January 8, 2018
In this week’s Municipal Market Update, we highlight the following:
- Prices on municipals for the week were mixed daily, as reflected by weekly data for the Municipal Market Data (MMD) Triple-A Scale; also shown are the yields for the Municipal Market Advisors (MMA) Triple-A Scale and US Treasuries for the week;
- Volume jumps to $3.3B for the first full week of trading in 2018;
- Municipal bond funds posted outflows for a second week;
- Demand in the Bank Qualified (BQ) market remains strong;
- Day-by-day recap of activity in the General Market.
Municipal Market Recap
Municipal bond funds reported investors pulled cash out of funds last week, as weekly reporting funds experienced outflows of $47.880MM in the latest reporting week, after experiencing outflows of $180.177MM the week prior. The four-week moving average was positive at $59.882MM, after being in the red at $129.796MM 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 weaker across the curve. On Wednesday they were mixed, as the short-end weakened, while bonds maturing 10 years and longer were stronger. On Thursday prices were mixed, as the front-end weakened, the intermediate range was steady and the long-end was stronger. On Friday they were mixed once again, as the front-end was steady, while bonds maturing 10 years and longer weakened. Prices on municipals were mixed daily for the week. On Tuesday bonds 10 years and in were steady, while the long-end weakened. On Wednesday the short and long maturities strengthened, while intermediate maturities were steady. On Thursday the front-end was steady, while bonds maturing 10 years and longer weakened. On Friday the short-end was steady, while bonds maturing 10 years and longer weakened. Volume for the week is projected to be $3.3B which is above last week’s revised level of $760.0MM. This week’s rise in volume is expected as bond markets fully recover from the year-end holiday shortened trading schedule. This week’s economic data releases are fairly light but important, with the biggest reports of the week on Friday: the December’s advance read on retail sales and December’s Consumer Price Index (CPI) inflation report.
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 yields on the 10- and 30-year maturities on the MMD Triple-A Scale each rose two basis points (bps) from Thursday to Friday and they ended the week at 2.01% and 2.58%, 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 three bps and the yield on the 30-year GO bond rose four bps.
Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale all rose one bp from Thursday to Friday and they ended the week at 1.38%, 2.08%, and 2.73%. Overall, week-over-week the yield on the two-year maturity rose six bps, while the yield on the 10-year GO bond fell two bps and the yield on the 30-year GO bond fell three bps.
Prices on U.S. Treasuries were weaker on Tuesday. The rest of the week prices were mixed daily. Overall, week-over-week the yield on the 10-year maturity rose seven bps and closed the week at 2.48%. Meanwhile the yield on the two-year maturity also rose seven bps week-over-week and closed the week at 1.96%. This resulted in an unchanged week-over-week 2s/10s spread of 52 bps. The yield on the 30-year maturity also rose seven bps and finished the week at 2.81%.
Volume Jumps to $3.3B for the First Full Week of Trading in 2018
Total volume for the coming week is estimated to be $3.3B, up significantly from the $760.0MM in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $1.72B in negotiated deals and approximately $1.58B in competitive sales.
The largest deal of the week will be a competitive offering from the Commonwealth of Massachusetts (Commonwealth). The Commonwealth is scheduled to sell $600.0MM of GO bonds in two separate sales on Tuesday. One sale consists of $400.0MM of consolidated loan of 2018 Series A GOs and the other is $200.0MM of consolidated loan of 2018 Series B GOs. Both deals are rated Aa1 by Moody’s Investors Service (Moody’s), AA by S&P Global Ratings (S&P) and AA+ by Fitch Ratings (Fitch).
In the negotiated sector, taxable bond deals dominate the slate. Stanford Health Care will offer $500.0MM of Series 2018 corporate CUSIP taxables on Wednesday. The deal is rated Aa3 by Moody’s, AA- by S&P and AA by Fitch. On Thursday the Pennsylvania Commonwealth Financing Authority will offer $410.0MM of Series 2018A taxable revenue bonds on Thursday. The deal is rated A1 by Moody’s, A by S&P and A+ by Fitch. Also this week the Illinois Finance Authority will price $218.67MM of Series 2018 taxable revenue refunding bonds for the Ann and Robert H. Lurie Children’s Hospital of Chicago. The deal is rated AA- by S&P and AA by Fitch.
Municipal Bond Funds Posted Outflows for a Second Week
Municipal bond funds posted outflows for the week, as market participants pulled cash out of funds, according to the latest data from Lipper. The weekly reporters saw $47.880MM of outflows, after experiencing outflows of $180.177MM the week prior. The four-week moving average was positive at $59.882MM, after being negative at $129.949MM the week prior.
