Muni Update

December 3, 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. On Tuesday prices were mixed as bonds maturing 10 years and in strengthened, while the long-end weakened. On Wednesday prices were mixed again, as bonds ten years and in strengthened, while the long-end was steady. On Thursday and Friday prices strengthened across the curve. Issuance for the trading week is projected to be just under $9.0B, which is forecasted to be almost two times last week’s $4.5B in issuance, according to revised data from Thomson Reuters. This increase in new issue volume coupled with bid lists should provide market participants with opportunities to fill their needs.

 

Municipal bond funds reported investors pulled cash out for a tenth week, as weekly reporting funds experienced outflows of $378.623MM, after experiencing outflows of $332.241MM the week prior. The four-week moving average was a negative $274.449MM, after being in a negative $509.960MM the week prior. 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 yields on the two- and 10-year maturities on the MMD Triple-A Scale each fell three basis points (bps) from Thursday to Friday and ended the week at 1.92% and 2.51%, respectively. Meanwhile, the yield on the 30-year maturity on the MMD Triple-A Scale fell two bps from Thursday to Friday and ended the week at 3.22%. Overall, week-over-week the yield on the two-year General Obligation (GO) bond fell nine bps, while the yield on the 10-year GO bond fell 10 bps and the yield on the 30-year GO bond fell five bps.

 

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale each fell two bps from Thursday to Friday and they ended the week at 1.90%, 2.64% and 3.28%, respectively. Overall, week-over-week the yield on the two-year GO bond fell six bps, while the yield on the 10-year GO bond fell five bps and the yield on the 30-year GO bond fell four bps.

 

New Issue Volume is Forecasted to be Just Under $9.0B for the Trading Week

Total issuance for the trading week is estimated to be just under $9.0B, which is almost two times last week’s trading volume of $4.5B in issuance, according to revised data from Thomson Reuters. This week’s trading calendar is comprised of $8.0B in negotiated offerings and $989.3MM in competitive offerings.

Topping the calendar this week is Chicago’s airport revenue bond offering of $1.848B of general airport senior lien revenue and refunding bonds on Tuesday. The deal is equally divided into a Series 2018B tax-exempt series of senior lien general airport revenue bonds not subject to the alternative minimum tax (AMT), a Series 2018A tax-exempt General Airport Revenue Bonds (GARB) series subject to the AMT, and a Series 2018C taxable GARB series. Ahead of the sale, S&P Global Ratings (S&P) and Fitch Ratings (Fitch) affirmed their A ratings for O’Hare Airport, while Kroll Bond Rating Agency (Kroll) affirmed its A+ rating. All three assigned a stable outlook.

On Thursday the Delaware River Port Authority, of Pennsylvania plans to offer $714.0MM of tax-exempt Series 2018A revenue refunding bonds and Series 2018B taxable revenue bonds. The deal is rated A2 by Moody’s Investors Service (Moody’s) and A+ by S&P.

In the short-term sector, Nassau County, New York plans to price to $578.0MM of notes on Wednesday. The issue is composed of a Series 2018A tax anticipation notes (TANs), a Series 2018B TANs, a Series 2018A revenue anticipation notes (RANs), a Series 2018B bond anticipation notes (BANs) and a Series 2018C BANs. The deal is rated SP1 by S&P and F1 by Fitch.

In the competitive arena, the Washington Suburban Sanitary District, Maryland is selling $390.0MM of consolidated public improvement bonds of 2018. Proceeds will be used to finance various water and sewer improvements. The deal is rated AAA by Fitch Ratings.

 

Municipal Bond Funds Post Outflows for a Tenth Straight Week        

Municipal bond funds posted outflows for a tenth 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 $378.623MM, after experiencing outflows of $332.241MM the week prior. The four-week moving average was a negative $274.449MM, after being a negative $509.960MM the week prior.

