Muni Update

July 13, 2020


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


Municipal Market Recap

Municipal prices across the curve were steady on Monday. On Tuesday municipal prices were mixed, as the front-end was steady, while prices on bonds maturing 10 years and longer strengthened. On Wednesday municipal prices were again steady across the curve. Thursday’s price action was a repeat of Tuesday’s, as the front-end was steady, while prices on bonds maturing 10 years and longer strengthened. On Friday municipal prices strengthened across the curve. This week’s projected level of new-issue offerings is $9.84B. This level of new-issue supply together with various secondary market opportunities should provide market participants with various opportunities to meet demand, especially given the continued strong demand in the municipal market during the summer redemption season. July is the third-heaviest month of redemptions for the summer, behind June which saw $43.5B in redemptions and August which will see $42.3B. The bulk of the July redemptions happened on July 1st, when issuers returned $31.2B in principal. Another $8.0B plus is due to be redeemed this week, on July 15th.

Investors in municipal bond funds put cash into funds for a ninth week in a row, as tax-exempt weekly reporting funds experienced inflows of $1.024B in the latest week, after experiencing inflows of $1.065B the week prior. The four-week moving average was a positive $1.318B, after being in the green at $1.752B the week prior. Investors still facing low or negative rates overseas continue to find positive yielding U.S. assets attractive despite the recent outflows.

Last week the yield on the two-year maturity on the MMD Triple-A Scale fell three basis points (bps) from Thursday to Friday and ended the week at 0.24%. Meanwhile, the yields on the 10-and 30-year maturities on the MMD Triple-A Scale each fell four bps from Thursday to Friday and they ended the week at 0.81% and 1.53%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond fell three bp, while the yield on the 10-year GO bond fell nine bps and the yield on the 30-year GO bond fell 10 bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale fell two bps from Thursday to Friday and ended the week at 0.35%. Meanwhile, the yield on the 10-year maturity fell three bps and the yield on the 30- year maturity fell four bps on the MMA Triple-A Scale from Thursday to Friday and they ended the week at 1.20% and 1.80%, respectively. Overall, week-over-week the yield on the two-year GO bond fell four bps, while the yield on the 10-year GO Bond fell six bps and the yield on the 30-year GO bond fell eight bps.


New-Issue Volume is Forecasted to be $9.84B for the Week

Total new-issue offerings for the trading week per IHS Markit Ipreo is estimated to be almost $9.84B. This week’s projected issuance is comprised of $7.29B in negotiated deals and $2.55B in competitive sales. The largest deal of the week will be the New York State Urban Development Corporation which plans to offer $2.3B of tax-exempt and taxable general purpose state personal income tax revenue bonds on Thursday. Also, on Thursday the Virginia College Building Authority plans to offer $703.82MM of revenue bonds. The deal consists of $362.33MM of Series 2020A tax-exempt educational facilities revenue bonds and $341.49MM of Series 2020B taxable educational facilities revenue and revenue refunding bonds for the 21st Century college and equipment programs. The deal is rated Aa1 by Moody’s Investors service (Moody’s) and AA+ by both Standard and Poor’s Global Ratings (S&P) and Fitch Ratings (Fitch).

On Tuesday the University of Virginia plan to offer $600.0MM of taxable general revenue pledge bonds. The deal is rated Triple-A by Moody’s, S&P and Fitch.

On Wednesday the Texas Transportation Commission plans to offer $1.047B of taxable general obligation mobility fund refunding bonds. The deal is rated Triple-A by Moody’s, Fitch and Kroll Bond Rating Agency (KBRA). Also, the Maryland Health and Higher Educational Facilities Authority plans to offer $602.0MM of taxable revenue bonds for the University of Maryland Medical System on Wednesday. The deal is rated A2 by Moody’s and A by S&P.

In the competitive arena, the State of Washington plans to sell $625.685MM of GO bonds in four offerings on Tuesday. On Thursday, Montgomery County, Maryland plans to offer $852.39MM of GO bonds in three offerings.


Municipal Bond Funds Posted Inflows for a Ninth Week in a Row

Investors in municipal bond funds put cash into funds for a ninth week in a row, as tax-exempt weekly reporting funds experienced inflows of $1.024B in the latest week, after experiencing inflows of $1.065B the week prior. The four-week moving average was a positive $1.318B, after being in the green at $1.752B the week prior.

Long-term municipal bond funds had inflows of $617.441MM in the latest week after experiencing inflows of $768.699MM the week prior. Intermediate-term funds had outflows of $73.818MM after inflows of $9.068MM the week prior. National funds had inflows of $951.064MM after experiencing inflows of $1.044B the week prior. High-yield municipal funds reported inflows of $85.577MM in the latest week, after inflows of $119.298MM the week prior. Exchange traded funds reported inflows of $379.709MM, after inflows of $385.850MM the week prior.


Demand in the Bank Qualified (BQ) Market Remains Strong

The expected level of new-issue paper this week, coupled with BQ and General Market (GM) secondary market opportunities should provide BQ market participants with various opportunities to fill their needs. BQ participants continue to have significant demand for municipal paper due in large part to having to replace rolloffs due to redemptions over the next few months, which started on June 1st. Larger BQ participants (in particular C-Corps), continue to find attractive opportunities, both in size and structure in general market paper, due in part to the lower tax rates from tax reform, attractive spreads and lower costs of funds currently.

