Muni Update

January 29, 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 third week, as weekly reporting funds experienced inflows of $781.160MM, after experiencing inflows of $1.18B 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 if yields should rise.

U.S. Treasury prices started the trading week weaker across the curve. On Tuesday prices reversed course and strengthened across the curve. On Wednesday they weakened again. On Thursday they were mixed again, as the front-end weakened and bonds maturing 10 years and longer strengthened. On Friday they were weaker across the curve. Prices on municipals started the week mixed, as the front-end strengthened, while bonds maturing 10 years and longer weakened. On Tuesday prices were mixed again, as the front-end was steady and bonds maturing 10 years and longer weakened. On Wednesday’s municipals were a repeat of Tuesday’s close. On Thursday prices were steady. 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 $5.25B, which is below last week’s revised level of $6.61B. 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. The front-end of the municipal curve has been outperforming, with MMD/UST ratios in the front-end moving down to around 70.0%, while long-dated ratios (30-year plus) have adjusted higher.

This week’s economic calendar is loaded with information. It starts off this morning with December’s personal income, spending, and PCE inflation reports.  Tuesday brings the home price report (S&P CoreLogic) and the Conference Board’s Consumer Confidence report. Wednesday morning we will get the ADP Employment report, which will preview Friday’s BLS labor reports, followed by the 4Q Employment Cost Index.  Wednesday afternoon brings Chairwoman Janet Yellen’s final FOMC decision as Chair. The Committee is not expected to raise rates at this time. Thursday will see a range of economic reports covering nonfarm productivity and unit labor costs, December’s Construction Spending tally, the ISM’s report on manufacturing sentiment, and January’s vehicle sales.   Friday’s calendar includes January’s Nonfarm Payroll Report, the Unemployment Rate, and Average Hourly Earnings.  In addition, the University of Michigan will release its report on consumer confidence.

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 each rose three basis points (bps) on the MMD Triple-A Scale from last Thursday to Friday, and they finished the week at 2.23% and 2.81%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell two bps, while the yield on the 10-year GO bond rose 10 bps and the yield on the 30-year GO bond rose eight 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 1.52%. Meanwhile, the yields on the 10- and 30-year maturities each rose two bps on the MMA Triple-A Scale from last Thursday to Friday, and they finished the week at 2.23% and 2.88%, respectively. Overall, week-over-week the yield on the two-year GO bond rose eight bps, while the yields on the 10- and 30-year GO bonds each rose six bps.

Prices on U.S. Treasuries were weaker on Monday, stronger on Tuesday and weaker again on Wednesday. On Thursday they were mixed and on Friday they were weaker 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 $5.25B for the Trading Week

Total volume for the coming week is estimated to be $5.25B, down from the $6.61B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $5.08B in negotiated deals and approximately $164.2MM in competitive sales. There are 16 deals on the docket that are $100.0MM or larger in par-amount, with taxable bonds making up half of the six largest expected transactions.

Topping this week’s slate is the $1.39B tobacco bond deal from the Pennsylvania Commonwealth Financing Authority. The deal is set to price on Wednesday, and is rated A1 by Moody’s Investors Service (Moody’s), A by S&P Global Ratings (S&P) and A+ by Fitch Ratings (Fitch). Also this week, the State of Hawaii plans to offer $775.0MM of GO tax-exempt and taxable bonds on Tuesday. The tax-exempt portion is anticipated to be $627.920MM, while the taxable portion is projected to be $127.080MM. The offerings are rated Aa1 by Moody’s, AA+ by S&P and AA by Fitch.

The Hampton Roads Transportation Accountability Commission’s $500.0MM offering of Series 2018A senior lien revenue bonds is also slotted to price on Tuesday. The deal is rated AA by S&P and AA-plus by Fitch. There are no competitive sales of $100.0MM or above slated for the week.

 

Municipal Bond Funds Posted Inflows for a Third Week       

Municipal bond funds posted inflows for a third week, as market participants put cash into funds, according to the latest data from Lipper. The weekly reporters saw $781.160MM of inflows, after experiencing inflows of $1.18B the week prior. The four-week moving average was positive at $744.164MM, after being positive at $503.830MM the week prior.

