Muni Update

February 26, 2018



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

 

Municipal Market Recap

Municipal bond funds reported investors put cash into funds, as weekly reporting funds experienced inflows of $347.403MM, after experiencing outflows of $443.409MM the week prior. The four-week moving average was positive at $203.707MM, after being positive at $312.146MM the week prior. We note that the bulk of fund inflows in 2018 have been to date 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.

Prices on municipals in the front-end of the curve were steady for the week. On Tuesday bonds maturing 10 years and longer weakened. On Wednesday bonds maturing in the intermediate part of the curve were steady, while the long-end weakened. On Thursday municipal prices were steady across the curve. On Friday prices on bonds 10 years and longer strengthened. Volume for the trading week is projected to be $4.8B, which is below last week’s revised level of $5.8B. Market participants report that the calendar looks promising for investors, even as a report on CUSIP requests casts doubt on prospects for near-term supply picking up. 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 full of data, but the big news may be new Fed Chairperson Powell’s first trip to the Hill for his semi-annual testimony.  He’ll testify before the House Financial Services Committee on Tuesday.  This week will also include reports on the housing market and construction spending, two reports on consumer confidence, the first revision to 4Q GDP, and January’s data on PCE inflation (Thu) and Personal Income and Spending.  The markets have keyed in on the inflation data, believing the foundation for firmer inflation is in place. The biggest risk to market volatility (from the economic data, at least) would be a surprise in any inflation metric.

Last week the yield on the two-year maturity on the MMD Triple-A Scale was unchanged from Thursday to Friday and ended the week at 1.52%.  Meanwhile, the yields on the 10- and 30-year maturities on the MMD Triple-A Scale each fell two basis points (bps) from Thursday to Friday and ended the week at 2.45% and 3.03%, 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 one bp and the yield on the 30-year GO bond rose one bp.

Last week the yield on the two-year maturity on the MMA Triple-A Scale was unchanged from Thursday to Friday and ended the week at 1.61%. 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 ended the week at 2.43% and 3.07%, respectively. Overall, week-over-week the yields on the two- and 10-year GO bonds each fell one bp, while the yield on the 30-year GO bond was unchanged.

On Tuesday, prices on U.S. Treasuries started the week weaker. On Wednesday they weakened further across the curve. On Thursday they reversed course and strengthened. On Friday they were mixed. Overall, week-over-week the yield on the 10-year maturity was unchanged and closed the week at 2.88%. Meanwhile the yield on the two-year maturity rose four bps week-over-week and closed the week at 2.25%. This resulted in a week-over-week 2s/10s spread of 63 bps, four bps tighter than last week’s 2s/10s spread of 67 bps. The yield on the 30-year maturity rose two bps week-over-week, and finished the week at 3.16%.

 

Volume to be $4.8B for the Trading Week

Total volume for the coming week is estimated to be $4.8B, which is below the $5.8B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $3.1B in negotiated deals and approximately $1.7B in competitive sales.

Baltimore County, Maryland, tops the slate as it will issue about $837.0MM of bonds and notes in four separate competitive offerings. On Wednesday the following two offerings will be priced: $225.0MM of GO metropolitan district bonds 80th issue, and $121.0MM of 2018 GO consolidated public improvement bonds. On Thursday, the County will sell $246.0MM of Series 2018 consolidated public improvement GO bond anticipation notes (BANs) and $245.0MM of Series 2018 metropolitan district GO BANs.

In the negotiated sector, Alabama’s Black Belt Energy Gas District plans to offer $653.0MM of gas prepay revenue bonds for Project Number 3. Also on tap this week, the New York State Thruway Authority plans to offer $600.0MM of Series L general revenue refunding bonds.

Participants will also have two airport deals to choose from this week. Houston, Texas plans to offer $417.0MM of airport system subordinate lien revenue and refunding bonds consisting of Series 2018A bonds subject to the alternative minimum tax (AMT) and Series 2018B non-AMT bonds. The other deal this week will come from the Los Angeles Department of Airports, which plans to offer $376.0MM of Series 2018 AMT subordinate revenue bonds for Los Angeles.

