Muni Update

January 22, 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 second week, as weekly reporting funds experienced inflows of $1.18B, after experiencing inflows of $1.06B the week prior. The four-week moving average was positive at $503.830MM, after being positive at $271.840MM 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.

U.S. Treasury prices started the trading week mixed: the short-end weakened, while intermediate maturities were steady and the long-end strengthened. On Wednesday they weakened across the curve. On Thursday they were mixed again, as the front-end strengthened and bonds maturing 10 years and longer weakened. On Friday they were weaker across the curve. Prices on municipals started the week stronger across the curve. On Wednesday bond prices were steady. On Thursday they weakened across the curve. On Friday municipal prices were mixed, the front-end was steady, while bonds maturing 10 years and longer weakened. Volume for the week is projected to be $7.17B which is above last week’s revised level of $2.78B. This week’s rise in issuance is expected, given that last week had a holiday, which resulted in a shortened trading week. Municipals remain attractive versus Treasuries, particularly at the 10-year spot and beyond.

This week’s economic data releases provided by the government will be delayed so long as the federal government shutdown persists. This week’s government data includes new home sales, the advanced goods trade balance, and the first estimate of 4Q GDP growth.

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 1.54%. Meanwhile, the yield on the 10-year maturity rose one basis point (bp) and the yield on the 30-year maturity rose two bps on the MMD Triple-A Scale from last Thursday to Friday, and they finished the week at 2.13% and 2.73%, 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 one bp and the yield on the 30-year GO bond rose two bps.

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 1.44%. Meanwhile, the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity rose two bps on the MMA Triple-A Scale from last Thursday to Friday, and they finished the week at 2.17% and 2.82%, respectively. Overall, week-over-week the yield on the two-year GO bond fell one bp, while the yield on the 10-year GO bond was unchanged and the yield on the 30-year GO bond rose one bp.

Prices on U.S. Treasuries were mixed on Tuesday. On Wednesday they weakened, while on Thursday they were mixed. On Friday they weakened again across the curve. Overall, week-over-week the yield on the 10-year maturity rose nine bps and closed the week at 2.64%. Meanwhile the yield on the two-year maturity rose six bps week-over-week and closed the week at 2.06%. This resulted in a week-over-week 2s/10s spread of 58 bps, three bps wider than last week’s 2s/10s spread of 55 bps. The yield on the 30-year maturity rose six bps and finished the week at 2.91%.

 

Volume to be $7.17B for the Trading Week

Total volume for the coming week is estimated to be $7.17B, up from the $2.78B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $5.56B in negotiated deals and approximately $1.61B in competitive sales.

The Chicago Sales Tax Securitization Corporation’s (Chicago STSC) $898.07MM is back on the calendar again this week, after being delayed the past few weeks. The deal is rated AA by S&P Global Ratings (S&P), AAA by Fitch Ratings (Fitch) and Kroll Bond Rating Agency (Kroll). The Chicago STSC is slated to come with a pre-sale on Monday for $361.0MM of tax-exempt paper, with a final pricing tentatively slated for Tuesday.

In addition, they are considering adding to the issuance longer-dated, index eligible taxable bonds that also could come during the week, according to market participants. The sizing on the taxable tranche was not immediately available, so it’s unclear whether the city’s revised borrowing plans will reach the same $898.0MM in size of the delayed issue, however, the taxable municipal index bonds must be in a par amount of at least $300.0MM.

The State of Connecticut plans to offer $800.0MM of special tax obligation bonds for transportation infrastructure purpose on Wednesday following a one-day retail order period. The deal is rated AA by S&P, A+ by Fitch and AA+ by Kroll.  The Port Authority of New York and New Jersey plans to offer $843.0MM of consolidated bonds that will also feature separate sales of alternative minimum tax (AMT) and taxable bonds on Tuesday. The deal is rated Aaa by Moody’s Investors Service (Moody’s) and AAA by S&P.

The biggest competitive sale will come from Anoka-Hennepin Independent School District No. 11, Minnesota on Monday. The $150.0MM GO school building bonds are rated AA+ by S&P.

 

Municipal Bond Funds Posted Inflows for a Second Week       

Municipal bond funds posted inflows for a second week, as market participants put cash into funds, according to the latest data from Lipper. The weekly reporters saw $1.18B of inflows, after experiencing inflows of $1.06B the week prior. The four-week moving average was positive at $503.830MM, after being positive at $271.840MM the week prior.

Long-term municipal bond funds had inflows of $1.099B in the latest week after inflows of $1.12B the week prior. Intermediate-term funds had inflows of $178.692MM after inflows of $360.123MM the week prior. National funds had inflows of $1.14B after inflows of $988.826MM the week prior. High-yield municipal funds reported inflows of $206.925MM in the latest week, after inflows of $365.937MM the week prior. Exchange traded funds reported inflows of $118.046MM, after inflows of $22.703MM 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. With January 1st and January 15th being large rolloff dates, BQ participants continue to have significant demand for BQ paper. This week’s issuance picks up, so market participants should find opportunities both in 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 tightened across the curve, except for the one-year maturity which was unchanged week-over-week. The largest tightening occurred in the five-, 10- and 15-year maturities: 10 bps each.

 

Daily Overview of the General Market for the Week Ending January 19th

Last Tuesday prices on municipals were stronger across the curve, as the first of the week’s big new issues priced, before buyers turned their attention to the high-yielding sales tax securitization coming from Chicago later in the week. On the day the yield on the two-year GO bond fell one bp, 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.

Prices on U.S. Treasuries were mixed, as U.S. assets reversed course in the afternoon causing the early rally in stocks to wane and the U.S. Dollar to give up its overnight gains. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity was steady and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio fell to 82.4% on Tuesday from last Friday’s level of 83.1%, while the 30-year municipal-to-Treasury ratio slipped to 94.7% on Monday from Friday’s level of 95.1%.

Last Wednesday prices on municipals were steady, as the Chicago Sales Tax Securitization Corporation’s highly anticipated bond sale was delayed until next week at the earliest. On the day the yields on the two-, 10- and 30- year GO bonds were steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were weaker across the curve, as stocks broke out of an early morning lull to begin a climb that would last for the remainder of the session and sent the three major indices to new record highs. With stocks rallying, yields remained under pressure all of Wednesday and the curve ended with some of the highest yields in months, if not years, across various maturities. On the day, the yield on the two-year maturity rose four bps, while the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio fell to 81.4% on Wednesday from Tuesday’s level of 82.4%, while the 30-year municipal-to-Treasury ratio slipped to 94.4% on Wednesday from Tuesday’s level of 94.7%.

Last Thursday prices on municipals weakened, as municipal participants scooped up supply from the New York Metropolitan Transportation Authority and Cook County, Illinois. 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 each rose two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed, as U.S. stocks failed to repeat Wednesday’s record performances as several intraday attempts to turn positive ultimately came up short. On the day, the yield on the two-year maturity fell 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 slipped to 81.2% on Thursday from Wednesday’s level of 81.4%, while the 30-year municipal-to-Treasury ratio fell to 93.8% on Thursday from Wednesday’s level of 94.4%.

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 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 trading session weaker. On the day, the yields on the two- and 30-year maturities each rose two bps, while the yield on the 10-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 80.7% on Friday from Thursday’s level of 81.2%, while the 30-year municipal-to-Treasury ratio was unchanged on Friday, from Thursday’s level of 93.8%.

 

 




Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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