Long-term municipal bond funds had inflows of $772.983MM in the latest week after inflows of $1.099B the week prior. Intermediate-term funds had inflows of $329.453MM after inflows of $178.692MM the week prior. National funds had inflows of $776.001MM after inflows of $1.14BMM the week prior. High-yield municipal funds reported inflows of $32.551MM in the latest week, after inflows of $206.925MM the week prior. Exchange traded funds reported inflows of $17.950MM, after inflows of $118.046MM 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 drops off slightly from last week’s level, 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 were mixed, as reflected by the spreads on the one-, two-, three- and five-year maturities all tightening, with the largest tightening occurring in the two-year maturity, six bps. Meanwhile, week-over-week the spreads on the 10- and 15-year maturities were unchanged, while the spread on the 30-year maturity widened two bps.

 

Daily Overview of the General Market for the Week Ending January 26th

Last Monday prices on municipals were mixed, as a pre-marketing wire on the Chicago Sales Tax Securitization Corporation’s $366.2MM of tax-exempt bonds indicated wider spreads than Chicago saw in last month’s sale. The issue will be priced on Tuesday and is projected to be composed of tax-exempt and taxable bonds. Details on the expected $300.0MM taxable offering, which are due in 2048 with a make-whole call feature, were not available. On the day the yield on the two-year GO bond fell two bps, 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 on the day, which started with the Government shutdown and ended with an agreement to open it. Despite all this noise, the recent trends across asset classes remained the constant: equities notched another round of all-time high closes, U.S. Treasury yields remain at or near multi-year highs, and the U.S. Dollar is at its weakest level in three years. 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 two bps. The 10-year municipal-to-Treasury ratio slipped to 80.5% on Monday from last Friday’s level of 80.7%, while the 30-year municipal-to-Treasury ratio also slipped to 93.5% on Monday from Friday’s level of 93.8%.

Last Tuesday prices on municipals were mixed, as the Chicago Sales Tax Securitization Corporation priced its bond deal, which saw yields soar compared with its inaugural sale last December due to a tougher market environment. 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.

Prices on U.S. Treasuries were stronger, as U.S. equities ended mixed with the S&P and NASDAQ reaching new record highs while the Dow slipped a minor 4 points, or 0.01%. The U.S. Dollar dropped again, reaching its weakest level since December 2014. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity fell four bps and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio rose to 82.1% on Tuesday from Monday’s level of 80.5%, while the 30-year municipal-to-Treasury ratio rose to 94.1% on Tuesday from Monday’s level of 93.5%.

Last Wednesday prices on municipals were mixed, as the Chicago Sales Tax Securitization Corporation’s taxable part came to market and at the same time the State of Connecticut’s special tax obligation bonds were sold. 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 five bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were weaker across the curve, as U.S. stocks closed mixed on the day, while the U.S. Dollar closed at its lowest level since December 2014 and is off to its worst year-to-date start since 1987. There were beneficiaries of the U.S. Dollar’s daily weakness, as gold closed at its highest level since August 2016 and U.S. crude prices rallied more than 2.0% to its best level since December 2014. On the day, the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year maturities each rose three bps. The 10-year municipal-to-Treasury ratio rose to 83.0% on Wednesday from Tuesday’s level of 82.1%, while the 30-year municipal-to-Treasury ratio rose to 94.9% on Wednesday from Tuesday’s level of 94.1%.

Last Thursday prices on municipals were steady, as municipal participants scooped up supply from the last of the week’s new issue offerings. 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.

U.S. Treasury prices finished the day mixed, as the ECB’s decision and moves in European assets were the markets’ major focus. U.S. stocks closed mixed with the Dow and S&P (barely) making new record levels. Energy was the biggest drag on the indices after oil prices pulled back from record levels on the Trump-driven U.S. Dollar jump. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell four bps. The 10-year municipal-to-Treasury ratio rose to 83.7% on Thursday from Wednesday’s level of 83.0%, while the 30-year municipal-to-Treasury ratio rose to 96.2% on Thursday from Wednesday’s level of 94.9%.

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 three 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 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 two bps. The 10-year municipal-to-Treasury ratio was relatively unchanged on Friday from Thursday’s level of 83.7%, while the 30-year municipal-to-Treasury ratio rose to 96.6% on Friday from Thursday’s level of 96.2%.

 

 



 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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