Muni Update

July 16, 2018


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

 

Municipal Market Recap

Prices on municipals were unchanged across the curve on Monday and were mixed daily the rest of the week. On Tuesday bonds maturing 10 years and in were steady, while bonds maturing on the long-end strengthened. On Wednesday bonds maturing 10 years and in strengthened, while the long-end was steady. On Thursday bonds in the front-end strengthened, while bonds maturing 10 years and longer were steady. On Friday the front- and long-ends strengthened, while intermediate maturities were steady. Volume for the week is projected to be $9.2B, which is above last week’s $6.9B in revised issuance. Demand continues to outpace supply due to redemptions. This higher level of new issue supply will provide market participants with opportunities in both the new issue market and the secondary market to fill needs.

Municipal bond funds reported investors reversed course and put cash into funds last week, as weekly reporting funds experienced inflows of $650.966MM, after experiencing outflows of $189.260MM the week prior. The four-week moving average was positive at $382.277MM, after being a positive $331.939MM the week prior. Investors still facing low rates overseas continue to find higher-yielding U.S. assets attractive. These factors, plus the high level of municipal redemptions over the next few months, should have both traditional and non-traditional market participants continuing to look for opportunities, especially if yields rise.

Last week the yield on the two-year maturity on the MMD Triple-A Scale fell two basis points (bps) from Thursday to Friday and ended the week at 1.57%. Meanwhile the yield on the 10-year maturity was unchanged and the yield on the 30-year maturity fell one bp on the MMD Triple-A Scale from Thursday to Friday, and they ended the week at 2.41% and 2.90%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell seven bps, while the yield on the 10-year GO bond fell two bps and the yield on the 30-year GO bond was unchanged.

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale were all unchanged from Thursday to Friday and they ended the week at 1.61%, 2.37% and 2.97%, respectively. Overall, week-over-week the yields on the two- and 10-year GO bonds fell two bps, while the yield on the 30-year GO bond was unchanged.

On Monday and Tuesday U.S. Treasury prices finished the day weaker across the curve. On Wednesday they reversed course and strengthened across the majority of the curve. On Thursday they reversed course and weakened across the curve. On Friday prices strengthened across the curve. Overall, week-over-week the yield on the 10-year maturity rose one bp and closed the week at 2.83%. Meanwhile the yield on the two-year maturity rose six bps week-over-week and closed the week at 2.59%. This resulted in a 2s/10s spread of 24 bps, five bps tighter than last week’s 2s/10s spread of 29 bps. The spread between the two- and 10-year Treasury yields has now dropped to a new post-Great Recession low. The yield on the 30-year maturity was unchanged week-over-week and finished the week at 2.93%.

 

Volume to be $9.2B for the Trading Week

Total volume for the coming week is estimated to be $9.2B, which is above the $6.9B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar is comprised of $7.5B in negotiated offerings and $1.7B of competitive sales. This week the primary’s gross new-issue supply is about 33.0% above the 12-week moving average.

Topping this week’s slate is a $1.2B deal from the New Jersey Transportation Trust Fund Authority. The Series 2018A federal highway reimbursement revenue refunding notes will be priced on Wednesday, after a one-day retail order period. The deal consists of tax-exempt GARVEE notes not subject to the alternative minimum tax (AMT). It is rated Baa1 by Moody’s Investors Service (Moody’s), A+ by S&P Global Ratings (S&P) and A- by Fitch Ratings (Fitch).

The New York City Transitional Finance Authority (NYC TFA) is selling $919.285MM of tax-exempt Fiscal 2019 Series S-1 and Fiscal 2019 Series S-2 Subseries S-2A building aid revenue bonds (BARBs). The deal was priced for retail investors last Friday and a second day of retail orders will be on Monday, ahead of the institutional pricing on Tuesday. Also on Tuesday, the NYC TFA will competitively sell $111.455MM of taxable Fiscal 2019 Subseries S-2B BARBs. The deals are rated Aa2 by Moody’s and AA by S&P and Fitch.

Houston is selling $600.0MM of airport system subordinate lien revenue refunding bonds. The Series 2018C bonds, which are subject to the AMT, and the Series 2018D bonds, which are not-AMT bonds, will both price on Tuesday. The offerings are rated A1 by Moody’s.

North Carolina is competitively selling $400.0MM of GO public improvement Connect North Carolina bonds on Wednesday. The deal is rated triple-A by Moody’s, S&P and Fitch.

 

Municipal Bond Funds Reversed Course and Posted Inflows for the Week        

Municipal bond funds reversed course last week, as market participants put cash into funds, according to the latest data from Lipper. The weekly reporting saw inflows of $650.966MM, after experiencing outflows of $189.260MM the week prior. The four-week moving average was a positive $382.277MM, after being a positive $331.939MM the week prior.

