Muni Update

January 31, 2022


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


Municipal Market Recap

Municipal bond prices started the week mixed, as prices on bonds maturing 23 years and in weakened, while prices on bonds maturing 24 years and out were steady. On Tuesday municipal prices weakened across the curve, as the Federal Open Market Committee’s (FOMC) two-day meeting got underway. On Wednesday municipal prices once again weakened across the curve, as the FOMC voted unanimous, despite varying degrees of concern to keep its overnight target rate range unchanged at 0.00-0.25% and continue reducing its net asset purchases at $30.0B per month. On Thursday and Friday municipal prices once again weakened across the curve.

This week, the projected level of new-issue offerings for the trading week are $8.07B. This level of new-issue offerings coupled with bank qualified (BQ) and general market (GM) offerings in the secondary market should provide market participants a number of opportunities to fill their needs, especially as demand continues to outpace supply. With the municipal market heading for the biggest monthly loss since the height of the pandemic-fueled market rout in early 2020, buyers are demanding more in compensation to own debt. Ten-year benchmark municipal bond yields have climbed about 51 basis points (bps) since the start of the year and by 10 bps on Friday, to 1.55%.

Investors not only pulled cash out of funds for a second week in a row but pulled the most cash out of municipal-bond mutual funds since April 2020, as they brace for Federal Reserve rate hikes as soon as March. Tax-exempt weekly reporting funds data showed that funds experienced outflows of $1.432B in the latest week, after experiencing outflows of $238.926MM the week prior. The four-week moving average fell to a negative $149.964MM, after being in the green at $508.754MM the week prior.

Last week the yields on the two-, 10- and 30-year maturities on the MMD Triple-A Scale each rose 10 basis points (bps) from Thursday to Friday and ended the week at 0.89%, 1.55% and 1.95%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose 31 bps, while the yield on the 10-year GO bond rose 27 bps and the yield on the 30-year GO bond rose 23 bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale rose 11 bps from Thursday to Friday and ended the week at 0.80%. Meanwhile the yields on the 10- and 30-year maturities on the MMA Triple-A Scale each rose 10 bps from Thursday to Friday and they ended the week at 1.77% and 2.29%, respectively. Overall, week-over-week the yield on the two-year maturity rose 32 bps, while the yield on the 10-year maturity rose 26 bps and the yield on the 30-year maturity rose 27 bps.


New-Issue Volume is Forecasted to be $8.07B for the Trading Week

Total new-issue offerings for the trading week per IHS Markit Ipreo are $8.07B. This week’s projected level of bond issuance is comprised of $6.274 in negotiated deals and $1.796 in competitive deals. The largest deal of the week will be the Rayburn Country Securitization offering of $908.289MM of senior secured cost recovery bonds: consisting of $205.399MM of Series 2022 Class A-1, term 2032; $353.327MM of Series 2022 Class A-2, term 2043; and $349.623MM of Series 2022 Class A-3, term 2051.

The Department of Airports of the City of Los Angeles, California, is set to price $412.275MM; consisting of $293.845 million of private activity/alternative minimum tax subordinate revenue and refunding revenue bonds 2022 Series C, $99.895MM of private activity/non-alternative minimum tax subordinate refunding revenue bonds, 2022 Series D, and $18.535MM of governmental purpose/non-alternative minimum tax subordinate refunding revenue bonds, 2022 Series E, on Tuesday.  The deal is rated Aa3 by Moody’s Investors Service (Moody’s) and AA- by Standard and Poor’s Global Ratings (S&P) and Fitch Ratings (Fitch).  Also on Tuesday, the City of San Antonio, Texas, Electric and Gas Systems is set to price $347.865MM of fixed and variable rate junior lien revenue refunding bonds, Series 2022. The deal is rated Aa3 by Moody’s, A+ by S&P, and AA- by Fitch.

