Muni Update

January 7, 2019



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

 

Municipal Market Recap

Municipal issuance was down two-thirds in December 2018 from a year earlier, putting 2018 total volume at $338.0B, nearly a quarter less than the market produced in 2017, which was $448.6B. December 2018 volume came to $21.9B on just 620 transactions, a far cry from the $69.8B on 1,364 deals sold the last month of 2017, when issuers were racing against the tax reform clock to complete deals. The decline this year is not as dire as it sounds, as part of the year-end spike in volume in 2017 was for loans that would have likely come to market in early 2018, were it not for fear of tax reform.

Last Monday, New Year’s Eve, saw prices on municipals finish the day unchanged across the curve. On Wednesday and Thursday prices strengthened across the curve. On Friday prices were mixed, as bonds maturing 10 years and in were steady, while the long-end weakened. Issuance this week is forecasted to be $7.77B as the market gets into full swing after the Christmas and New Year’s Holidays. This increase in new issue volume coupled with bid lists should provide market participants with opportunities to fill their needs.

Investors in municipal bond funds pulled their cash out of them in the latest week, as weekly reporting funds experienced outflows of $599.184MM, after experiencing inflows of $931.424MM the week prior. The four-week moving average was a positive $67.686MM, after being a positive $44.474MM 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 in the U.S. municipal market.

Last week the yields on the two- and 10-year maturities on the MMD Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 1.73% and 2.20%, respectively. Meanwhile the yield on the 10-year maturity on the MMD Triple-A Scale rose two basis points (bps) from Thursday to Friday and ended the week 2.95%. Overall, week-over-week the yield on the two-year General Obligation (GO) bond fell five bps, while the yield on the 10-year GO bond fell eight bps and the yield on the 30-year GO fell seven 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 1.76%. Meanwhile the yields on the 10- and 30-year maturities on the MMA Triple-A Scale each rose two bps from Thursday to Friday and they ended the week at 2.46% and 3.10%, respectively. Overall, week-over-week the yield on the two-year GO bond fell six bps, while the yield on the 10-year GO bond fell five bps and the yield on the 30-year GO bond fell seven bps.

 

New Issue Volume is Forecasted to be $7.77B for the Week

Total issuance for the trading week is estimated to be $7.77B, which is well above last week’s trading volume of $43.9MM in issuance, according to revised data from Thomson Reuters. Last week’s low volume was anticipated. This week’s trading calendar is comprised of $5.81B in negotiated offerings and $1.96B in competitive offerings.

The Commonwealth of Massachusetts got an early start to this week’s offerings, as it priced for retail last Friday its $918.49MM of tax-exempt GO bonds. The deal will have a second retail order period today, before being priced for institutions on Tuesday. The bonds are rated Aa1 by Moody’s Investors Service (Moody’s), AA by S&P Global Ratings (S&P) and AA+ by Fitch Ratings (Fitch).

The San Francisco Airport Commission will price $1.78B of tax-exempt and taxable revenue and revenue refunding bonds on Thursday. The deal, which consists of bonds subject to the alternative minimum tax (AMT) and non-AMT bonds. The deal is rated A1 by Moody’s and A+ by S&P and Fitch. Also this week, the New Jersey Transportation Trust Fund Authority will price $500.0MM of transportation program bonds on Wednesday.

In the competitive arena, New York’s Empire State Development is selling about $1.56B of Urban Development Corporation state personal income tax revenue bonds in six sales on Tuesday.

 

Municipal Bond Funds Post Outflows for the Week

Investors in municipal bond funds pulled their cash out of them in the latest week, according to the latest data from Lipper. The weekly reporting funds saw outflows of $599.184MM, after experiencing inflows of $931.424MM the week prior. The four-week moving average was a positive $67.686MM, after being a positive $44.474MM the week prior.

