Muni Update

February 12, 2018


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 fifth week, as weekly reporting funds experienced inflows of $674.908MM, after experiencing inflows of $235.926MM the week prior. The four-week moving average was positive at $717.654MM, after being positive at $815.115MM 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, especially as yields have begun to rise recently.

U.S. Treasury prices started the trading week stronger across the curve. On Tuesday and Wednesday prices were weaker across the curve. On Thursday they were mixed, as the front-end was steady, while bonds maturing 10 years and longer weakened. On Friday they were mixed, as bonds 10 years and in strengthened, while the long-end was steady. Prices on municipals were mixed on Monday, as bonds 10 years and in were steady, while the long end weakened. On Tuesday they were stronger across the curve. On Wednesday municipal prices were mixed again, as the front-end was steady, while bonds maturing 10 years and longer weakened. Thursday’s price action was a repeat of Wednesday’s. On Friday municipal prices were steady across the curve. Despite the past week’s slight drop in municipal yields, they are still looking cheap on a taxable-equivalent-yield basis across the tax rate spectrum. Volume for the week is projected to be $3.52B, which is just below last week’s revised level of $3.58B and reflects another week of a smaller-than-average slate of new issue offerings. This lower level of supply year-to-date was anticipated due to the run up in supply prior to the close of last year due to the enacted tax reform.

This week’s economic calendar is much busier than last week. The most important reports of the week are scheduled for Wednesday, when the January reports on CPI, inflation, and Retail Sales will be released. These are of particular importance given the impact of rising inflation expectations on the markets over the past few weeks. Any data pointing to rising prices could have an outsized response from stocks and/or bonds. We do note, however, that core CPI is currently projected to rise just 0.2% month-over-month (MoM), which would bring the year-over-year (YoY) rate down from 1.8% to 1.7%. Retail sales data will also be important given the importance of a strong consumer in today’s economic cycle. January is generally the month to return holiday gifts, but the Census Bureau attempts to control for that effect with its seasonal adjustment. Based on their credit card data, Bank of America projects retail sales rose 0.3% MoM which would be a solid start to 2018.

Last week the yields on the two-, 10- and 30-year maturities on the MMD Triple-A Scale were all unchanged from Thursday to Friday and ended the week at 1.51%, 2.42% and 2.97%, respectively. Overall, week-over-week the yields on the two- and 10-year general obligation (GO) bonds each fell four basis points (bps), while the yield on the 30-year GO bond fell three 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 ended the week at 1.60%, 2.40% and 3.03%, respectively. Overall, week-over-week the yield on the two-year GO bond fell one bp, while the yield on the 10-year GO bond was unchanged and the yield on the 30-year GO bond fell three bps.

Prices on U.S. Treasuries started the week stronger across the curve. On Tuesday and Wednesday they weakened. On Thursday and Friday they were mixed. Overall, week-over-week the yield on the 10-year maturity was unchanged and closed the week at 2.84%. Meanwhile the yield on the two-year maturity fell eight bps week-over-week and closed the week at 2.07%. This resulted in a week-over-week 2s/10s spread of 77 bps, eight bps wider than last week’s 2s/10s spread of 69 bps. The yield on the 30-year maturity rose six bps and finished the week at 3.14%.

 

Volume to be $3.52B for the Trading Week

Total volume for the coming week is estimated to be $3.52B, which is just slightly below the $3.58B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $2.7B in negotiated deals and approximately $824.0MM in competitive sales.

This week’s calendar is dominated by the Pennsylvania Commonwealth Financing Authority’s $1.39B of tobacco master settlement payment revenue bonds. The deal is rated A1 by Moody’s Investors Service (Moody’s), A by S&P Global Ratings (S&P) and A+ by Fitch Ratings (Fitch). The deal is set to price on Tuesday. Also on Tuesday is a taxable corporate CUSIP deal from Community Health Network Inc. in Indiana. The offering will be $202.0MM of Series 2018 bonds structured as a 2058 bullet. The deal is rated A2 by Moody’s and A by S&P.

 

Municipal Bond Funds Posted Inflows for a Fifth Week       

Municipal bond funds posted inflows for a fifth week, as market participants put cash into funds, according to the latest data from Lipper. The weekly reporters saw $674.908MM of inflows, after experiencing inflows of $235.926MM the week prior. The four-week moving average was positive at $717.654MM, after being positive at $815.115MM the week prior.

