Muni Update

February 20, 2018



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

 

Municipal Market Recap

Municipal bond funds reported investors pulled cash out, as weekly reporting funds experienced outflows of $443.409MM, after experiencing inflows of $674.908MM the week prior. The four-week moving average was positive at $312.146MM, after being positive at $717.654MM the week prior. We note that the bulk of fund inflows in 2018 have been into national funds, not into funds of high tax states. 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 continue to rise.

U.S. Treasury prices on Monday were mixed, as bonds 10 years and in weakened and the long-end was steady. On Tuesday they were mixed again, as the front-end weakened, while bonds 10 years and longer strengthened. On Wednesday they were weaker across the curve. On Thursday they were mixed, as the front-end weakened, while bonds maturing 10 years and longer strengthened. Friday’s price action was a repeat of Thursday’s. Prices on municipals were mixed daily for the week. On Monday bonds 10 years and in weakened, while the long-end was steady. On Tuesday the front-end was steady, while intermediate maturities strengthened and the long-end weakened. On Wednesday the front-end was steady, while bonds maturing 10 years and longer weakened. On Thursday the front- and long-ends were steady, while the 10 year maturity weakened. On Friday the front-end was steady, while bonds 10 years and longer strengthened. Volume for the holiday shortened trading week is projected to be $5.8B, which is above last week’s revised level of $3.9B. Supply is running on pace for about $215.0B for the year, and the 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 enacted tax reform. Market participants appear to be confident that this lower overall projected level of supply will not be sustained and that supply will start to pick up in mid-to-late spring.

This week’s economic calendar is fairly light, with the market’s biggest focus this week likely to be the Treasury’s scheduled issuance. The Treasury is scheduled to issue $28.0B in two-year notes today, $35.0B in five-year notes on Wednesday, and $29.0B in seven-year notes on Thursday. As the Fed is backing away from reinvesting the cashflows from its $4.0T portfolio and fiscal authorities have approved surprising new levels of deficit spending (which will require increased debt issuance), investors are growing more concerned about the amount of demand with which issuance will be met. As to actual economic reports this week, people will focus on the January Existing Home Sales and the FOMC Minutes, both to be released on Tuesday. The FOMC Minutes are from their January 31 meeting, which took place right before the recent stock market volatility began and the run of stronger-than-expected earnings and inflation data.

Last week the yield on the two-year maturity on the MMD Triple-A Scale was unchanged from Thursday to Friday and it ended the week at 1.52%. Meanwhile, the yields on the 10- and 30-year maturities on the MMD Triple-A Scale each fell one basis point (bp) from Thursday to Friday and ended the week at 2.46% and 3.02%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose one bp, while the yield on the 10-year GO bond rose four bps and the yield on the 30-year GO bond rose five bps.

Last week the yields on the two- and 10-year maturities on the MMA Triple-A Scale were all unchanged from Thursday to Friday and ended the week at 1.62% and 2.44%, respectively. Meanwhile, the yield on the 30-year maturity on the MMA Triple-A Scale fell one bp from Thursday to Friday and ended the week at 3.07%. Overall, week-over-week the yield on the two-year GO bond rose two bps, while the yields on the 10- and 30-year GO bonds each rose four bps.

Prices on U.S. Treasuries were mixed on Monday and Tuesday. On Wednesday they weakened across the curve. On Thursday and Friday they were mixed again. Overall, week-over-week the yield on the 10-year maturity rose four bps and closed the week at 2.88%. Meanwhile the yield on the two-year maturity rose 14 bps week-over-week and closed the week at 2.21%. This resulted in a week-over-week 2s/10s spread of 67 bps, 10 bps tighter than last week’s 2s/10s spread of 77 bps. The yield on the 30-year maturity was unchanged week-over-week, and finished the week at 3.14%.

 

Volume to be $5.8B for the Trading Week

Total volume for the coming week is estimated to be $5.8B, which is above the $3.9B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $4.5B in negotiated deals and approximately $1.3B in competitive sales. Dominating this week’s slate are two deals from opposite ends of the county.

The Los Angeles Unified School District (LAUSF), plans to offer two deals totaling $1.35B in GO bonds. The first offering will consist of the Election of 2005 series 2018M-1 tax-exempts and Series 2018M-2 taxables. The second offering will consist of the Election of 2008 Series 2018B-1 tax-exempts and Series 2018B-2 taxables. The tax-exempts are rated Aa2 by Moody’s Investors Service (Moody’s) and AAA by Fitch Ratings (Fitch), while the taxables are rated Aa2 by Moody’s and F1+ by Fitch.

New York City (NYC) plans to price $700.0MM of tax-exempt fixed-rate GO bonds on Thursday after a two-day retail order period. Also on Thursday, NYC will offer competitively $250.0MM of taxable fixed-rate bonds in two separate offerings consisting of $188.11MM and $61.89MM GOs. Proceeds of the sale will be used to fund capital projects and to convert some outstanding floating-rate bonds into fixed-rate bonds. NYC is rated Aa2 by Moody’s and AA by Fitch.