Long-term municipal bond funds had outflows of $438.059MM in the latest week, after outflows of $25.904MM the week prior. Intermediate-term funds had inflows of $168.848MM, after inflows of $25.976MM the week prior. National funds had outflows of $621.558MM, after outflows of $108.311MM the week prior.  High-yield municipal funds reported inflows of $313.919MM in the latest week, after experiencing inflows of $94.315MM the week prior. Exchange traded funds reported inflows of $22.877MM, after outflows of $14.571MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The BQ market continues to see strong activity, even with the lower level of new issue supply so far this year, which has contributed to secondary market bid lists being well received. BQ participants continue to have significant demand for BQ paper, as participants search for opportunities to address the forecasted $137.0B in redemptions this summer that started on June 1st. Participants are recognizing more and more our recommendation to enter into extension swaps (sell short paper eight-years and in, and roll out to the 12- to 20-year maturity area of the curve or longer), as a way to pick up more yield with little to no drop-off in credit quality. This is especially true in specialty states that have high individual tax rates and a strong retail presence, as retail investors are driving the demand for short paper (eight years and in), as they look to add additional tax free income opportunities. We continue to emphasize this opportunity now, as concerns that long-term rates will start to be compressed back down are a possibility later this year. Week-over-week, bank qualified spreads were mixed, as the spreads on the one-, two, three, five- and 15-year maturities all tightened, with the largest tightening occurring in the one- and two- maturities, 10 bps each. Meanwhile the spreads on 10- and 30-year maturities were each unchanged week-over-week.

 

Daily Overview of the General Market for the Week Ending July 13th

Last Monday prices on municipals were unchanged, as market participants prepped for the $6.6B in new issue offerings scheduled for the week. On the day, the yields on the two-, 10- and 30- year GO bonds were steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker on the day, as U.S. equities joined in on Monday’s global rally. The Dow outperformed, adding 320 points on greater-than-2.0% gains by financials and industrials. Boeing, Goldman Sachs, Caterpillar, and JPMorgan Chase combined for a 150 points of the total gain. Those sectors also finished in the top two spots of the S&P 500, which rose a solid 0.9%. On the day, the yields on the two- and 10-year maturities each rose four bps, while the yield on 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 85.0% on Monday from last Friday’s level of 86.1%, while the 30-year municipal-to-Treasury ratio fell to 98.0% on Monday from last Friday’s level of 99.0%.

Last Tuesday prices on municipal bonds were mixed, as the first of the week’s new offerings came to market, as two big competitive issues sold. On the day, the yields on the two- and 10-year maturities were steady, while the yield on the 30-year maturity 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 stocks posted gains. However, the big news came after equity markets closed, as sentiment soured in after-hours trading, evidenced by a pullback in equity futures and a notable drop in U.S. Treasury yields after a news report indicated that President Trump was preparing to release a list of $200.0B of Chinese imports that could be subjected to tariffs. The list would be in addition to the $50.0B previously announced: $34.0B were put in place last Friday and an additional $16.0B are currently being considered. The report lined up with remarks from the President three weeks ago that he was considering a 10.0% tariff on $200.0B of Chinese imports. On the day, the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year maturities each rose one bp. The 10-year municipal-to-Treasury ratio slipped to 84.7% on Tuesday from Monday’s level of 85.0%, while the 30-year municipal-to-Treasury ratio was unchanged on Tuesday from Monday’s level of 98.0%.

Last Wednesday prices on municipals were mixed, as the Dormitory Authority of New York competitively sold $1.79B of state sales tax bonds in five deals. On the day the yields on the two- and 10-year GO bonds each fell two bps, while the yield on the 30-year GO bond was steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were stronger, as the S&P 500 fell for the first time in five sessions and U.S. equities moved lower with other major global indexes in response to the White House proposing tariffs on an additional $200.0B of Chinese imports. On the day, the yield on the two-year maturity fell one bp, while the yields on the 10- and 30-year maturities each fell three bps. The 10-year municipal-to-Treasury ratio bumped up to 84.9% on Wednesday from Tuesday’s level of 84.7%, while the 30-year municipal-to-Treasury ratio rose to 99.0% on Wednesday from Tuesday’s level of 98.0%.

Last Thursday prices on municipals were mixed, as California State, Los Angeles Airport and Los Angeles County Facilities Incorporated all came to market with deals. 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 were steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day weaker, as stocks recovered after weakening on Wednesday in response to the latest tariffs between the U.S. and China. On the day, the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year maturities each rose one bp. The 10-year municipal-to-Treasury ratio slipped to 84.6% on Thursday from Wednesday’s level of 84.9%, while the 30-year municipal-to-Treasury ratio slipped to 98.6% on Thursday from Wednesday’s level of 99.0%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to the coming week’s $9.2B in new issuance offerings. On the day, the yield on the two-year GO bond fell two bps, while the yield on the 10-year GO bond was steady and the yield on the 30-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as U.S. stocks traded mixed for the session. On the day, the yield on the two-year maturity fell one bp, while the yields on the 10- and 30-year maturities each fell two bps. The 10-year municipal-to-Treasury ratio rose to 85.2% on Friday from Thursday’s level of 84.6%, while the 30-year municipal-to-Treasury ratio rose to 99.0% on Friday from Thursday’s level of 98.6%.

 



 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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