Muni Update

December 4, 2017


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

 

Municipal Market Recap

Municipal bond funds reported investors put cash into funds for a fourth week, as weekly reporting funds experienced inflows of $100.434MM in the latest reporting week, after experiencing inflows of $659.237MM the week prior. The four-week moving average was positive at $410.109MM, after being in the green at $221.250MM 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 volatile last week, as yields surged higher for the first three days and then fell the last two days. Many market participants expect more of the same as we head to year-end.

U.S. Treasury prices started the trading week mixed, as bonds 10 years and in strengthened, while the long-end weakened. They were mixed again on Tuesday, as bonds ten years and in weakened, while the long-end was steady. On Wednesday and Thursday they weakened across the curve. On Friday they strengthened across the curve. Prices on municipals weakened daily through Wednesday. On Thursday they were mixed, as the front-end was steady and bonds 10 years and longer strengthened. On Friday they strengthened across the curve. Volume for the trading week is projected to be $18.39B, which is well above last week’s revised level of $9.32B. The rise in supply is due to the potential sunset of certain municipal issue options due to potential tax reform. This increased supply level, together with secondary market opportunities, should address the continued strong demand for municipal bonds and the upcoming January redemptions.

The economic calendar this week is more manageable than last week.  We will get information on factory orders on Monday and October’s trade balance data on Tuesday. Also on Tuesday, the ISM will release its latest services sector index.  Wednesday’s focus will be primarily on ADP’s private payroll data and secondarily on 3Q productivity and unit labor costs. Thursday should be quiet with weekly jobless claims activity and two midday reports on the consumer balance sheet.  Friday’s data will be the most important. The BLS’s nonfarm payroll report for November is expected to show that 198k net jobs were added last month and the unemployment rate held at 4.1%. More importantly, however, are expectations for the average hourly earnings data. Earnings are expected to have gained 0.3% last month after flat lining in October, which would boost the YoY growth rate up from a disappointing 2.4% to a mildly more attractive 2.7%.

Away from the data, Washington will remain in focus. Senate Republicans voted just before 1 a.m. CT Saturday morning to pass their version of a tax reform bill. With the House and Senate now both having successfully, and individually, agreed on changes to the current tax code, the process will send those versions to a conference committee. In committee, the differences will have to be ironed out so that one bill can be sent back to both chambers for a vote. Also on the radar in Washington will be what happens with a spending bill. Current spending is authorized under a continuing resolution, which expires on Friday, alongside the debt ceiling. If no agreement is reached on a spending bill, the government will shut down upon expiration. While the debt ceiling will ultimately have to be settled, current estimates are that the U.S. Treasury could make do until early spring of 2018 by using extraordinary measures.

Last week the yield on the two-year maturity on the MMD Triple-A Scale fell four basis points (bps) from Thursday to Friday and ended the week at 1.53%. Meanwhile, the yield on the 10-year maturity fell eight bps and the yield on the 30-year maturity fell 11 bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 2.07% and 2.68%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose 13 bps, while the yield on the 10-year GO bond fell one bp and the yield on the 30-year GO bond fell eight bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale fell three bps from Thursday to Friday and ended the week at 1.29%. Meanwhile, the yield on the 10-year maturity fell six bps and the yield on the 30-year maturity fell seven bps on the MMA Triple-A Scale from Thursday to Friday and they ended the week at 2.15% and 2.88%, respectively. Overall, week-over-week the yield on the two-year GO maturity rose seven bps, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity fell three bps.

Prices on U.S. Treasuries were mixed on Monday and Tuesday. On Wednesday and Thursday they weakened across the curve. On Friday they reversed course and strengthened across the curve to close the week. Overall, week-over-week the yield on the 10-year maturity rose two bps and closed the week at 2.36%. Meanwhile the yield on the two-year maturity also rose two bps week-over-week and closed the week at 1.77%. This resulted in an unchanged week-over-week 2s/10s spread of 59 bps. The yield on the 30-year maturity was unchanged week-over-week and finished the week at 2.76%.

 

New Issue Volume for the Week is Estimated to be $18.39B

Total volume for the coming week is estimated to be $18.39B, which is well above last week’s $9.32B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $15.51B in negotiated deals and approximately $1.88B in competitive sales, according to data from Thomson Reuters.

The San Jose Successor Agency to its former Redevelopment Agency’s plans to offer $1.67B of senior taxable and tax-exempt allocation refunding bonds in two separate sales on Wednesday, with the larger sale expected to be $1.34B. The larger deal carries ratings of AA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch), while the other has ratings of AA-minus by S&P and Fitch. According to representatives of the organization, the deal does include a tiny portion of advance refunding, but the vast majority is a regular refunding, which has been planned for a long time.