Long-term municipal bond funds had outflows of $315.870MM in the latest week after experiencing outflows of $63.643MM the week prior. Intermediate-term funds had outflows of $183.646MM after outflows of $98.176MM the week prior. National funds had outflows of $275.862MM after experiencing outflows of $156.485MM the week prior. High-yield municipal funds reported outflows of $85.331MM in the latest week, after outflows of $227.862MM the week prior. Exchange traded funds reported inflows of $34.818MM, after inflows of $447.558MM 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, the primary focus of activity over the past few months has been selling shorter (6 years and in) maturities with lower yields and reinvesting out on the curve (now 20+ years due to rising yields and widening spreads). This trade continues to working well for banks because of the higher tax rates of retail investors who have been buying the shorter paper with extremely low take-out yields. Banks are looking at 12-15 year discount paper as an opportunity to pick up 4.0% coupons.

In addition, they will be looking for both the BQ and general market (GM) segments of the municipal market, as the long-end remains cheap. The primary reason is that BQ and GM opportunities are presenting chances to pick up 4.0% and higher coupons. Week-over-week, bank qualified spreads were mixed, as the one-year maturity tightened by two bps, the five-year maturity was unchanged and all other maturities widened, with the largest widening occurring in the 10-year maturity, six bps.

 

Daily Overview of the General Market for the Week Ending November 23rd

Last Monday prices on municipals were steady, as market participants were looking forward to the projected $6.0B in new money offerings for the week. New issue offerings last week included a number of big, well-known issuers, such as New York City and the Chicago Board of Education. 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 weaker, as the Dow, S&P and NASDAQ all posted gains for the session. On the day, the yield on the two-year maturity rose three 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 fell to 85.0% on Monday from last Friday’s level of 85.6%, while the 30-year municipal-to-Treasury was slipped to 98.5% on Monday from last Friday’s level of 98.8%.

Last Tuesday prices on municipals were mixed, as a number of deals for both retail and institutions were priced, paving the way for bigger issuance as the week progressed. 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 rose one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed, as U.S. equities salvaged the session with an afternoon recovery sufficient enough to erase an early-morning drop. U.S. futures predicted the weak start to trading on renewed uncertainty around U.S.-China trade, driven by a Monday afternoon WSJ interview with President Trump that had weighed on global markets overnight. On the day, the yields on the two- and 10-year maturities each fell one bp, while the yield on the 30-year maturity was unchanged. The 10-year municipal-to-Treasury was unchanged on Tuesday from Monday’s level of 85.0%, while the 30-year municipal-to-Treasury bumped up to 98.8% on Tuesday from Monday’s level of 98.5%.

Last Wednesday prices on municipals were mixed, as the $856.0MM New York City offering saw strong demand for its second day of retail pricing, and a number of other mid-sized deals were priced. On the day, the yield on the two-year 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 was steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were mixed on the day, as U.S. stock prices rose for the session. 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 two bps. The 10-year municipal-to-Treasury ratio fell to 84.3% on Wednesday from Tuesday’s level of 85.0%, while the 30-year municipal-to-Treasury ratio fell to 98.2% on Wednesday from Tuesday’s level of 98.8%.

Last Thursday prices on municipals were stronger, as a number of new offerings hit the market including the institutional pricing of the $856.0MM New York City negotiated offering, as well as the $350.0MM taxable competitive offering by New York City. On the day, the yields on the two-, 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 the day mixed, as U.S. stock prices see-sawed during the day and closed slightly down for the session. On the day, the yield on the two-year maturity was steady, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio fell to 83.8% on Thursday from Wednesday’s level of 84.3%, while the 30-year municipal-to-Treasury fell to 97.3% on Thursday from Wednesday’s level of 98.2%.

Last Friday prices on municipals strengthened, as market participants were looking ahead to the coming trading week’s almost $9.0B in new issue bond volume. On the day, the yields on the two- and 10-year GO bonds each fell three bps, while 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 also finished the day stronger, as U.S. stock prices fell for the session. On the day, the yield on the two-year maturity fell 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 slipped to 83.4% on Friday from Thursday’s level of 83.8%, while the 30-year municipal-to-Treasury bumped up to 97.6% on Friday from Thursday’s level of 97.3%.

Taxable Market





 



Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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