While currently you can buy anywhere along the curve and pick up spread over U.S. Treasurys, we continue to see bank portfolio managers purchase municipals in the steepest part of the curve from new-issue offerings. Along with outright purchases of Bank Qualified municipals with a five-to-nine-year call window, bank portfolio managers have taken advantage of the yield pickup and larger block size available in General Market (100% TEFRA) municipals in this low cost of funds environment. We also encourage participants to utilize extension swaps, to pick up more yield with little to no drop-off in credit quality. Week-over-week, bank qualified spreads tightened, with the largest tightening occurring in the three-year maturity, 20 bps.


Daily Overview of the General Market for the Week Ending July 10th

Last Monday municipal prices were steady, as a few of the smaller new issues of the week’s projected $7.38B in new-issue offerings came to market. 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. Treasurys were mixed on Monday, as U.S. stocks rose sharply in the morning, as stock gains around the world helped boost US market sentiment and along with new economic data showing a much stronger than expected rebound in US service sector activity in June contributed to U.S. stocks trading higher. The Dow finished up 460 points or 1.8%, while the S&P finished up 1.6% and the NASDAQ was up 2.2%. On the day, the yield on the two-year maturity was unchanged, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio fell to 130.4% on Monday from Friday’s level of 132.3%, while the 30-year municipal-to-Treasury ratio fell to 112.4% on Monday from Friday’s level of 114.0%.

Last Tuesday prices on municipals were mixed, as several new-issue offerings were priced, including the City of Los Angeles’ $1.76B tax and revenue anticipation notes (TRANs). 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 fell two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasurys were mixed on Tuesday, while U.S. stocks finished lower over rising fears over global economic activity in the wake of the Organization for Economic Cooperation and Development issuing a dismal economic forecast given risks of a second wave of COVID-19. The Dow was down 397 points, or 1.5%, while the S&P finished down 1.1% and the NASDAQ finished down 0.9%. On the day, the yield on the two-year maturity was steady, 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 135.4% on Tuesday from Monday’s level of 130.4%, while the 30-year municipal-to-Treasury ratio rose to 116.7% on Tuesday from Monday’s level of 112.4%.

Last Wednesday municipals prices were steady, as a variety of new-issue offerings came to market including the retail pricing of the Regents of the University of California’s tax-exempt revenue bonds and indications of interest were taken on the taxable portion of the deal. The issue was comprised of $790.45MM of tax-exempt Series BE, $328.305MM of taxable Series BF and $1.2B of taxable Series BG. 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. Treasurys were mixed on Wednesday, as U.S. stocks rose for the session and the NASDAQ closed at yet another all-time high, exceeding the record it set on Monday. The Dow ended the session up 177 points or 0.7%, while the S&P rose 0.8% and the NASDAQ rose 1.4%. On the day, the yield on the two-year maturity was unchanged, while the yield on the 10-year maturity rose two bps and the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio fell to 131.3% on Wednesday from Tuesday’s level of 135.4%, while the 30-year municipal-to-Treasury ratio fell to 115.8% on Wednesday from Tuesday’s level of 116.7%.

Last Thursday municipals prices were mixed, as the last of the week’s new-issue offerings came to market including the institutional pricing of the Regents of the University of California’s tax-exempt revenue bonds and the initial pricing of the Regents taxable offerings. On the day, the yield on the two-year GO bond was unchanged, while the yield on the 10-yer GO bond fell three bps and the yield on the 30-year GO bond fell four bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were also mixed last Thursday, as were U.S. Stocks for the Session. The Dow and the S&P turned negative, as fears over the economic outlook following an increase in coronavirus cases resurged. The Dow finished down 361 points or 1.4%, while the S&P was down 0.6%. Meanwhile, the NASDAQ gained for the session and was up 0.5%. On the day, the yield on the two-year maturity was unchanged, while the yield on the 10-year maturity fell five bps and the yield on the 30-year maturity fell seven bps. The 10-year municipal-to-Treasury ratio rose to 137.1% on Thursday from Wednesday’s level of 131.3%, while the 30-year municipal-to-Treasury ratio rose to 118.9% on Thursday from Wednesday’s level of 115.8%.

Last Friday prices on municipals strengthened, as market participants started looking ahead to the $9.84B in expected new-issue offerings next week. On the day, the yield on the two-year GO bond fell three bps, while the yields on the 10- and 30-year GO bonds each fell four bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were mixed on Friday, as U.S. stocks rose and the NASDAQ hit yet another record high for the session, after Gilead Sciences announced that its Remdesivir treatment reduced the risk of death for Covid-19 patients, based on new data from the company. The Dow finished up 369 points, or 1.4%, while the S&P was up 1.1% and the NASDAQ was up 0.7%. On the day, the yield on the two-year maturity was unchanged, while the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio fell to 124.6% on Friday from Thursday’s level of 137.1%, while the 30-year municipal-to-Treasury was fell to 115.0% on Friday from Thursday’s level of 118.9%.


Taxable Bonds

Municipal advanced refundings are surging despite their prohibition on a tax-exempt basis (the 2017 tax law barred municipalities from selling tax-exempt debt for advanced refundings). The boom reflects a side effect of the steep drop in interest rates. Yields have dropped low enough that municipalities can do them with taxable bonds and still come out ahead. There have been about $75.0B of taxable municipal bonds sold so far this year, a 380% jump from the same period in 2019, according to data compiled by Bloomberg.






Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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