Miami-Dade County will offer $958.74MM of water and sewer system revenue and refunding bonds on Thursday after a one-day retail order period.  County officials hope that the deal will save ratepayers millions in debt service on its advance refunding component. The Trinity Health Credit Group will offer $900.0MM of tax-exempt bonds on Tuesday, after a one-day retail order period. Approximately $775.0MM will be offered through the Michigan Finance Authority, $43.0MM will be issued through the Idaho Health Facilities Authority, and $75.0MM will be issued via Franklin County, Ohio. The deal is rated Aa3 by Moody’s Investors Service (Moody’s) and AA-minus by Fitch. New York City plans to price $850.0MM of GO bonds on Tuesday. The deal is rated Aa2 by Moody’s and AA by S&P and Fitch.

 

Municipal Bond Funds Posted Inflows for the Fourth 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 $100.434MM of inflows, after experiencing inflows of $659.237MM the week prior. The four-week moving average was positive at $410.109MM, after being in the green at $221.250MM the week prior.

Long-term municipal bond funds had inflows of $185.461MM in the latest week after inflows of $434.368MM the week prior. Intermediate-term funds had inflows of $18.641MM after experiencing inflows of $112.175MM the week prior. National funds had inflows of $136.295MM after inflows of $642.814MM the week prior. High-yield municipal funds reported inflows of $71.670MM in the latest week, after inflows of $177.142MM the week prior. Exchange traded funds reported inflows of $61.076MM, after inflows of $83.606MM 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 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 steepest part of the curve (15+ years).  Participants will continue to utilize extension swaps and perform portfolio cleanup, as the bid side for municipals continues to remain strong. The short-end (5 years and in) continues to perform extremely well due to demand driven by the retail sector, thus making extension swaps extremely attractive with the ability to increase yield in the portfolio. Week-over-week, bank qualified spreads widened, with the largest widening in the three-year maturity, 19 bps.

 

Daily Overview of the General Market for the Week Ending December 1st

Last Monday prices on municipals were weaker, as market participants were focused on the $10.0B plus in new issue offerings last week, as well as the burgeoning new issue calendar, as participants waited for a U.S. Senate vote on tax reform.  On the day the yield on the two-year GO bond rose five bps, while the yield on the 10-year GO bond rose four 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 mixed, as were U.S. stocks. A modest 0.1% gain for the Dow was offset by similar modest losses for the S&P and NASDAQ. The U.S. Dollar recovered against most currencies except the yen and closed near its highest level of the day. 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 rose one bp. The 10-year municipal-to-Treasury ratio rose to 91.4% on Monday from Friday’s level of 88.9%, while the 30-year municipal-to-Treasury ratio rose to 100.7% on Monday from Friday’s level of 100.0%.

Last Tuesday prices on municipals weakened, as the market was buzzing with activity and issuers rushed to sell bonds that may no longer be allowed next year, creating an opportunity for buyers. On the day the yield on the two-year GO bond rose five 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, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as U.S. stocks rose on the day and closed at new all-time highs. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity rose two bps and the yield on the 30-year maturity was steady. The 10-year municipal-to-Treasury ratio rose to 92.3% on Tuesday from Monday’s level of 91.4%, while the 30-year municipal-to-Treasury ratio rose to 101.4% on Tuesday from Monday’s level of 100.7%.

Last Wednesday prices on municipals were once again weaker, as issuers flooded the market ahead of the possibility of tax reform. On the day the yield on the two-year GO bond rose seven bps, while the yield on the 10-year GO bond rose five 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 across the curve on Wednesday, as the three major equity indices had a mixed performance on the day. The NASDAQ tumbled, while the Dow rose and the S&P was relatively unchanged. 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 four bps. The 10-year municipal-to-Treasury ratio rose to 93.3% on Wednesday from Tuesday’s level of 92.3%, while the 30-year municipal-to-Treasury ratio was unchanged on Wednesday from Tuesday’s level of 101.4%.

Last Thursday prices on municipals were mixed, as billions in new issue paper hit the market on speculation that some municipal exemptions may be preserved in the final tax bill. 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 six bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as all three major indices notched healthy gains with the Dow and the S&P finishing at new record highs. 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 four bps. The 10-year municipal-to-Treasury ratio fell to 89.2% on Thursday from Wednesday’s level of 93.3%, while the 30-year municipal-to-Treasury ratio fell to 98.6% on Thursday from Wednesday’s level of 101.4%.

Prices on municipals last Friday finished the day stronger, as market participants prepped for the estimated $18.39B in new issue paper expected to come to market. On the day, the yield on the two-year GO bond fell four bps, while the yield on the 10-year GO bond fell eight bps and the yield on the 30-year GO bond fell 11 bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day stronger. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity fell five bps and the yield on the 30-year maturity fell seven bps. The 10-year municipal-to-Treasury ratio fell to 87.7% on Friday from Thursday’s level of 89.2%, while the 30-year municipal-to-Treasury ratio fell to 97.1% on Friday from Thursday’s level of 98.6%.

 



 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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