Muni Update

July 10, 2017



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

 

Municipal Market Recap

Municipal bond funds recorded outflows for the week, as weekly reporting funds experienced $458.306MM of outflows in the latest reporting week, after experiencing inflows of $496.355MM the week prior. The four-week moving average turned negative at $114.416MM, after being in the green at $246.434MM the week prior. High demand is expected to continue to outpace supply, as the market is in the middle of the heaviest volume of called and maturing bonds in any given year. This year the annual occurrence, which began June 1st, is expected to be record-breaking with over $100.0B of called and maturing bond proceeds, excluding coupon payments, slated to arrive into investors’ accounts over a three-month span. In addition, investors still facing negative 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 rise. While the uncertainty surrounding tax reform, infrastructure, and the pace of Fed tightening is causing some market participants to continue to be observers more than buyers at this time, retail participants are showing growth.

U.S. Treasury prices started the holiday-shortened trading week weaker across the curve. On Wednesday prices were steady in the front-end and stronger 10 years and longer. On Thursday the front-end strengthened, while maturities 10 years and longer weakened. On Friday prices were steady in the front-end and weaker 10 years and longer. Prices on municipals also started the trading week weaker across the curve. On Wednesday prices on the two- and 30-year maturities were steady, while the 10-year maturity weakened. On Thursday and Friday prices on municipals were steady in the front-end and weaker 10 years and longer. Volume for the trading week is projected to be $9.29B, which is well above last week’s revised level of $255.7MM. Market participants will be looking at both the projected sizable new issue market and the secondary market for opportunities to address the continued strong demand by market participants due to the municipal markets current period of high redemptions.

This week’s economic calendar contains a number of announcements. Of primary focus will be Fed Chair Yellen’s testimony before the House and Senate on Wednesday and Thursday. The markets will be looking for any sign that she is becoming more concerned about the weak trend for inflation. The Fed has seemingly shifted its outlook from patient to tightening, despite the data.  This is likely to reverse, at some point, if the paralysis in Washington persists and/or inflation continues trending below the Federal Open Market Committees (FOMCs) 2.0% target.  As for economic releases, there are several reports early in the week, but Friday will bring the most important reports.  June’s Consumer Price Index is expected to show core CPI remain at 1.7% YoY, while June’s retail sales report is expected to show an uptick in consumer spending.  July’s Consumer Confidence report from the University of Michigan will also be released Friday. Second quarter earnings season kicks into full gear this week with the banks beginning their reports on Friday, including JP Morgan, Wells Fargo, and Citi.

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 1.07%. Meanwhile, the yield on the 10-year maturity rose two basis points (bps) and the yield on the 30-year maturity rose three bps on the MMD Triple-A Scale from Thursday to Friday and ended the week at 2.05% and 2.85%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose one bp, while the yields on the 10- and 30-year GO bonds each rose six bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale fell one bp from Thursday to Friday and ended the week at 1.05%. Meanwhile, the yield on the 10-year maturity rose two basis points (bps) and the yield on the 30-year maturity was unchanged on the MMA Triple-A Scale from Thursday to Friday, and they ended the week at 2.18% and 3.00%, respectively. Overall, week-over-week the yield on the two-year maturity was unchanged, while the yields on both the 10- and 30-year maturities each rose three bps.

Prices on U.S. Treasuries started last week weaker. The rest of the week they were mixed. Overall, week-over-week the yield on the 10-year maturity rose nine bps and closed the week at 2.39%. Meanwhile the yield on the two-year maturity rose two bps week-over-week and closed the week at 1.40%. This resulted in a week-over-week 2s/10s spread of 99 bps, seven bps wider than last week’s 2s/10s spread of 92 bps. The yield on the 30-year maturity rose nine bps week-over-week and finished the week at 2.93%.

 

New Issue Volume is Expected to be $9.29B

Total volume for the trading week is estimated to be $9.29B, which is well above last week’s $255.7MM in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $7.94B in negotiated deals and approximately $1.35B in competitive sales, according to data from Thomson Reuters. For the week, there are 19 deals scheduled that are $100.0MM or larger, with four of them being competitive deals.

