Muni Update

February 4, 2019



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

 

Municipal Market Recap

Municipal prices started the week steady across the curve. On Tuesday, bonds were mixed, as the front-end was steady, while prices on bonds maturing 10 years and longer strengthened. On Wednesday, prices were once again steady across the curve. On Thursday, municipal prices strengthened across the curve. On Friday, prices on municipals were mixed, as the front-end weakened, while prices on bonds maturing 10 years and longer were steady. Issuance this week is forecasted to be $7.2B, which is above last week’s revised issuance of $3.8B. This increase in 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. CreditSights estimates that February municipal bond redemptions (maturing principal plus called bond proceeds) will total $28.8B, a 9.0% increase over January’s total and 22.0% higher than in March. The lower amount in March could, per CreditSights, take some of the urgency out of the February reinvestment decisions.

Investors in municipal bond funds put cash into funds for a fourth week, as weekly reporting funds experienced inflows of $1.064BMM, after experiencing inflows of $834.371MM the week prior. The four-week moving average was a positive $1.099BMM, after being a positive $683.673MM 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 10- and 30-year maturities on the MMD Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 2.17% and 3.02%, respectively. Meanwhile, the yield on the two-year maturity on the MMD Triple-A Scale rose one basis point (bp) from Thursday to Friday and ended the week at 1.64%. Overall, week-over-week the yield on the two-year General Obligation (GO) bond fell five bps, while the yield on the 10-year GO fell six bps and the yield on the 30-year GO fell eight bps.

Last week the yields on the two- and 10-year maturities on the MMA Triple-A Scale were steady from Thursday to Friday and they ended the week at 1.70% and 2.43%, respectively. Meanwhile the yield on the 30-year maturity on the MMA Triple-A Scale rose one bp from Thursday to Friday and ended the week at 3.12%. Overall, week-over-week the yields on the two-, 10- and 30-year GO bonds each fell five bps.

 

New Issue Volume is Forecasted to be $7.2B for the Week

Total issuance for the trading week is estimated to be $7.2B, which is above last week’s trading volume of $3.8B in issuance, according to revised data from Thomson Reuters. This increased level of issuance should be well received by market participants. This week’s trading calendar is comprised of $5.6B in negotiated offerings and $1.6B in competitive offerings.

Topping off the negotiated calendar is a $550.0MM deal coming out of Hawaii. The State’s GO bonds will be priced on Wednesday, after a one-day retail order period. The bonds are being sold in three tranches: a $454.2MM tax-exempt series, a $50.0MM taxable series, and a $45.7MM taxable series. The deal’s ratings were affirmed by Moody’s Investors Service (Moody’s) Aa1, S&P Global Ratings (S&P) AA+ and Fitch Ratings (Fitch) AA.

Also on Wednesday the Los Angeles County Metropolitan Transportation Authority plans to price $545.0MM of Proposition C sales tax senior revenue bonds, after a one day retail order period on Tuesday. The issue is composed of Series 2019A green bonds and Series 2019B revenue bonds. The deal is rated Aa2 by Moody’s, AAA by S&P and AA+ by Fitch.

On the competitive side, Washington State is selling $640.925MM of GO bonds in two offerings. The deals consist of $468.695MM of Series 2019C various purpose GOs and $172.23MM of Series 2019D motor vehicle fuel tax GOs. Proceeds of the Series 2019C&D bonds will be used to reimburse expenditures for various state capital projects and programs. The deals are rated Aa1 by Moody’s and AA+ by S&P and Fitch.

 

Municipal Bond Funds Post Inflows for a Fourth Week

Investors in municipal bond funds put cash into funds for a fourth week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $1.064B, after experiencing inflows of $834.371MM the week prior. The four-week moving average was a positive $1.099B, after being a positive $683.673MM the week prior.