 

Municipal Bond Funds Posted Inflows for the Week       

Municipal bond funds posted inflows last week, as market participants put cash into funds, according to the latest data from Lipper. The weekly reporters saw $347.403MM of inflows, after experiencing outflows of $443.409MM the week prior. The four-week moving average was positive at $203.707MM, after being positive at $312.146MM the week prior.

Long-term municipal bond funds had outflows of $52.672MM in the latest week after outflows of $102.806MM the week prior. Intermediate-term funds had inflows of $491.709MM after experiencing inflows of $201.425MM the week prior. National funds had inflows of $354.086MM after outflows of $410.442MM the week prior. High-yield municipal funds reported outflows of $5.074MM in the latest week, after inflows of $20.088MM the week prior. Exchange traded funds reported outflows of $18.979MM, after outflows of $60.759MM 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 roll out to the 12-20-year maturity area of the curve), as a way to pick up more yield with little to no drop-off in credit quality. Week-over-week, bank qualified spreads were mixed, as spreads on maturities three years and in all tightened, while spreads on maturities five years and longer widened. The largest tightening occurred in the two-year maturity, five bps, while the largest widening occurred in the 10- and 15-year maturities, seven bps each.

 

Daily Overview of the General Market for the Week Ending February 23rd

Last Tuesday prices on municipals were mixed, as market participants gave a warm reception to the week’s two biggest sales that were priced for retail investors. 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 one bp, 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 ended a day of back-and-forth trading on a sour note, as the major equity indexes fell for the first time in seven sessions. On the day, the yield on the two-year maturity rose four bps, 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 was relatively unchanged on Tuesday from last Friday’s level of 85.4%, while the 30-year municipal-to-Treasury ratio fell to 95.9% on Tuesday from Friday’s level of 96.2%.

Last Wednesday prices on municipals were mixed, as several of the week’s biggest deals were priced, including offerings from the Los Angeles Unified School District School and Utah Transit, while New York City held a second day of orders for retail investors. On the day the yields on the two- and 10-year GO bonds were steady, while 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 were weaker on the day, and after a brief hesitation following the release of the Fed’s January meeting Minutes. Stocks sold off and erased earlier gains, and the U.S. Dollar rose. From its intraday peak, the Dow fell 470 points to end the day down 0.67%. The S&P followed a similar path to finish 0.55% lower. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity rose five bps and the yield on the 30-year maturity rose six bps. The 10-year municipal-to-Treasury ratio fell to 84.0% on Wednesday from Tuesday’s level of 85.5%, while the 30-year municipal-to-Treasury ratio fell to 94.7% on Wednesday from Tuesday’s level of 95.9%.

Last Thursday prices on municipals were steady, as New York City had little difficulty selling both competitive and negotiated offerings that together totaled over $1.0B in issuance, even amid concerns over rising interest rates. On the day, the yields on the two-, 10- and 30-year GO bonds were all unchanged, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as the major equity indices pared sharp morning gains to differing degrees and ended an up-and-down day in mixed fashion. On the day, the yields on the two- and 30-year maturities each fell one bp, while the yield on the 10-year maturity fell two bps. The 10-year municipal-to-Treasury ratio rose to 84.6% on Thursday from Wednesday’s level of 84.0%, while the 30-year municipal-to-Treasury ratio bumped up to 95.0% on Thursday from Wednesday’s level of 94.7%.

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 two bps, 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 was steady, while the yield on the 10-year maturity fell four bps and the yield on the 30-year maturity fell five bps. The 10-year municipal-to-Treasury ratio rose to 85.1% on Friday from Thursday’s level of 84.6%, while the 30-year municipal-to-Treasury ratio rose to 95.9% on Friday from Thursday’s level of 95.0%.

 

 



 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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