The largest deal of the week is a New York City Transitional Finance Authority (NYC TFA) offering of $1.0B in building aid revenue bonds on Wednesday, after a two-day retail order period. The deal is rated Aa2 by Moody’s Investors Service (Moody’s) and AA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch). The Port Authority of New York and New Jersey is offering $828.63MM of consolidated bonds, including alternative minimum tax (AMT) bonds on Thursday, after a one-day retail order period. The deal is rated Aa3 by Moody’s and AA- by S&P and Fitch. The Pennsylvania Turnpike Commission plans to offer $770.0MM of subordinate revenue and motor license fund enhanced turnpike special revenue refunding bonds on Thursday. Finally, this week also includes some credits that have had their share of fairly recent negative news coming to market, and they include $348.0MM from the City of Philadelphia, $344.0MM from Jefferson County, Alabama and $230.0MM from the Chicago Transit Authority.

The largest competitive deal of the week will be on Tuesday when Lewisville Independent School District, Texas offers $202.525MM of unlimited tax school building bonds. The deal is backed by the Texas Permanent School Fund and is rated triple-A by S&P.

 

Municipal Bond Funds Post Outflows for the Week      

Municipal bond funds posted outflows for the week, as market participants pulled cash out of funds, according to the latest data from Lipper. Weekly reporting funds reported $458.306MM of outflows for the most recent week. These followed inflows of $496.355MM the week prior, according to Lipper. The four-week moving average turned negative at $114.416MM, after being in the green at $246.434MM the week prior.

Long-term municipal bond funds had outflows of $305.061MM in the latest week after experiencing inflows of $347.179MM the week prior. Intermediate-term funds had outflows of $106.962MM after inflows of $48.313MM in the prior week. National funds had outflows of $402.531MM after inflows of $528.345MM the week prior. High-yield municipal funds reported outflows of $208.683MM in the latest reporting week, after inflows of $224.042MM the week prior. Exchange traded funds saw inflows of $2.624MM, after inflows of $83.810MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong 

The new issue calendar for the week picks up substantially from last week’s nearly non-existent calendar. This together with strong bid lists should contribute to meeting market participants growing demand, as they search for opportunities and prep for coming redemptions. In addition, the attractive slope of the BQ yield curve has participants continuing to utilize swaps to extend out the curve. Last week the spreads on the one- and two-year maturities each tightened one bp week-over-week, while the spreads for all other maturities widened week-over-week, with the largest widening occurring in the 10-year maturity, seven bps.

 

Daily Overview of the General Market for the Week Ending July 7th

Last Monday’s shortened trading day saw prices on municipal bonds finish steady across the curve, ahead of the July 4th holiday on Tuesday. 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.

Prices on U.S. Treasuries last Monday were weaker. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose four bps and the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio fell to 85.9% on Monday from the prior Friday’s level of 86.5%, while the 30-year municipal-to-Treasury ratio fell to 97.9% on Monday from the prior Friday’s level of 98.2%.

Last Wednesday prices on municipals finished the day mixed, as market participants returned to work after the July 4th holiday to just a $130.4MM new issue calendar, the smallest of the year. On the day, the yield on the two- and 30-year GO bonds were each unchanged, while the yield on the 10-year GO bond rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mixed, as tech stocks recovered Wednesday helping the NASDAQ finish well ahead of the Dow and S&P. On the day, the yield on the two-year maturity was unchanged, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio rose to 86.7% on Wednesday from Monday’s level of 85.9%, while the 30-year municipal-to-Treasury ratio rose to 98.3% on Wednesday from Monday’s level of 97.9%.

Last Thursday prices on municipals were mixed, as the last of the week’s smaller-sized bond sales hit the primary market. 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 were also mixed, as a sell-off in European sovereigns sent yields surging in another bad day for long positions in global sovereign debt. Almost all signs on Thursday were bearish for sovereigns. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity rose four bps and the yield on the 30-year maturity rose five bps. The 10-year municipal-to-Treasury ratio fell to 85.7% on Thursday from Wednesday’s level of 86.7%, while the 30-year municipal-to-Treasury ratio fell to 97.2% on Thursday from Wednesday’s level of 98.3%.

Last Friday prices on municipals finished the week steady in the front-end and weaker 10 years and longer, as market participants prepped for the estimated $9.29B in new issue paper expecting to come to market. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond rose two bps and the yield on the 30-year GO bond rose three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasuries finished the day steady in the front-end and stronger 10 years and longer. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity rose three six bps and the yield on the 30-year maturity rose one bp. Both the 10- and 30-year municipal-to-Treasury ratios were each unchanged on Friday from Thursday’s levels of 85.7% and 97.3%, respectively.





Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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