On Wednesday the Massachusetts State College Building Authority is set to price $102.86MM of project and refunding revenue bonds, Series 2022A. The deal is rated Aa2 by Moody’s and AA- by S&P. Other deals on Wednesday include New York Liberty Development Corporation plans to process $449.19MM of green tax-exempt liberty revenue refunding bonds, Series 2022A, consisting of $355.19 million of Series 1 (rated Aaa by Moody’s), $58.8MM of Series 2 (rated Aa3by Moody’s) and $35.2MM of Series 3 (rated A2 by Moody’s.  Arlington Independent School District, Texas, is set to price $195.035MM of unlimited tax school building and refunding bonds, Series 2022, serials 2023-2047, insured by Permanent School Fund Guarantee Program and rated Triple-A by Moody’s and S&P. Broward County, Florida, is set to price $178.67MM of water and sewer utility revenue bonds, Series 2022, The deal is rated Aa1 by Moody’s and AA+ by S&P.

Other deals this week include the Upper Arlington City School District, Ohio, is set to price next week $125.23MM of unlimited tax GO revenue bonds, consisting of $55.71MM of Series A, $64.545MM of Series B, and $4.975MM of Series A-CAB.  Georgetown Independent School District, Texas, plans to price $103.88MM of taxable unlimited tax refunding bonds, Series 2022-A, insured by Permanent School Fund Guarantee Program.

In the competitive arena the Commonwealth of Massachusetts is set to sell $300.0MM of GO bonds consolidated loan of 2022, Series A at 10 a.m. eastern on Tuesday. Also on Tuesday, the Commonwealth of Massachusetts will also sell $350.0MM of GO bonds consolidated loan of 2022, Series A at 10:30 a.m. The deals are rated Aa1 by Moody’s, AA by S&P, and AA+ by Fitch. Hampton, Virginia, is set to sell $117.37MM of general obligation public improvement bonds, Series 2022A at 10 a.m. eastern on Thursday.


Municipal Bond Funds Posted Outflows for the Second Week in a Row

Investors in municipal bond pulled cash out of funds for the second week in a row, as tax-exempt weekly reporting funds experienced outflows of $1.432B in the latest week, after experiencing outflows of $238.926MM the week prior. The four-week moving average fell to a negative $149.964MM, after being $508.754MM after being in the green at $508.754MM the week prior.

Long-term municipal bond funds had outflows of $760.347MM in the latest week, after experiencing inflows of $426.196MM the week prior. Intermediate-term funds had outflows of $157.818MM after outflows of $70.812MM the week prior. National funds had outflows of $1.291B after experiencing outflows of $312.876MM the week prior. High-yield municipal funds reported outflows of $453.999MM in the latest week, after inflows of $182.035MM the week prior. Exchange traded funds reported outflows of $209.020MM, after inflows of $56.463MM the week prior.


Demand in the Bank Qualified (BQ) Market Remains Strong

BQ participants continue to be focused on the new-issue paper and the expected level of both BQ and general market (GM) new-issue paper this trading week, together with secondary market offerings should provide BQ market participants with some opportunities to fill their needs, as demand continues to remain strong. This significant demand for all types of municipal paper is being driven in large part by investors having to replace rolloffs due to continued strong redemption activity and demand from funds. We also note that customers should be watching the outflows from funds, because the bond funds will have to “liquidate” or sell to meet redemptions and when they do, they typically sell their high-grade credits to get the most value possible when liquidating. This may create opportunities for our bank customers.

At this time of year, we encourage participants to review their portfolio and clean-up any odd lots (on-going monitoring of line items), as well as credit clean-up for any credits on negative credit watches or recent downgrades. Finally, extension swaps present an opportunity to sell short duration municipals and extend on out the yield curve, while maintaining or improving the overall credit quality of the portfolio, especially, as overall credit quality continues to stabilize and improve in the municipal market. Week-over-week, BQ spreads were mixed, as the spread on the one-year maturity tightened, 12 bps. Meanwhile the spreads on the two-, three-, five-, 10-, 15-, and 30-year maturities all widened, with the largest widening occurring in the three-year maturity, 27 bps.