Long-term municipal bond funds had outflows of $542.820MM in the latest week after experiencing inflows of $694.069MM the week prior. Intermediate-term funds had outflows of $550.066MM after outflows of $255.794MM the week prior. National funds had outflows of $16.142MM after experiencing inflows of $936.236MM the week prior. High-yield municipal funds reported outflows of $8.143MM in the latest week, after inflows of $395.844MM the week prior. Exchange traded funds reported inflows of $107.278MM, after inflows of $549.913MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

Last week, the BQ market saw decent activity, despite the low 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. The expected pick up in new issue paper this week, together with secondary opportunities, should provide market participants the chance to address their needs while picking up attractive structures, especially those in the long-end of the curve. Participants should also continue to utilize extension swaps and perform portfolio cleanup, as the bid side for municipals continues to remain strong. Week-over-week, bank qualified spreads tightened across the curve, with the largest tightening occurring in the five-year maturity, 20 bps.

 

Daily Overview of the General Market for the Week Ending January 4th

Last Monday prices on municipals were steady ahead of the New Year’s Day Holiday on Tuesday. On the day, the yields on the two-, 10- and 30-year GO bonds were all unchanged, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries strengthened on the day, as U.S. equities posted gains for the session, with the Dow the biggest winner. On the day, the yield on the two-year maturity fell four bps, 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 84.8% on Monday from last Friday’s level of 83.8%, while the 30-year municipal-to-Treasury rose to 100.0% on Monday from last Friday’s level of 99.3%.

Last Wednesday prices on municipals were stronger, as the market is mostly in vacation mode with no major bond sales scheduled until next week. On the day, the yield on the two-year GO bond fell two bps, while the yield on the 10-year GO bond fell one bp and the yield on the 30-year GO bond fell three bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as the market volatility that was a mainstay of 2018 carried over into 2019’s opening session as the S&P 500 erased its opening 1.6% decline to close up 0.1%, oil prices jumped more than 7.0% from their intraday lows to close 2.7% higher, and the U.S. Treasury curve flattened on a long-end rally. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell five bps. The 10-year municipal-to-Treasury ratio rose to 85.3% on Wednesday from Monday’s level of 84.8%, while the 30-year municipal-to-Treasury ratio rose to 100.7% on Wednesday from Monday’s level of 100.0%.

Last Thursday prices on municipals strengthened again, as once again there was no new issue offerings and continued volatility in the stock market helped keep alive the rally in municipal and U.S. Treasury bonds. On the day, the yield on the two-year GO bond fell three bps, while the yield on the ten-year GO bond fell seven bps and the yield on the 30-year GO bond fell six bps according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as stocks posted losses on the session. On the day, the yield on the two-year maturity fell 11 bps, while the yield on the 10-year maturity fell 10 bps and the yield on the 30-year maturity fell five bps. The 10-year municipal-to-Treasury ratio bumped up 85.9% on Thursday from Wednesday’s level of 85.3%, while the 30-year municipal-to-Treasury was slipped to 100.3% on Thursday from Wednesday’s level of 100.7%.

Last Friday, after an unexpectedly strong jobs report was released, municipal bonds snapped a more-than two-week rally, with prices dropping alongside U.S.  Treasuries in the early part of the day, before rallying back in certain maturities to finish the session unchanged. Market participants by the late afternoon had turned their attention to the coming week’s $7.77B in forecasted new issue offerings. On the day, the yields on the two- and 10-year GO bonds were unchanged, while the yield on the 30-year GO bonds were rose two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were weaker, as a very strong jobs report and later, Federal Reserve Chairman Jerome Powell starting that the central bank will be patient in raising rates, quelled fears of tighter monetary policy in the near future and helped propel U.S. equites prices higher for the session. On the day, the yields on the two- and 10-year maturities each rose 11 bps, while the yield on the 30-year maturity rose six bps. The 10-year municipal-to-Treasury ratio fell to 82.4% on Friday from Thursday’s level of 85.9%, while the 30-year municipal-to-Treasury ratio fell to 99.0% on Friday from Thursday’s level of 100.3%.







Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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