Muni Update

December 18, 2017


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

 

Municipal Market Recap

Municipal bond funds reported investors put cash back into funds last week, as weekly reporting funds experienced inflows of $216.923MM in the latest reporting week, after experiencing outflows of $807.203MM the week prior. The four-week moving average was positive at $42.348MM, after being in the green at $92.547MM 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 relatively range bound last week. The front-end of the general market curve came under pressure, as mutual funds kept selling shorter-dated bonds to reinvest in longer-dated bonds. This resulted in opportunities in the five- to- seven-year maturities, as they remained attractive.

U.S. Treasury prices weakened across the curve on Monday and Tuesday. On Wednesday they strengthened. On Thursday they were mixed: the front-end weakened, while bonds maturing 10 years and longer strengthened. On Friday they were mixed again, as bonds 10 years and in weakened, while the long-end strengthened. Prices on municipals also weakened Monday and Tuesday across the curve. On Wednesday they were mixed, as the front-end was steady while bonds maturing 10 years and longer strengthened. Thursday’s price action was a repeat of Wednesday’s. On Friday they were mixed again, as bonds 10 years and in weakened and the long-end strengthened. Volume for the trading week is projected to be $11.14B, which is below last week’s revised level of $16.41B, but above the weekly average for the year. 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 is full of important data and events. Most important will be Republican efforts to pass their newly reconciled (last Friday) tax bill. The new bill does increase the child tax credit as Senator Marco Rubio demanded at the last minute. Like the original Senate bill, it also ends the individual mandate, which is scheduled to actually save the government money.  The irony of this only highlights the financial challenges of healthcare. The House is expected to vote on Tuesday and Senate leader McConnell has stated that the Senate will follow shortly thereafter.

Apart from tax reform, there will be a barrage of housing reports beginning today. As the week goes on, we will also see reports on 3Q GDP (final revision), personal income and spending, consumer confidence, durable goods orders (business investment), and PCE inflation. Friday is also a recommended early close for the bond market in anticipation of the Christmas Holiday.

Last week the yields on the two- and 10-year maturities on the MMD Triple-A Scale were unchanged from Thursday to Friday and ended the week at 1.46% and 1.99%, respectively. Meanwhile, the yield on the 30-year maturity rose one basis point (bp) on the MMD Triple-A Scale from Thursday to Friday and ended the week 2.58%. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose three bps, while the yield on the 10-year GO bond rose four bps and the yield on the 30-year GO bond rose two bps.

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale were all unchanged from Thursday to Friday and they ended the week at 1.25%, 2.09%, and 2.77%. Overall, week-over-week the yields on the two- and 10-year GO maturities each rose two bps, while the yield on the 30-year maturity was unchanged.

Prices on U.S. Treasuries were weaker on Monday on Tuesday across the curve. On Wednesday they strengthened across the cure. On Thursday and Friday they were mixed. Overall, week-over-week the yield on the 10-year maturity fell two bps and closed the week at 2.36%. Meanwhile the yield on the two-year maturity rose four bps week-over-week and closed the week at 1.84%. This resulted in a week-over-week 2s/10s spread of 52 bps, six bps tighter than last week’s 2s/10s spread of 58 bps. The yield on the 30-year maturity fell eight bps and finished the week at 2.69%.

 

New Issue Volume for the Week is Estimated to be $11.14B

Total volume for the coming week is estimated to be $11.14B, which is below last week’s $16.41B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $10.98B in negotiated deals and approximately $163.3MM in competitive sales, according to data from Thomson Reuters. There are 35 deals on the calendar $100.0MM or larger in par, with all of them coming via the negotiated route.

Starting the week the New York Metropolitan Transportation Authority (MTA), will offer $608.61MM of revenue refunding bonds on Monday. The deal is rated A1 by Moody’s Investors Service (Moody’s) and AA- by S&P Global Ratings (S&P) and Fitch Ratings (Fitch). On Tuesday, the City of Houston, Texas plans to offer $1.007B of pension obligation taxable bonds. The deal is rated Aa3 by Moody’s and AA by S&P. On Wednesday the Railsplitter Tobacco Settlement Authority of Illinois will offer $678.61MM of tobacco settlement backed bonds.

 

Municipal Bond Funds Posted Inflows for the Week       

Municipal bond funds posted inflows for the week, as market participants put cash into funds, according to the latest data from Lipper. The weekly reporters saw $216.923MM of inflows, after experiencing outflows of $807.203MM the week prior. The four-week moving average was positive at $42.348MM, after being in the green at $92.547MM the week prior.