Long-term municipal bond funds had inflows of $36.688MM in the latest week after inflows of $170.114MM the week prior. Intermediate-term funds had inflows of $391.078MM after experiencing inflows of $264.852MM the week prior. National funds had inflows of $686.135MM after inflows of $347.233MM the week prior. High-yield municipal funds reported outflows of $572.375MM in the latest week, after outflows of $143.414MM the week prior. Exchange traded funds reported inflows of $53.734MM, after experiencing outflows of $16.893MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

Last week, the BQ market saw good activity, even with the light level of new issue supply, as secondary market bid lists were well received. BQ participants continue to have significant demand for BQ paper due in part to having to replace rolloffs due to the high level of redemptions. This week’s new issue opportunities are light again, so market participants should be looking for opportunities in both primary offerings and secondary market opportunities to provide them the chance to address their needs, especially those seeking attractive structures in the long-end of the curve. Participants should also continue to utilize extension swaps and perform portfolio cleanup. Week-over-week, bank qualified spreads widened across the curve, with the largest widening occurring in the two-year maturity, 14 bps.

 

Daily Overview of the General Market for the Week Ending February 9th

Last Monday prices on municipals were mixed, as market participants prepped for the upcoming week’s light new issue calendar. 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 one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger on the day, as U.S. Stocks continued their selloff that started last Friday. The continued sell-off, while still a ripple effect of both an actual and an expected higher interest rate environment, drove a bid for safety that sent Treasury yields into a decline across the curve. On the day, the yield on the two-year maturity fell seven bps, while the yield on the 10-year maturity fell nine bps and the yield on the 30-year maturity fell five bps. The 10-year municipal-to-Treasury ratio rose to 89.5% on Monday from last Friday’s level of 86.6%, while the 30-year municipal-to-Treasury ratio rose to 99.3% on Monday from Friday’s level of 97.4%.

Last Tuesday prices on municipals were stronger, as market participants adopted a cautious tone, waiting for trading volatility to die down before jumping back into the market. On the day the yield on the two-year GO bond fell four bps, while the yields on the 10- and 30-year GO bonds each fell nine bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker across the curve, as U.S. Stocks whipsawed between positive and negative territory several times and notched a second straight day with a greater than 1,100-point trading range. The big blue-chip index finished up 567 points, or 2.3%. The S&P was equally as volatile and managed to convert a 2.1% drop at the open into a 1.7% daily gain, the largest since November 2016. Despite the net recovery on Tuesday, the prior two days’ turmoil was enough to leave the Dow and S&P down 4.9% and 4.5% from last Thursday’s close. For some longer perspective on the recent swings, however, both indices are still holding most of their post-election gains. 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 two bps. The 10-year municipal-to-Treasury ratio fell to 85.6% on Tuesday from Monday’s level of 89.5%, while the 30-year municipal-to-Treasury ratio fell to 95.7% on Tuesday from Monday’s level of 99.3%.

Last Wednesday prices on municipals were mixed, as a number of deals priced. Despite the activity in the new issue market, some market participants, mainly retail investors, stayed on the sidelines due to continuing market volatility curbing their enthusiasm. On the day the yield on the two-year GO bond was steady, while the yields on the 10- and 30-year GOs each rose two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were weaker, as a valiant effort by the major U.S. equity indices ultimately came up short. Last-minute selling erased hard-earned gains and pushed the major indices to a negative close near the lows of the day. 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 seven bps. The 10-year municipal-to-Treasury ratio fell to 84.2% on Wednesday from Tuesday’s level of 85.6%, while the 30-year municipal-to-Treasury ratio fell to 94.2% on Wednesday from Tuesday’s level of 95.7%.

Last Thursday prices on municipals were mixed, as the last of the week’s deals were digested. 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 rose three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished Thursday mixed, as investors continued to search for a balance between higher interest rates and appropriate stock valuations, as a jump in longer yields once again battered U.S. equities. The Dow ultimately sank 4.15%, losing more than 1,000 points for a second time this week, and officially entered a correction. The S&P tumbled 3.75%, also into correction territory, and the NASDAQ dropped 3.90%. On the day, the yield on the two-year maturity was steady, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio rose to 84.9% on Thursday from Wednesday’s level of 84.2%, while the 30-year municipal-to-Treasury ratio rose to 94.6% on Thursday from Wednesday’s level of 94.2%.

Prices on municipals last Friday finished the trading day steady, as market participants were looking ahead to next week’s new issue calendar. On the day, the yields on the two-, 10- and 30-year GO bonds were all steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the trading session mixed, as U.S. Stocks rebounded from Thursday’s losses to finish the day in positive territory. On the day, the yield on the two-year maturity fell seven bps, while the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity was unchanged. The 10-year municipal-to-Treasury ratio rose to 85.2% on Friday from Thursday’s level of 84.9%, while the 30-year municipal-to-Treasury ratio was unchanged on Friday from Thursday’s level of 94.6%.

 





Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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