Long-term municipal bond funds had inflows of $255.775MM in the latest week after inflows of $122.015MM the week prior. Intermediate-term funds had inflows of $8.637MM after inflows of $43.649MM the week prior. National funds had inflows of $138.051MM after inflows of $37.812MM the week prior. High-yield municipal funds reported inflows of $73.675MM in the latest week, after inflows of $225.414MM the week prior. Exchange traded funds reported inflows of $195.493MM, after outflows of $15.570MM 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. Week-over-week, bank qualified spreads widened across the curve five years and in, and tightened 10 years and longer. The largest widening occurred in the one-year maturity, 23 bps, while the largest tightening occurred in the 10-year maturity, 15 bps.
Daily Overview of the General Market for the Week Ending January 5th
Last Tuesday prices on municipals were mixed, as municipal market participants gauged the direction of yields, as they looked ahead to what may be a downturn in issuance in 2018. On the day the yields on the two- and 10-year GO bonds were 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 weaker across the curve, as the NASDAQ started 2018 by extending the impressive run it registered for 2017. The S&P closed up a smaller 0.83%, but also at a new record high, and the Dow trailed with an even more modest 0.42% improvement. On the day the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose five bps and the yield on the 30-year maturity rose seven bps. The 10-year municipal-to-Treasury ratio fell to 80.5% on Tuesday from the prior Friday’s level of 82.2%, while the 30-year municipal-to-Treasury ratio fell to 90.8% on Tuesday from the prior Friday’s level of 92.7%.
Last Wednesday prices on municipals were mixed, as market participants appeared to be more focused on how far issuance will drop in 2018 due to the loss of both advance refundings under the recently approved tax reform and the amount of issuance that was originally planned for 2018 but was pushed into 2017. On the day the yield on the two-year GO bond fell two bps, while the 10- year GO bond was steady and the 30-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.
U.S. Treasury prices also were mixed, as U.S. stocks climbed steadily throughout the session and all three major indices recorded a new all-time high close. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio rose to 80.8% on Wednesday from Tuesday’s level of 80.5%, while the 30-year municipal-to-Treasury ratio bumped up to 91.0% on Wednesday from Tuesday’s level of 90.8%.
Last Thursday prices on municipals were mixed. 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 also finished the day mixed, as stocks surged on the day to close above 25K for the first time in history. The blue-chip index was Thursday’s top performer with its 0.61% move higher outpacing smaller gains of 0.40% and 0.18% for the S&P and NASDAQ. On the day, the yield on the two-year maturity rose two bps, 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 rose to 81.2% on Thursday from Wednesday’s level of 80.8%, while the 30-year municipal-to-Treasury ratio rose to 92.1% on Thursday from Wednesday’s level of 91.0%.
Prices on municipals last Friday finished the trading day mixed, as market participants were looking ahead to a new issue calendar that is dominated by two big competitive sales from Massachusetts and three large taxable deals in the negotiated sector. 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 two bps, according to the final read of the MMD Triple-A Scale.
U.S. Treasury prices also finished the trading session mixed. On the day, the yield on the two-year maturity was steady, while the yields on the 10- and 30-year maturities each rose three bps. The 10-year municipal-to-Treasury ratio slipped to 81.1% on Friday from Thursday’s level of 81.2%, while the 30-year municipal-to-Treasury ratio fell to 91.8% on Friday from Thursday’s level of 92.1%.
December Municipal Volume Hits Record $62.5B Ahead of Tax Overhaul (The Bond Buyer)
Municipal bond issuance set a new single-month record in December as issuers rushed to close deals before the new tax law took effect with the New Year. Data from Thomson Reuters shows volume in December ballooned to $62.5B on 1,168 transactions from $20.81B on 780 deals from the last month of 2016. The issuance surpassed the previous record of $54.7B of deals in December 1985, just before the last comprehensive tax overhaul took effect.
The flood of issuance also resulted in a 2017 total of $434.76B being closer than expected to the yearly issuance record, of $451.65B, that was set in 2016. Of the 2017 total, $144.61B came in the fourth quarter.
For December, refundings offerings accounted for $28.49B on 492 deals, up from $5.57B on 227 transactions during December of 2016. New money deal volume grew to $27.31B on 595 sales from $13.02B on 502 deals. The value of combined new money and refunding deals for the month rose to $6.69B from $2.22B a year earlier. Issuance of revenue bonds increased to $48.29B, while general obligation (GO) bond sales gained to $14.21B from $8.33B.
Negotiated deals jumped to $52.69B from $14.16B, while competitive sales increased to $6.83B from $3.91B. Taxable bond volume vaulted to $6.79B from $2.29B, while tax-exempt issuance expanded to $52.84B. Deals wrapped by bond insurance rose 70.2% year-over-year to $2.92B on 121 transactions from $1.72B on 123 deals.
California remained the state with the most volume. Issuers in the Golden State sold $67.59B last year. New York came in second with $48.45B, followed by Texas with $41.62B. Illinois was fourth with $21.57B and Pennsylvania rounds out the top five with $20.47B.
Senior Vice President
Vining Sparks IBG, LP