Long-term municipal bond funds had inflows of $376.086MM in the latest week after outflows of $140.663MM the week prior. Intermediate-term funds had outflows of $54.970MM after experiencing outflows of $285.696MM the week prior.  National funds had inflows of $424.665MM after outflows of $637.093MM the week prior. High-yield municipal funds reported inflows of $249.618MM in the latest week, after outflows of $236.365MM the week prior. Exchange traded funds reported inflows of $146.556MM, after inflows of $127.808MM 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 widened across the curve, with the largest widening occurring in the 10-year maturity, 20 bps.

 

Daily Overview of the General Market for the Week Ending December 15th

Last Monday prices on municipals were weaker across the curve, as the first of the week’s projected $22.88B in new issue offerings hit the market. On the day the yield on the two-year GO bond rose two bps, while the yield on the 10-year GO bond rose six bps and the yield on the 30-year GO bond rose eight bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also weaker across the curve, as stocks finished near their highs of the day and gains in the Dow and S&P were enough to cement new record highs. On the day, the yield on the two-year maturity rose three bps, while the yields on the 10- and 30-year maturities each rose one bp. The 10-year municipal-to-Treasury ratio rose to 84.1% on Monday from Friday’s level of 81.9%, while the 30-year municipal-to-Treasury ratio rose to 95.0% on Monday from Friday’s level of 92.4%.

Last Tuesday prices on municipals weakened across the curve, as issuers from California, Ohio, Virginia, Florida and the District of Columbia added to a jump in new issue offerings in the market. On the day the yield on the two-year GO bond rose one bp, while the yields on the 10- and 30-year GO bonds each rose four bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also weaker across the curve, as U.S. equities were mixed in Tuesday’s trading. The Dow marched 0.49% higher, the S&P added a more modest 0.20%, but the NASDAQ slipped 0.19%. The daily gains for the Dow and S&P pushed both indices to their third consecutive record high. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio rose to 84.7% on Tuesday from Monday’s level of 84.1%, while the 30-year municipal-to-Treasury ratio rose to 95.7% on Tuesday from Monday’s level of 95.0%.

Last Wednesday prices on municipals were mixed, as the Federal Open Market Committee voted 7-2 in favor of raising the federal funds target rate by 25 basis points to a range of 1.25% to 1.50%. The meeting marked Chair Janet Yellen’s final press conference. Municipal market participants were also eyeing tax reform talks in Washington as reports of a possible House-Senate deal made the rounds. On the day the yield on the two-year GO bond was unchanged, while the yield on the 10-year GO bond fell four bps and the yield on the 30-year GO bond fell seven bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices strengthened on the day, as investors had other issues on their minds, attempting to digest another weak inflation report released just hours before another rate increase by the Federal Reserve. The U.S. Dollar also weakened in response to the daily data, but stocks were mixed at the close. On the day, the yields on the two- and 30-year maturities each fell five bps, while the yield on the 10-year maturity fell four bps. The 10-year municipal-to-Treasury ratio rose to 85.2% on Wednesday from Tuesday’s level of 84.7%, while the 30-year municipal-to-Treasury ratio fell to 94.9% on Wednesday from Tuesday’s level of 95.7%.

Last Thursday prices on municipals were mixed, as billions in new issue paper hit the market and investors wait for final details of tax law changes affecting private activity bonds (PABs). PABs are used for multi- and single-family housing, airports, water and sewer facilities, and nonprofit hospitals and universities. On the day, the yield on the two-year GO bond was steady, while the yield on the 10- and 30- year GO bonds each fell four bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished mixed, as an opening jump for U.S. equities quickly succumbed to a slow and steady drift lower during the session. The U.S. Dollar finished stronger on a mix of notable swings against the Euro, Yen, and Canadian Dollar. 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 four bps. The 10-year municipal-to-Treasury ratio fell to 84.7% on Thursday from Wednesday’s level of 85.2%, while the 30-year municipal-to-Treasury ratio was unchanged on Thursday from Wednesday’s level of 94.9%.

Prices on municipals last Friday finished the day mixed, as market participants prepped for the estimated $11.1B in new issue paper expected to come 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. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio slipped to 84.3% on Friday from Thursday’s level of 84.7%, while the 30-year municipal-to-Treasury ratio rose to 95.9% on Friday from Thursday’s level of 94.9%.

 



 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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