Muni Update

January 16, 2018



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

 

Municipal Market Recap

Municipal bond funds reported investors put cash into funds last week, as weekly reporting funds experienced inflows of $1.06B, after experiencing outflows of $47.880MM the week prior. The four-week moving average was positive at $271.840MM, after being positive at $59.822MM 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 if yields should rise in the New Year.

U.S. Treasury prices started the trading week mixed, as the short-end strengthened, while bonds maturing 10 years and longer were steady. On Tuesday and Wednesday they weakened across the curve. On Thursday they reversed course and strengthened across the curve. On Friday they were mixed, as bonds maturing 10 years and in weakened, while the long-end strengthened.  Prices on municipals in the front-end were steady all week. On Monday the intermediate maturities were steady, while the long-end weakened. On Tuesday bonds maturing 10 years and longer were weaker. On Wednesday bonds maturing 10 years and longer weakened again. On Thursday intermediate maturities were steady, while the longer-end weakened. On Friday municipal prices were steady across the curve. Volume for the week is projected to be $3.35B which is just above last week’s revised level of $3.12B. This week’s level of issuance is expected due to the holiday shortened trading week. According to CreditSights, the very light new issue calendar, coupled with two months (January and February) of above-average redemption flows, should result in a constructive tone for the municipal market.  This week’s economic data releases are very light, with the most important releases coming on Friday. They include initial and continuing jobless claims and the University of Michigan’s Consumer sentiment index for January.

Last week the yields on the two-, 10- and 30-year maturities on the MMD Triple-A Scale were all unchanged from Thursday to Friday and ended the week at 1.54%, 2.12%, and 2.71%, 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 rose 11 basis points (bps) and the yield on the 30-year GO bond rose 13 bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale rose one bp from Thursday to Friday and ended the week at 1.45%. Meanwhile, the yields on the 10- and 30-year maturity on the MMA Triple-A Scale were both unchanged from Thursday to Friday and ended the week at 2.17% and 2.81%, respectively. Overall, week-over-week the yield on the two-year maturity rose seven bps, while the yield on the 10-year GO bond rose nine bps and the yield on the 30-year GO bond rose eight bps.

Prices on U.S. Treasuries were mixed on Monday. On Tuesday and Wednesday they were weaker across the curve. On Thursday they reversed course and strengthened across the curve and on Friday they were mixed. Overall, week-over-week the yield on the 10-year maturity rose seven bps and closed the week at 2.55%. Meanwhile the yield on the two-year maturity rose four bps week-over-week and closed the week at 2.00%. This resulted in a week-over-week 2s/10s spread of 55 bps, three bps wider than last week’s 2s/10s spread of 52 bps. The yield on the 30-year maturity rose four bps and finished the week at 2.85%.

 

Volume to be $3.35B for the Holiday Shortened Trading Week

Total volume for the coming week is estimated to be $3.35B, up slightly from the $3.12B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $2.36B in negotiated deals and approximately $986.0MM in competitive sales.

The largest deal of the week will be the Chicago’s Sales Tax Securitization Corporation’s $898.07MM offering. The deal is expected to price on Wednesday and is rated AA by S&P Global Ratings (S&P), AAA by Fitch Ratings (Fitch) and Kroll Bond Rating Agency (Kroll). On Thursday Denver Public School’s plans to offer $211.995MM of GO bonds, consisting of both tax-exempt and taxable bonds. The deal is rated Aa2 by Moody’s Investors Service (Moody’s) and AA+ by S&P and Fitch.

In the competitive arena, The University of Kentucky is scheduled to sell a total of $220.685MM of taxable and tax-exempt general receipt bonds on Wednesday. The deals are rated Aa2 by Moody’s and AA by S&P.

 

Municipal Bond Funds Posted Inflows for the Week       

Municipal bond funds posted inflows for the week, as market participants put cash into funds, according to the latest data from Lipper. The weekly reporters saw $1.06B of inflows, after experiencing outflows of $47.880MM the week prior. The four-week moving average was positive at $271.840MM, after being positive at $59.822MM the week prior.

