Muni Update

December 17, 2018


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

 

Municipal Market Recap

Monday saw prices on municipals start the week steady across the curve. Tuesday through Thursday saw prices mixed daily. On Tuesday bonds in the front-end were steady, while bonds maturing 10 years and longer weakened. On Wednesday bonds ten years and in were steady, while bonds on the long-end weakened. Thursday’s price action was a repeat of Wednesday’s. On Friday prices were steady across the curve. Issuance for the trading week is projected to be $1.0B, well below last week’s revised total of $7.8B, according to updated data from Thomson Reuters. This low level of issuance is expected given that it is the last full week of trading for the year, ahead of the Christmas and New Year’s Holidays. In addition, Wednesday is the Federal Open Market Committees (FOMC) meeting, and the Fed is expected to move forward with a final rate hike of 2018 bringing the target range to 2.25-2.50%.

Municipal bond funds reported investors pulled cash out for a 12th week, as weekly reporting funds experienced outflows of $316.517MM, after experiencing outflows of $692.041MM the week prior. The four-week moving average was a negative $429.855MM, after being in a negative $383.506MM the week prior. We note, that Bloomberg and CreditSights believe that the recent pullback in municipal bond mutual funds is more tax-related than a sign that investors are growing more bearish on the $3.8T municipal market. The retreat came before funds begin sending out payments to shareholders that reflect their gains on the sale of securities this year, these gains are taxed. Investors may have pulled their money out beforehand to minimize what they’ll owe the federal government next year. On the other hand, while mutual funds were losing cash, municipal-bond ETFs pulled in $504.0MM during the week ended last Wednesday. ETFs don’t typically have to pay out capital-gains distributions, because when shareholders want to sell, they can do that in the stock market. Even with all this a action in funds, investors still facing 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 in the U.S. municipal market.

Last week the yield on the two, 10- and 30-year maturities on the MMD Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 1.83%, 2.40% and 3.17%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond was unchanged, while the yield on the 10-year GO bond rose two basis points (bps) and the yield on the 30-year GO bond rose seven bps.

Last week the yield on the two- and 10-year maturities on the MMA Triple-A Scale rose were unchanged from Thursday to Friday and they ended the week at 1.96% and 2.61%, respectively. Meanwhile, the yield on the 30-year maturity fell one bp on the MMA Triple-A Scale from Thursday to Friday and ended the week at 3.252%. Overall, week-over-week the yield on the two-year General Obligation (GO) bond rose 12 bps, while the yields on the 10- and 30-year GO bonds each rose four bps.

 

New Issue Volume is Forecasted to be just under $1.0B for the Trading Week

Total issuance for the trading week is estimated to be just under $1.0B, which is well below e last week’s trading volume of $7.8B in issuance, according to revised data from Thomson Reuters. This week’s light calendar is expected given that it is the last full week of trading ahead of the end of year holidays’. This week’s calendar is comprised of $832.0MM in negotiated offerings and $175.1MM in competitive offerings.

Topping the calendar this week is the San Juan Unified School District, Sacramento County, California’s $230.0MM GO bonds offering set for on Tuesday. The offering is composed of Election of 2012 Series 2019 Measure N GOs and Election of 2016 Series 2019 Measure P GOs. The deal is rated Aa2 by Moody’s Investors Service (Moody’s) and AAA by Fitch Ratings (Fitch). Also on Tuesday Allentown Neighborhood Improvement Zone Development Authority, Pennsylvania plans to offer $149.0MM of Series 2018 subordinate tax revenue bonds for the City Center project. The deal is unrated.

On Wednesday, the Colorado Health Facilities Authority plans to offer $136.0MM of improvement and refunding revenue bonds consisting of Series 2018A-1 for the Bethesda project, Series 2018A-2 taxable bonds and Series 2018B second tier bonds. The deal is rated A- by S&P Global Ratings (S&P).

There are no competitive deals on the calendar larger than $100.0MM. The biggest competitive sale of the week will be Stratford, Connecticut’s $70.0MM offering of Series 2018 GO bonds on Wednesday.

 

Municipal Bond Funds Post Outflows for a 12th Straight Week        

Municipal bond funds posted outflows for a 12th straight week, as market participants pulled cash out of funds for the week, according to the latest data from Lipper. The weekly reporting funds saw outflows of $316.517MM, after experiencing outflows of $692.041MM the week prior. The four-week moving average was a negative $429.855MM, after being a negative $383.506MM the week prior.

