Muni Update

February 5, 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 fourth week, as weekly reporting funds experienced inflows of $235.926MM, after experiencing inflows of $781.160MM the week prior. The four-week moving average was positive at $744.164MM, after being positive at $503.830MM 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 mixed, as the front-end was stable, while bonds maturing 10 years and longer weakened. On Tuesday prices were weaker across the curve. On Wednesday they were mixed, as the front-end weakened and bonds maturing 10 years and longer strengthened. On Thursday they once again weakened across the curve. On Friday they were mixed, as the front-end strengthened, while bonds maturing 10 years and longer weakened. Prices on municipals were weaker across the curve on Monday and Tuesday. On Wednesday municipals were mixed, as the front and long ends were stable and intermediate maturities weakened. On Thursday prices were mixed again, as the front-end was steady, while bonds maturing 10 years and longer weakened. On Friday municipal prices were mixed once again, as Friday’s price action was a repeat of Thursday’s. The recent rise in municipal bond yields have them looking cheap on a taxable-equivalent-yield basis across the tax rate spectrum. Volume for the week is projected to be $3.83B, which is just above last week’s revised level of $3.59B 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.

After a blistering week of economic news, including predominately strong data, this week’s economic calendar is notably quieter. The most important report of the week will be this morning’s ISM Non-Manufacturing Activity report scheduled for 9:00 a.m. CT. The index is expected to rebound from 55.9 to 56.7 after falling from almost 60 back in October. December’s Trade Balance (Tue) and Wholesale Inventories (Fri) reports will help sharpen the pencil for 4Q GDP estimates.  Tuesday’s Job Openings and Labor Turnover will give a little more color to the labor data.  Bloomberg’s Survey of Economists is scheduled for Thursday.

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 1.55%. Meanwhile, the yields on the 10- and 30-year maturities each rose seven basis points (bps) on the MMD Triple-A Scale from last Thursday to Friday, and they finished the week at 2.46% and 3.00%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose three bps, while the yield on the 10-year GO bond rose 23 bps and the yield on the 30-year GO bond rose 19 bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale rose three bps from Thursday to Friday and ended the week at 1.61%. Meanwhile, the yields on the 10- and 30-year maturities each rose six bps on the MMA Triple-A Scale from last Thursday to Friday, and they finished the week at 2.40% and 3.06%, respectively. Overall, week-over-week the yield on the two-year GO bond rose nine bps, while the yield on the 10-year GO bond rose 17 bps and the yield on the 30-year GO bond rose 18 bps.

Prices on U.S. Treasuries were mixed on Monday, weaker on Tuesday and mixed again on Wednesday. On Thursday they weakened across the curve. On Friday they were mixed again. Overall, week-over-week the yield on the 10-year maturity rose 18 bps and closed the week at 2.84%. Meanwhile the yield on the two-year maturity rose two bps week-over-week and closed the week at 2.13%. This resulted in a week-over-week 2s/10s spread of 69 bps, 16 bps wider than last week’s 2s/10s spread of 53 bps. The yield on the 30-year maturity rose 17 bps and finished the week at 3.08%.

 

Volume to be $3.83B for the Trading Week

Total volume for the coming week is estimated to be $3.83B, which is just above the $3.58B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $2.60B in negotiated deals and approximately $1.23B in competitive sales.

This week’s calendar is topped by Harris County, Texas’ sale of $567.0MM of toll road revenue bonds. The senior lien offering of refunding bonds is set to price on Wednesday. The deal is rated Aa2 by Moody’s Investors Service (Moody’s) and AA by Fitch Ratings (Fitch). Also from Texas this week, Houston is set to price $134.0MM of airport system special facilities revenue bonds on Tuesday. The deal is rated BB- by S&P Global Ratings (S&P).

The Los Angeles Department of Water and Power plans to offer $231.0MM of series 2018A water system revenue bonds on Wednesday, after holding a retail order period on Tuesday. The deal is rated Aa2 by Moody’s, AA+ by S&P and AA by Fitch.  Also from Texas, Citigroup is set to price Houston’s $134MM of airport system special facilities revenue bonds on Tuesday.

 

Municipal Bond Funds Posted Inflows for a Fourth Week       

Municipal bond funds posted inflows for a fourth week, as market participants put cash into funds, according to the latest data from Lipper. The weekly reporters saw $235.926MM of inflows, after experiencing inflows of $781.160MM the week prior. The four-week moving average was positive at $789.939MM, after being positive at $811.354MM the week prior.

Long-term municipal bond funds had inflows of $170.114MM in the latest week after inflows of $772.983MM the week prior. Intermediate-term funds had inflows of $264.852MM after inflows of $329.453MM the week prior. National funds had inflows of $347.233MM after inflows of $776.001MM the week prior. High-yield municipal funds reported outflows of $143.414MM in the latest week, after inflows of $32.551MM the week prior. Exchange traded funds reported outflows of $16.893MM, after outflows of $17.950MM 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 were mixed, as reflected by the spreads on the one-, three-, 15- and 30-year maturities all tightening, with the largest tightening occurring in the 15-year maturity, seven bps. Meanwhile, week-over-week the spreads on the two, five and 10-year maturities all widened, with the largest widening occurring in the 10-year maturity, seven bps.