Long-term municipal bond funds had inflows of $1.12B in the latest week after inflows of $255.775MM the week prior. Intermediate-term funds had inflows of $360.123MM after inflows of $8.637MM the week prior. National funds had inflows of $988.826MM after inflows of $138.051MM the week prior. High-yield municipal funds reported inflows of $365.937MM in the latest week, after inflows of $73.675MM the week prior. Exchange traded funds reported inflows of $22.703MM, after inflows of $195.493MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

Last week, the BQ market saw decent activity, even with the light level of new issue supply, as secondary market bid lists were well received. With January 1st and January 15th being large rolloff dates, BQ participants continue to have significant demand for BQ paper. This week’s issuance is light again, so market participants will once again be looking to 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 widened across the curve, except for the 10-year maturity which was unchanged week-over-week. The largest widening occurred in the one-year maturity, 10 bps.

 

Daily Overview of the General Market for the Week Ending January 12th

Last Monday prices on municipals were mixed, as the municipal bond market was quiet and traders waited for the week’s new issue offering to get underway on Tuesday with competitive deals from Massachusetts and Fairfax County, Virginia. On the day the yields on the two- and 10-year GO bonds were each steady, while 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 also mixed, as U.S. stocks traded mixed, with the S&P and NASDAQ managing modest gains to make it five straight record closes (every day so far in 2018), while the Dow dropped a quiet 13 points, or 0.05%. The U.S. dollar finished stronger on the day, almost exclusively because of gains against the Euro. On the day, the yield on the two-year maturity fell one bp, while the yields on the 10- and 30-year maturities were each steady. The 10-year municipal-to-Treasury ratio was unchanged on Monday from last Friday’s level of 81.1%, while the 30-year municipal-to-Treasury ratio rose to 92.2% on Monday from Friday’s level of 91.8%.

Last Tuesday prices on municipals were mixed, as issuers in Massachusetts, Virginia and Minnesota offered new tax-exempts to bond-hungry investors. 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 bond rose five bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker across the curve, as stocks had another record day, but it was the jump in Treasury yields that may have been the biggest surprise on Tuesday. On the day the yield on the two-year maturity rose one bp, while the yields on the 10- and 30-year maturities each rose seven bps. The 10-year municipal-to-Treasury ratio fell to 80.4% on Tuesday from the Monday’s level of 81.1%, while the 30-year municipal-to-Treasury ratio fell to 91.7% on Tuesday from Monday’s level of 92.2%.

Last Wednesday prices on municipals were mixed, as U.S. Treasury bonds weakened on reports that China may halt its buying of U.S. government debt, while a handful of deals priced in the primary market. On the day the yield on the two-year GO bond was steady, while the 10-year GO bond rose seven bps and the 30-year GO bond fell eight bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were weaker across the curve, as stock prices see-sawed through the day to finish down at the close. Longer Treasury yields were equally as volatile on news China was reconsidering holding U.S. Treasuries, before rallying back after a solid 10-year auction. The U.S. Dollar also sold off on the China report but slowly climbed back with the biggest jump following a headline that Canadian officials see a growing chance that the U.S. will pull out of NAFTA. The White House responded by saying the President’s position on NAFTA was unchanged. On the day, the yields on the two-, 10- and 30-year maturities each rose one bp. The 10-year municipal-to-Treasury ratio rose to 82.8% on Wednesday from Tuesday’s level of 80.4%, while the 30-year municipal-to-Treasury ratio rose to 94.1% on Wednesday from Tuesday’s level of 91.7%.

Last Thursday prices on municipals were mixed, as municipal participants scoped up taxable supply from Pennsylvania and Illinois. 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 fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio rose to 83.8% on Thursday from Wednesday’s level of 82.8%, while the 30-year municipal-to-Treasury ratio rose to 94.4% on Thursday from Wednesday’s level of 94.1%.

Prices on municipals last Friday finished the trading day steady, as market participants were looking ahead to next week’s new issue calendar. On the day, the yields on the two-, 10- and 30 GO bonds were unchanged, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the trading session mixed. On the day, the yield on the two-year maturity rose four bps, while the yield on the 10-year maturity rose two bps and the yield on the 30-year maturity was steady. The 10-year municipal-to-Treasury ratio fell to 83.1% on Friday from Thursday’s level of 83.8%, while the 30-year municipal-to-Treasury ratio rose to 95.1% on Friday from Thursday’s level of 94.4%.

 

 



 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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