Muni Update

February 25, 2019


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

 

Municipal Market Recap

Municipal prices were mixed daily for the week. On Tuesday prices on bonds in the front and long-ends were steady, while intermediate maturities strengthened. On Wednesday the front-end was steady, while bonds maturing 10 years and longer strengthened. On Thursday the front-end was steady again, while bonds maturing 10 years and longer weakened. Friday’s price action was a repeat of Wednesday’s. Issuance this week is forecasted to be $5.7B, which is well above last week’s revised level of $2.0B in issuance. The heavier new issue calendar coupled with bid lists should provide market participants with opportunities to fill their needs, as municipals remain in demand. Driving this strong demand is a combination of high redemption flows and the municipal bond mutual funds, which have averaged around $2.0B per week of net inflows for the last seven weeks, after losing assets in 14 of the previous 15 weeks.

 

Investors in municipal bond funds put cash into funds for a seventh week, as weekly reporting funds experienced inflows of $1.469B after experiencing inflows of $1.451B the week prior. The four-week moving average was a positive $1.283B, after being a positive $1.125BMM 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-year maturity on the MMD Triple-A Scale was steady from Thursday to Friday and ended the week at 1.60%. Meanwhile the yield on the 10-year maturity fell one basis point (bp) and the yield on the 30-year maturity fell two bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 2.10% and 2.99%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond was unchanged, while the yield on the 10-year GO bond fell two bps and the yield on the 30-year GO bond fell one bp.

 

Last week the yields on the two- and 30-year maturities on the MMA Triple-A Scale each fell two bps from Thursday to Friday and they ended the week at 1.65% and 3.06%, respectively. Meanwhile the yield on the 10-year maturity fell three bps on the MMA Triple-A Scale from Thursday to Friday and ended the week at 2.36%. Overall, week-over-week the yield on the two-year GO bond fell two bps, while the yields on the 10- and 30-year GO bonds each fell four bps.

 

New Issue Volume is Forecasted to be $5.7B for the Week

Total issuance for the trading week is estimated to be $5.7B, which is above last week’s trading volume of $2.0B 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 $4.3B in negotiated offerings and $1.4B in competitive offerings.

Topping this week’s new issue slate is will be Intel Corporation which will receive bond proceeds for new projects from the Chandler Industrial Development Authority (IDC) of Arizona and the Oregon Business Development Commission (BDC). The Chandler IDA is expected to price $500.0MM of Series 2019 industrial development revenue bonds and the Oregon BDC will price $100.0MM BDC Series 250 economic development revenue bonds on, both deals are scheduled for Wednesday.

In the competitive arena, the New York City Municipal Water Finance Authority is planning to sell $390.415MM of Fiscal 2019 Series EE water and sewer system second general resolution revenue bonds in two offerings on Wednesday. The deals consist of $275.0MM of Subseries EE-2 bonds and $115.415MM of Subseries EE-1 bonds. The deals are rated Aa1 by Moody’s Investors Service (Moody’s) and AA+ by S&P Global Ratings (S&P) and Fitch Ratings (Fitch).

 

Municipal Bond Funds Post Inflows for a Sixth Week

Investors in municipal bond funds put cash into funds for a seventh week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $1.469B, after experiencing inflows of $1.451B the week prior. The four-week moving average was a positive $1.283B, after being a positive $1.125B the week prior.

Long-term municipal bond funds had inflows of $919.613MM in the latest week after experiencing inflows of $998.428MM the week prior. Intermediate-term funds had inflows of $377.716MM after inflows of $417.524MM the week prior. National funds had inflows of $1.291B after experiencing inflows of $1.240B the week prior. High-yield municipal funds reported inflows of $397.226MM in the latest week, after inflows of $452.473MM the week prior. Exchange traded funds reported inflows of $95.27MM, after inflows of $821,000 the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

Last week, the BQ market had good activity, due in part to opportunities in both BQ and general market (GM) new issue and secondary market bid lists. With rolloffs expected to continue at a brisk pace, BQ participants will continue to have significant demand for BQ paper. The continued low level of projected new issue BQ paper at this time, has have market participants looking to GM opportunities in both the primary and secondary markets to provide them with additional chances to address their needs, while picking up attractive structures (4.0% coupons), especially those in the long-end of the curve (15 to 25 years), as well as picking up an additional 15 to 20 bps in yield. Participants should also continue to utilize extension swaps, as the bid side for municipals continues to remain strong. Week-over-week, bank qualified spreads were mixed, as the one-year maturity was unchanged and the two-year maturity widened, two bps. All other maturities tightened week-over-week, with the largest tightening occurring in the 10-year maturity, 12 bps.

 

Daily Overview of the General Market for the Week Ending February 22nd

Last Tuesday prices on municipals were mixed, as market participants were looking forward to the $2.8B in new issue offerings, as well as secondary market bid list to meet demand. On the day, the yields on the two- and 30-year GO bonds were steady, while the 10-year GO fell one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger, as U.S. equity markets finished the day posting minimal gains for the session. On the day, the yield on the two-year maturity fell two bps, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio was relatively unchanged on Tuesday from last Friday’s level of 79.7%, while the 30-year municipal-to-Treasury ratio bumped up to 100.3% on Tuesday from last Friday’s level of 100.0%.

Last Wednesday prices on municipals were mixed again, as more new supply hit the market, led by a $151.285MM competitively priced deal from Collin County, Texas. 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.

Prices on U.S. Treasuries were mixed, as U.S. stocks posted modest gains on the session. On the day, the yields on the two- and 10-year maturities were steady, while the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio slipped to 79.3% on Wednesday from Tuesday’s levels of 79.6%, while the 30-year municipal-to-Treasury ratio fell to 99.7% on Wednesday from Tuesday’s level of 100.3%.

Last Thursday prices on municipals were mixed, as the last of the week’s new issue offerings came to market. 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 two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day weaker, as stocks pulled back after the day’s U.S. economic data was, on balance, weaker than expected. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose four bps and the yield on the 30-year maturity rose five bps. The 10-year municipal-to-Treasury ratio fell to 78.4% on Thursday from Wednesday’s levels of 79.3%, while the 30-year municipal-to-Treasury ratio fell to 98.7% on Thursday from Wednesday’s level of 99.7%.

Last Friday, prices on municipals were mixed again, as market participants were looking ahead to the coming trading week’s $5.7B in new issue offerings. 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 fell two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as U.S. equity markets finished the session up. On the day, the yield on the two-year maturity fell five bps, while the yield on the 10-year maturity fell four bps and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury rose to 79.3% on Friday from Thursday’s level of 78.4%, while the 30-year municipal-to-Treasury ratio bumped up to 99.0% on Friday from Thursday’s level of 98.7%.







Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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