Long-term municipal bond funds had inflows of $546.399MM in the latest week after experiencing inflows of $500.408MM the week prior. Intermediate-term funds had inflows of $462.466MM after inflows of $243.066MM the week prior. National funds had inflows of $802.305MM after experiencing inflows of $701.121MM the week prior. High-yield municipal funds reported inflows of $295.001MM in the latest week, after inflows of $383.195MM the week prior. Exchange traded funds reported outflows of $239.027MM, after outflows of $117.588MM 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 February 1st and 15th being large rolloff dates, BQ participants continue to have significant demand for BQ paper. The projected level of new issue paper this week picks up, together 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. 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 spreads on two, three, five and 10-year maturities all widened, with the largest widening occurring in the two and three-year maturities, four bps each. Meanwhile, week-over-week the spreads on the one, 15 and 30-year maturities all tightened, with the largest tightening occurring in the one-year maturity, three bps.

 

Daily Overview of the General Market for the Week Ending February 1st

Last Monday prices on municipals were steady across the curve, as market participants were looking forward to the new competitive sales scheduled for the week, as well as the Federal Open Market Committee (FOMC) two-day monetary policy meeting. Also this week the Bond Buyer will hold its annual conference on Tuesday where experts will unveil their expectations for the market this year and discuss infrastructure financing, fiscal policy, the effects of tax reform, as well as regulatory developments, technology and pension funding. On the day, the yields on the two-, 10-year-, and 30-year GO Bonds were steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as stocks posted losses for the session. On the day, the yields on the two- and 30-year maturities were steady, while the yield on the 10-year maturity rose one bp. The 10-year municipal-to-Treasury ratio bumped up to 81.1% on Monday from last Friday’s level of 80.8%, while the 30-year municipal-to-Treasury ratio was unchanged on Monday from last Friday’s level of 101.3%.

Last Tuesday prices on municipals were mixed, as competitive offerings from issuers in Virginia, Tennessee and Florida hit the 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 one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries strengthened, as the major equity indices fluctuated in response to corporate earnings and markets finished mixed for the day. The Dow rose slightly, while the NASDAQ and the S&P posted minimal losses for the session. 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 two bps. The 10-year municipal-to-Treasury ratio rose to 81.6% on Tuesday from Monday’s level of 81.1%, while the 30-year municipal-to-Treasury bumped up to 101.6% on Tuesday from last Monday’s level of 101.3%.

Last Wednesday prices on municipals were steady again, as the FOMC voted unanimously to keep the target range for the federal funds rate at 2.25% to 2.5%. On the day, the yields on the two-, 10- and 30-year GO bonds were unchanged, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as stocks posted gains for the session boosted by the Federal Reserve’s decision to keep interest rates steady. The Dow finished above 25K for the first time since December 7, 2018. On the day, the yield on the two-year maturity fell four bps, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio rose to 82.2% on Wednesday from Tuesday’s levels of 81.6%, while the 30-year municipal-to-Treasury ratio fell to 101.0% on Wednesday from Tuesday’s level of 101.6%.

Last Thursday prices on municipals strengthened across the curve, as the New York Metropolitan Transportation Authority (NYMTA) sold over $1.0B of securities in four competitive sales. On the day, the yield on the two-year GO bond fell six bps, while the yield on the 10-year GO bond fell five bps and the yield on the 30-year GO bond fell seven bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mostly stronger, as U.S. equity markets finished mixed on the day. The Dow was down slightly, while the S&P and the NASDAQ posted gains for the session. On the day, the yields on the two-, 10- and 30-year maturities each fell seven bps. The 10-year municipal-to-Treasury ratio bumped up to 82.5% on Thursday from Wednesday’s level of 82.2%, while the 30-year municipal-to-Treasury was unchanged on Thursday from Wednesday’s level of 101.0%.

Last Friday, prices on municipals were mixed, as market participants were looking ahead to the coming trading week’s $7.2B in new issuance offerings. On the day, the yield on the two-year GO bond rose one bp, while the yields on the 10- and 30-year GO bonds were unchanged, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were weaker across the curve, as U.S. equity markets finished the day mixed. The Dow and S&P posted minimal prices gains, while the NAQDAQ finished slightly down on the session. On the day, the yields on the two- and 10-year maturities each rose seven bps, while the yield on the 30-year maturity rose four bps. The 10-year municipal-to-Treasury fell to 80.4% on Friday from Thursday’s level of 82.5%, while the 30-year municipal-to-Treasury ratio fell to 99.7% on Friday from Thursday’s level of 101.0%.

 

Taxable Market







Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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