Muni Update

February 11, 2019


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

 

Municipal Market Recap

Municipal prices were mixed through Wednesday. On Monday the front-end was steady, while bonds maturing 10 years and longer weakened. On Tuesday the front-and long-ends were steady, while intermediate maturities weakened. On Wednesday prices were once again mixed, as the front-end was steady, while bonds maturing 10 years and longer strengthened. On Thursday and Friday municipal prices strengthened across the curve. Issuance this week is forecasted to be $6.4B, which is just above last week’s revised issuance of $6.1B. This level of issuance coupled with bid lists should provide market participants with opportunities to fill their needs, as municipals remain in demand, especially with the current above-average redemption flows.

Investors in municipal bond funds put cash into funds for a fifth week, as weekly reporting funds experienced inflows of $1.149B after experiencing inflows of $1.064B the week prior. The four-week moving average was a positive $998.486MM, after being a positive $1.099B 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 yield on the two-year maturity on the MMD Triple-A Scale fell one basis point (bp) from Thursday to Friday and ended the week at 1.61%. Meanwhile, the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell three bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 2.12% and 2.97%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond fell three bps, while the yields on the 10- and 30-year GO bonds each fell five bps.

Last week the yields on the two-year maturity on the MMA Triple-A Scale fell one bp from Thursday to Friday and ended the week at 1.67%. Meanwhile the yields on the 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 2.38% and 3.07%, respectively. Overall, week-over-week the yield on the two-year GO bond fell three bps, while the yields on the 10- and 30-year GO bonds each fell five bps.

 

New Issue Volume is Forecasted to be $6.4B for the Week

Total issuance for the trading week is estimated to be $6.4B, which is just above last week’s trading volume of $6.1B in issuance, according to revised data from Thomson Reuters. This level of issuance should be well received by market participants due to strong demand driven in large part by high redemptions. This week’s trading calendar is comprised of $5.0B in negotiated offerings and $1.4B in competitive offerings.

Starting off on Tuesday, the Dormitory Authority of the State of New York (DASNY) will offer $845.05MM of Series 2019A tax-exempt and Series 2019B taxable and taxable green bonds. The deal is rated Aa2 by Moody’s Investors Service (Moody’s) and AA- by S&P Global Ratings (S&P).

On Wednesday, Washington, D.C will offer $941.48MM in GO bonds. The deal is rated AA+ by S&P and Fitch Ratings (Fitch). Also on Wednesday, the State of Oregon plans to price $519.0MM of GO bonds. The offering will consist of Series 2019A tax-exempts, Series 2019B taxable sustainability bonds, Series 2019C taxable bonds and Series 2019D tax-exempts. The deal is rated Aa1 by Moody’s and AA+ by S&P and Fitch.

In the competitive arena, the State of Texas is selling $159.965MM of GO college student loan bonds subject to the alternative minimum tax (AMT) on Tuesday. The deal is rated AAA by S&P. The State of Delaware plans to offer $250.0MM of GO bonds on Wednesday. The deal is rated triple-A by Moody’s and S&P.

 

Municipal Bond Funds Post Inflows for a Fifth Week

Investors in municipal bond funds put cash into funds for a fifth week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $1.149B, after experiencing inflows of $1.064B the week prior. The four-week moving average was a positive $998.486MM, after being a positive $1.099B the week prior.

Long-term municipal bond funds had inflows of $712.920MM in the latest week after experiencing inflows of $546.399MM the week prior. Intermediate-term funds had inflows of $604.747MM after inflows of $462.466MM the week prior. National funds had inflows of $1.013B after experiencing inflows of $802.305MM the week prior. High-yield municipal funds reported inflows of $296.447MM in the latest week, after inflows of $295.001MM the week prior. Exchange traded funds reported outflows of $378.137MM, after outflows of $239.027MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

Last week, the BQ market had good activity, due in part to new issue opportunities and secondary market bid lists that continue to be well received. With rolloffs expected to continue at a brisk pace, BQ participants will continue to have significant demand for BQ paper. The projected level of new issue paper this week, together with secondary market opportunities should provide market participants with the chance to address their needs while picking up attractive structures, especially those in the long-end of the curve. For banks, selling shorter maturities with lower yields and reinvesting out on the curve (now 15+ years) is again presenting an opportunity for banks because of the higher tax rates of retail investors who have been buying the shorter paper with extremely low take-out yields. Participants should also continue to utilize extension swaps, as the bid side for municipals continues to remain strong. Week-over-week, bank qualified spreads widened across the curve, with the largest widening occurring in the five-year maturity, six bps.

 

Daily Overview of the General Market for the Week Ending February 8th

Last Monday prices on municipals were mixed, as market participants were looking forward to the $7.2B in new issue offerings scheduled for the week. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond rose one bp 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 weaker, as stocks posted gains for the session. On the day, the yield on the two-year maturity rose one bp, while the yields on the 10- and 30-year maturities each rose three bps. The 10-year municipal-to-Treasury ratio fell 79.9% on Monday from last Friday’s level of 80.4%, while the 30-year municipal-to-Treasury ratio was unchanged on Monday from last Friday’s level of 99.7%.

Last Tuesday prices on municipals were mixed, as Washington State and Hawaii kicked off the action in the primary market. On the day, the yields on the two- and 30-year GO bonds were steady, while the yield on the 10-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. stocks rose to take the S&P 500 index higher for a fifth consecutive session, matching the longest stretch since February 2018. On the day, the yield on the two-year maturity were steady, 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 ratio rose to 80.8% on Tuesday from Monday’s level of 79.9%, while the 30-year municipal-to-Treasury rose to 100.7% on Tuesday from last Monday’s level of 99.7%.

Last Wednesday prices on municipals were mixed again, as a number of new deals came to market. On the day, the yield on the two-year GO bond was steady, 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. Treasuries were mixed, as U.S. stocks faded after an opening jump and spent the rest of the session stuck in modestly negative territory. 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 steady. The 10-year municipal-to-Treasury ratio slipped to 80.4% on Wednesday from Tuesday’s levels of 80.8%, while the 30-year municipal-to-Treasury ratio fell to 100.0% on Wednesday from Tuesday’s level of 100.7%.

Last Thursday prices on municipals strengthened across the curve, as the last of the week’s new issuance came to market. On the day, the yield on the two-year GO bond fell two bps, while the yields on the 10- and 30-year GO bonds each fell three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day stronger, as U.S. equity markets finished down on the day. On the day, the yield on the two-year maturity fell four bps, while the yield on the 10-year maturity fell five bps and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio bumped up to 80.08% on Thursday from Wednesday’s level of 80.4%, while the 30-year municipal-to-Treasury was unchanged on Thursday from Wednesday’s level of 100.0%.

Last Friday, prices on municipals were stronger again, as market participants were looking ahead to the coming trading week’s $6.4B in new issuance offerings. On the day, the yield on the two-year GO bond fell one bp, while the yield on the 10- GO bond fell two bps and the yield on the 30-year GO bond fell three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were also stronger across the curve, as U.S. equity markets finished the day mixed. The Dow was down, while the S&P and NAQDAQ finished slightly up for the session. On the day, the yields on the two- and 30-year maturities each fell three bps, while the yield on the 10-year maturity fell two bps. The 10-year municipal-to-Treasury slipped to 80.6% on Friday from Thursday’s level of 80.8%, while the 30-year municipal-to-Treasury ratio was unchanged on Friday from Thursday’s level of 100.0%.





 

 



Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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