 30-year municipal-to-Treasury ratio slipped to 90.3% on Monday from last Friday’s level of 90.4%.

Last Tuesday prices on municipals strengthened again, as a number of new-issue offerings came to market and the Federal Reserve began its two-day monetary policy meeting. The FOMC is gathering in Washington to decide on interest rates and while it’s not expected to lower rates on Wednesday, market participants will be looking for any signs of future easing. On the day, the yields on the two-, 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. Treasurys were mixed, as U.S. stocks finished slightly lower for the session despite the Wall Street Journal reporting that American and Chinese negotiators are working to delay the December 15th duties that the United States is set to impose on Chinese imports. In addition, Democratic lawmakers announced their support for the USMCA trade deal with Mexico and Canada that will replace the North American Free Trade Agreement. The Dow and S&P were off by 0.1%, while the NASDAQ was off by 0.07%. On the day, the yields on the two- and 10-year maturities each rose two bps, while the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio fell to 78.4% on Tuesday from Monday’s level of 79.8%, while the 30-year municipal-to-Treasury was unchanged on Tuesday from Monday’s level of 90.3%.

Last Wednesday municipal prices were mixed, as more new-issue offerings flooded into the market including offerings from Connecticut, California, and Cincinnati, to name a few. In addition, the FOMC meeting yielded no surprises. In a unanimous vote, the panel left rates at a range of 1.5% to 1.75%, and offered predictions of the rate holding at that level through next year. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond fell three bps and 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 strengthened, and U.S. stocks moved slightly higher on the session as markets took kindly to the Fed’s decision to leave rates unchanged and show little inclination to make any adjustments to policy through at least the end of next year. For the session the Dow and the S&P closed up 0.11% and 0.29%, respectively, while the NASDAQ was up 0.44%. On the day, the yield on the two-year maturity fell four bps, while the yield on the 10-year maturity fell six bps and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio rose to 79.3% on Wednesday from Tuesday’s level of 78.4%, while the 30-year municipal-to-Treasury ratio bumped up to 90.6% on Wednesday from Tuesday’s level of 90.3%.

Last Thursday prices on municipals were mixed, as the last of the week’s new-issue offerings totaling just over $1.15B in issuance hit the market. On the day, the yield on the two-year GO bond was unchanged, while the yield on the 10-year GO bond rose two 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 weakened on the day, as U.S. stocks posted gains for the session on news that the United States and China are nearing a preliminary trade deal. The Dow and S&P both finished up 0.79% and 0.73% respectively, while the NASDAQ rose 0.86%. On the day, the yield on the two-year maturity rose five bps, while the yield on the 10-year maturity rose 11 bps and the yield on the 30-year maturity rose nine bps. The 10-year municipal-to-Treasury ratio fell to 75.8% on Thursday from Wednesday’s level of 79.3%, while the 30-year municipal-to-Treasury ratio fell to 88.8% on Thursday from Wednesday’s level of 90.6%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to the final full week of trading for the year and its $6.0B in new-issue long-term debt forecasted to be offered. 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 two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices strengthened, as U.S. stocks posted minimal gains on a choppy day of trading. Stocks powered ahead shortly after the open before pulling back and drifting aimlessly until they finished slightly up for the session. The Dow and S&P were both up 0.01%, respectively, while the NASDAQ was up 0.20%. On the day, the yield on the two-year maturity fell five bps, while the yield on the 10-year fell eight bps and the yield on the 30-year maturity fell six bps. The 10-year municipal-to-Treasury ratio rose to 78.0% on Friday from Thursday’s level of 75.8%, while the 30-year municipal-to-Treasury ratio rose to 90.3% on Friday from Thursday’s level of 88.8%.


Taxable Market






Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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