 

Daily Overview of the General Market for the Week Ending February 2nd

Last Monday prices on municipals were weaker, as the large tobacco deal from Pennsylvania, $1.39B, was placed on the day-to-day calendar. It was originally schedule to price on Wednesday. On the day the yield on the two-year GO bond rose one bp, while the yield on the 10-year GO bond rose six bps and the yield on the 30-year GO bond rose five bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed on the day, as the morning’s economic data was solid. Meanwhile U.S. stocks recoiled on Monday, after the prior Friday’s big gains sent the major equity indices to new record closes. Crude prices also fell back from their highest levels in more than three years on expectations that U.S. inventories rose last week for the first time in 11 weeks. Also hurting the commodity was a jump in the U.S. Dollar, which makes the commodity more expensive for foreign purchasers in their domestic currencies. On the day, the yield on the two-year maturity was unchanged, while the yield on the 10-year maturity rose four bps and the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio rose to 84.8% on Monday from last Friday’s level of 83.8%, while the 30-year municipal-to-Treasury ratio rose to 97.3% on Monday from Friday’s level of 96.6%.

Last Tuesday prices on municipals were weaker, as new issues from Hawaii and Ohio were priced, and market participants awaited President Trump’s State of the Union address Tuesday evening and any details he may provide on infrastructure spending proposals. On the day the yield on the two-year GO bond rose two bps, while the yields on the 10- and 30-year GO bonds each rose five bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker, as stocks endured a bludgeoning as the Dow lost 1.4% of its value, the S&P shed 1.1% and the NASDAQ dropped 0.9%. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose four bps. The 10-year municipal-to-Treasury ratio rose to 85.7% on Tuesday from Monday’s level of 84.8%, while the 30-year municipal-to-Treasury ratio rose to 97.7% on Tuesday from Monday’s level of 97.3%.

Last Wednesday prices on municipals were mixed, as a few deals priced and market participants began weighing in on what they thought about what President Trump said about infrastructure in his State of the Union address Tuesday night. On the day the yields on the two- and 30-year GO bonds were steady, 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 were also mixed, as the Federal Reserve voted unanimously to leave its target rate range unchanged at 1.25-1.50% in Janet Yellen’s final meeting as Chairwoman. U.S. stocks erased early gains after the Fed reported an optimistic outlook that bolstered the market’s expectation for another rate increase in March. However, a late-afternoon recovery helped the major indices back above Tuesday’s close for their first positive finish of the week. 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 86.4% on Wednesday from Tuesday’s level of 85.7%, while the 30-year municipal-to-Treasury ratio rose to 98.6% on Wednesday from Tuesday’s level of 97.7%.

Last Thursday prices on municipals were mixed again, as the last of the weeks deals were digested and market participants weighed the U.S. Treasury’s announcement that it intends to increase the size of its auctions by about $42.0B over the next quarter. On the day, the yield on the two-year GO bond was unchanged, while the yield on the 10-year GO bond rose four bps 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 Thursday weaker. As a result, the curve steepened the most between 2s and 10s in a single session since the week of the 2016 presidential election to its steepest level since December 20th. Stocks recovered from an opening sell-off, but weakened again in the afternoon as the sell-off in the bond market intensified. The U.S. Dollar extended its worst annual start since 1987 and touched a new low since December 2014. 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 was relatively unchanged on Thursday from Wednesday’s level of 86.4%, while the 30-year municipal-to-Treasury ratio fell to 97.3% on Thursday from Wednesday’s level of 98.6%.

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 rose seven bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the trading session mixed, as U.S. Stocks sold off and posted their biggest losses since early 2016. For the week, the S&P 500 was down 3.85% and the Dow was down 4.12%. On the day, the yield on the two-year maturity fell two bps, while the yield on the 10-year maturity rose 10 bps and the yield on the 30-year maturity rose seven bps. The 10-year municipal-to-Treasury ratio rose to 86.6% on Friday from Thursday’s level of 86.3%, while the 30-year municipal-to-Treasury was relatively unchanged on Friday from Thursday’s level of 97.3%.

 



 

 

January’s Primary Hangover (the Bond Buyer)

Municipal bond volume evaporated in January, as the municipal market felt the aftereffect of federal tax legislation that had the municipal market drowning in bonds during the final two months of 2017. Total volume for January 2018 plummeted 53.8% compared to January 2017, to $16.75B on 490 transactions from $36.01B on 777 transactions, according to Thomson Reuters’ data. The month went by without a single billion-dollar deal. The largest negotiated deal was the Port Authority of New York and New Jersey’s $832.28MM offering.

Refundings deals in the first month of 2018, without the ability to issue advance refund debt due to it being taken away under the new tax law, slid to $1.78B on 93 deals from $8.78B on 272 deals in January 2017. New money issuance decreased 11.6% to $14.29B on 371 deals to account for the majority of the month’s issuance. This is down from $16.17B of new money volume on 412 deals a year earlier.

Combined new-money and refunding issuance dropped to $1.04B, while issuance of revenue bonds was down 57.0% to $9.18B. General obligation bond sales fell to $7.57B. Negotiated deals sunk to $10.85B and competitive sales decreased by 19.3% to $5.74B. Taxable bond volume fell to $1.93B from $3.71B, while tax-exempt issuance decreased by 55.1% to $14.15B. Minimum tax bonds dropped to $678.0MM from $806.0MM.

The volume of deals wrapped with bond insurance fell 63.5% to $499MM on 70 deals from $1.37B on 109 deals a year earlier. Only two of the 10 sectors saw year-over-year increases, as public facilities rose 18.6% to $567.0MM from $478.0MM and utilities rose 23.5% to $2.78B from $2.25B. The other eight sectors declined at least 47.0% with the biggest drops in terms of par-amount from education, which was at $5.90B compared with $13.99B, health care at $599.0MM compared with $1.02B, and general-purpose bonds, which was at $3.0B compared with $6.72B. State governments finished the month with $1.52B in issuance, slightly up from $1.51B, making them the only type of issuer to see an increase.

 

 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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