 

Municipal Bond Funds Posted Outflows for the Week       

Municipal bond funds posted outflows last week, as market participants pulled cash out of funds, according to the latest data from Lipper. The weekly reporters saw $443.409MM of outflows, after experiencing inflows of $674.908MM the week prior. The four-week moving average was positive at $312.146MM, after being positive at $717.654MM the week prior.

Long-term municipal bond funds had outflows of $102.806MM in the latest week after inflows of $36.688MM the week prior. Intermediate-term funds had inflows of $201.425MM after experiencing inflows of $391.078MM the week prior. National funds had outflows of $410.442MM after inflows of $686.135MM the week prior. High-yield municipal funds reported inflows of $20.088MM in the latest week, after outflows of $572.375MM the week prior. Exchange traded funds reported outflows of $60.759MM, after inflows of $53.734MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The BQ market continues to see good activity, even with the lighter level of new issue supply so far this year, which has contributed to secondary market bid lists being 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. We continue to encourage participants to utilize extension swaps (sell short paper and rolling out the cover), as a way to pick more yield with little to no drop-off in credit quality. Week-over-week, bank qualified spreads were mixed, as spreads on maturities five-years and in all tightened, while spreads on maturities 10 years and longer widened. The largest tightening occurred in the two-year maturity, seven bps, while the largest widening occurred in the 30-year maturity, 13 bps.

 

Daily Overview of the General Market for the Week Ending February 16th

Last Monday prices on municipals were mixed, as a lack of supply, recent price direction, and yield made for a tough Monday in the municipal market. On the day the yields on the two- and 10-year GO bonds rose one bp, while the yield on the 30-year GO bond was unchanged, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed on the day, as U.S. Stocks continued their bounce back that started last Friday. The Dow tacked on 410 points (1.7%) to last Friday’s 330-point (1.4%) gain, trimming its net loss over the last seven sessions to 1,585 points (-6.1%). The S&P 500 and NASDAQ rallied 1.4% and 1.6% respectively. 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 unchanged. The 10-year municipal-to-Treasury ratio slipped to 85.0% on Monday from last Friday’s level of 85.2%, while the 30-year municipal-to-Treasury ratio was unchanged on Monday from Friday’s level of 94.6%.

Last Tuesday prices on municipals were mixed, as the oversubscribed Pennsylvania tobacco deal was increased, resulting in yields being lowered. Market participants reported the deal fared well based on several factors, including the issue’s security pledge, timing, and partial insurance. On the day the yield on the two-year GO bond was unchanged, while the yield on the 10-year GO bond fell one bp and 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 mixed, as equity trading was a tale of two halves. The sessions first-half losses gave way to after-lunch gains, which helped nudge the major U.S. indices higher for a third consecutive session. On the day, the yield on the two-year maturity rose two bp, while the yields on the 10- and 30-year maturities each fell three bps. The 10-year municipal-to-Treasury ratio rose to 85.5% on Tuesday from Monday’s level of 85.0%, while the 30-year municipal-to-Treasury ratio fell to 95.8% on Tuesday from Monday’s level of 94.6%.

Last Wednesday prices on municipals were mixed, as market participants were taking stock of Pennsylvania’s successful sale of over $1.5B of tobacco bonds. On the day the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond rose four bps and the yield on the 30-year GO rose five bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were weaker, as the market responses to January’s firmer-than-expected CPI report proved to be a mixed indicator for the daily changes across asset classes. Equities, led by financials, recovered from early selling to finish up more than 1.0% and at their highest levels of the day. The U.S. Dollar reversed lower, tumbling 0.7% and to its second lowest level since December 2014. On the day, the yields on the two- and 30-year maturities each rose seven bps, while the yield on the 10-year maturity rose eight bps. The 10-year municipal-to-Treasury ratio fell to 84.5% on Wednesday from Tuesday’s level of 85.5%, while the 30-year municipal-to-Treasury ratio fell to 95.3% on Wednesday from Tuesday’s level of 95.8%.

Last Thursday prices on municipals were mixed, as the last of the week’s deals were digested and Puerto Rico bonds continued their week-long rise as investors gained heart from the latest financial plan from the island’s government. On the day, the yields on the two- and 30-year GO bonds were unchanged, while the yield on the 10-year GO bond rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished Thursday mixed, as stocks seesawed in the morning before turning positive midday and finishing the day near their session highs. The U.S. Dollar’s year-long woes continued, as the greenback weakened against all major currencies to a new 38-month low. 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 three bps. The 10-year municipal-to-Treasury ratio rose to 85.2% on Thursday from Wednesday’s level of 84.5%, while the 30-year municipal-to-Treasury ratio rose to 96.2% on Thursday from Wednesday’s level of 95.3%.

Prices on municipals last Friday finished the trading day mixed, as market participants were looking ahead to next week’s new issue calendar. 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 one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the trading session mixed. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio bumped up to 85.4% on Friday from Thursday’s level of 85.2%, while the 30-year municipal-to-Treasury ratio was unchanged on Friday from Thursday’s level of 96.2%.

 



 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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