Daily Overview of the General Market for the Week Ending January 28th

On Monday municipal prices were mixed, as the first of the trading week’s $4.95B in new-issue long-term debt was offered. On the day, the yield on the two-year GO bond rose five bps, while the yield on the 10-year GO bond rose two bps and the yield on the 30-year GO bond was unchanged, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasurys were also mixed on Monday, as U.S. stocks fell on the open and for most of the day before they reversed course to close the session in the green. The Dow finished up 101 points or 0.3%, after being down over 1,000 points at one time during the day. The S&P was also up 0.3% and the NASDAQ was up 0.6%. On the day, the yield on the two-year maturity fell two bps, while the yield on the 10-year maturity was unchanged and the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio rose to 74.3% on Monday from last Friday’s level of 73.1%, while the 30-year municipal-to-Treasury ratio fell to 81.9% on Monday from last Friday’s level of 83.1%.

On Tuesday municipals prices weakened, as the primary market got underway with several large new-issue offerings being priced. On the day, the yield on the two-year GO bond rose three bps, while the yields on the 10- and 30-year GO bonds each rose four bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasurys also weakened on Tuesday, while U.S. stocks seesawed through the day and closed down for the session. The Dow was down 67 points or 0.2%, while the S&P was down 1.2% and the NASDAQ was down 2.3%. On the day, the yields on the two- and 10-year maturities each rose three bps, while the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio rose to 75.3% on Tuesday from Monday’s level of 74.3%, while the 30-year municipal-to-Treasury ratio rose to 83.0% on Tuesday from Monday’s level of 81.9%.

On Wednesday municipals prices weakened, pushing yields higher even before the FOMC announced that they would soon raise interest rates, but for now voted unanimous to keep its overnight target rate range unchanged at 0.00-0.25% and continue reducing its net asset purchases at $30.0B per month. Meanwhile a number of new-issue offerings came to market and were well received. On the day, the yields on the two-, 10-and 30-year GO bonds each rose three bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasurys also weakened on Wednesday, while U.S. stocks spent another day seesawing up and down to finish the session barely mixed, as the central bank affirmed market expectations that it was nearing the start of interest rate hikes as the economic recovery progressed and inflation remained hot. The Dow finished down 130 points or 0.4%, while the S&P was down 0.2% and the NASDAQ was barley up at 0.02%. On the day, the yield on the two-year maturity rose 11 bps, while the yield on the 10-yearmaturity rose seven bps and the yield on the 30-year maturity rose four bps. The 10-year municipal-to-Treasury ratio fell to 74.1% on Wednesday from Tuesday’s level of 75.3%, while the 30-year municipal-to-Treasury ratio slipped to 82.9% on Wednesday from Tuesday’s level of 83.0%.

Last Thursday municipals prices weakened across the curve, as the last of the week’s new-issue offerings came to market. On the day, the yield on the two-year GO bond rose 10 bps, while the yield on the 10-year GO bond rose eight bps and the yield on the 30-year GO bond rose six bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were mixed on Thursday, as U.S. stocks seesawed throughout the day, only to slip into the red at the end of the session. The Dow finished by just seven points or 0.02%, while the S&P was down 0.5% and the NASDAQ was down 1.4%. On the day, the yield on the two-year maturity rose five bps, while the yield on the 10-year maturity fell four bps and the yield on the 30-year maturity fell seven bps. The 10-year municipal-to-Treasury ratio rose to 80.1% on Thursday from Wednesday’s level of 74.1%, while the 30-year municipal-to-Treasury ratio rose to 88.5% on Thursday from Wednesday’s level of 82.9%.

Last Friday municipals prices once again weakened, as market participants looked ahead to the $8.07B in expected new-issue offerings in the upcoming trading week. On the day, the yields on the two-, 10- and 30-year GO bond each rose 10 bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices strengthened on Friday, while U.S. stocks surged into the close, reversing earlier losses as investors took in earnings results from some major tech companies and another hot print on inflation at the end of a volatile week. The Dow was up 565 points or 1.7%, while the S&P was up 2.4% and the NASDAQ was up 3.1%. On the day, the yields on the two- and 10-year maturities each fell three bps, while the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio rose to 87.1% on Friday from Thursday’s level of 80.1%, while the 30-year municipal-to-Treasury rose to 94.2% on Friday from Thursday’s level of 88.5%.





Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks

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