Long-term municipal bond funds had outflows of $417.609MM in the latest week after experiencing outflows of $516.300MM the week prior. Intermediate-term funds had outflows of $1.024B after outflows of $256.528MM the week prior. National funds had outflows of $134.066MM after experiencing outflows of $503.919MM the week prior. High-yield municipal funds reported inflows of $160.424MM in the latest week, after outflows of $146.985MM the week prior. Exchange traded funds reported inflows of $642.771MM, after inflows of $257.596MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The BQ market continues to see decent two – way flows with both buying and selling from market participants. For banks, with January 1st and January 15th being large rolloff dates, BQ participants should be looking to address their coming needs while picking up attractive structures, especially those in the long-end of the curve which are presenting chances to pick up higher coupons. Participants should also continue to utilize extension swaps and perform portfolio cleanup, as the bid side for municipals continues to remain strong. Week-over-week, bank qualified spreads were mixed, as the one-year maturity widened by one bp and the 30-year maturity was unchanged. The two-, three-, five-, 10- and 15-year maturities all tightened, with the largest tightening occurring in the five-year maturity, five bps.

 

Daily Overview of the General Market for the Week Ending December 14th

Last Monday prices on municipals were steady, as market participants looked forward to the projected almost $8.1B in new money offerings for the week. 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.

Prices on U.S. Treasuries were mixed, as U.S. equities stumbled out of the gates, extending last Friday’s steep sell-off that capped the worst week for the major indices since March. However, stocks found their footing a couple of hours in, as a positive reversal in tech led the major indices on a gradual climb higher and into positive territory before the close. On the day, the yields on the two- and 10-year maturities were unchanged, while the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio was unchanged on Monday from last Friday’s level of 83.5%, while the 30-year municipal-to-Treasury ratio bumped up to 99.0% on Monday from last Friday’s level of 98.7%.

Last Tuesday prices on municipals were mixed, as a number of deals including the biggest deal of the week, the Dormitory Authority of the State of New York’s $1.5B of state personal income tax revenue bonds came to market. On the day, the yield on the two-year GO was unchanged, while the yield on the 10-year GO bond rose two bps and the yield on the 30-year GO bond rose three bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed, as U.S. equities jumped up out of the gates, before dropping back on the day. The Dow and the S&P closed down, while the NASDAQ posted some gains on the session. On the day, the yield on the two-year maturity rose six bps, while the yield on the 10-year maturity rose four bps and the yield on the 30-year maturity was steady. The 10-year municipal-to-Treasury ratio fell to 83.0% on Tuesday from Monday’s level of 83.5%, while the 30-year municipal-to-Treasury ratio rose to 100.0% on Tuesday from Monday’s level of 99.0%.

Last Wednesday prices on municipals were mixed, as a number of deals came to market. On the day, the yields on the two- and 10-year GO bonds were unchanged, while the yield on the 30-year GO bond rose three bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed, as U.S. equities posted gains for the sessions. On the day, the yield on the two-year maturity fell one bp, while the yields on the 10- and 30-year maturities each rose two bps. The 10-year municipal-to-Treasury ratio fell to 82.5% on Wednesday from Tuesday’s level of 83.0%, while the 30-year municipal-to-Treasury ratio bumped up to 100.3% on Wednesday from Tuesday’s level of 100.0%.

Last Thursday prices on municipals were mixed again, as the last of the week’s new issue offerings came to market. On the day, the yields on the two- and 10-year GO bonds were steady, while the yield on the 30-year GO bond rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mixed, as stocks had a mixed session in the morning with the S&P 500 spending the better half of the session moving sideways in negative territory. A late afternoon recovery, however, cut the index’s roughly 0.5% loss to nil by the close. On the day, the yield on the two-year maturity fell two bps, while the yield on the 10-year maturity was steady and the yield on the 30-year maturity rose one bp. Both the 10- and 30-year municipal-to-Treasury ratios were unchanged on Thursday from Wednesday’s levels of 82.5% and 100.3%, respectively.

Last Friday prices on municipals were steady, as market participants were looking ahead to the coming trading week’s $1.0B in new issue bond volume. 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 finished the day stronger, as U.S. stock prices fell for the session. On the day, the yields on the two-, 10- and 30-year maturities each fell by two bps. The 10-year municipal-to-Treasury ratio rose to 83.0% on Friday from Thursday’s level of 82.5%, while the 30-year municipal-to-Treasury ratio rose to 101.0% on Friday from Thursday’s level of 100.3%.







Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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