Muni Update

July 17, 2017


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

 

Municipal Market Recap

Municipal bond funds recorded outflows for a second week, as weekly reporting funds experienced $172.555MM of outflows in the latest reporting week, after experiencing outflows of $458.306MM the week prior. The four-week moving average was negative at $256.274MM, after being in the red at $114.416MM 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 trading week stronger across the curve. On Tuesday they weakened in the front-end and were stronger in the intermediate area of the curve and steady in the long-end. On Wednesday prices were again stronger across the curve. On Thursday prices reversed course and weakened across the curve. Prices ended the week stronger across the curve. Prices on municipals started the trading week steady in the front and intermediate areas of the curve, while the long-end weakened. On Tuesday they were steady across the curve. On Wednesday they were steady in the front-end, while maturities 10 years and longer strengthened. On Thursday prices were stronger in the front-end and steady 10 years and longer. On Friday prices on municipals were stronger across the curve. Volume for the trading week is projected to be $7.66B, which is just above last week’s revised level of $7.42B. Market participants will be looking at both the 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. Finally, with spreads as tight as they are, we caution participants not to chase yield by giving up credit quality, especially given the headwinds a number of States is facing.

This week’s economic calendar is fairly light and contains no Fedspeak, as the official silent period ahead of next week’s policy meeting and decision has begun. The most notable central bank activity should be the ECB’s latest decision scheduled for early Thursday morning. Concerns of recent shifts in the mindsets of certain ECB officials were responsible in part for the recent move higher in global sovereign yields. Reports last week indicated the ECB could make an announcement at its September meeting that it intends to begin some form of tapering of its QE asset purchases. As evidence of how slow this week’s economic calendar is, Wednesday’s housing starts and building permits data should be the highlights. Both are expected to rebound from extremely weak May results. This should leave investors focused on the ramping up of the Q3 corporate earnings season.

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 1.03%. Meanwhile, the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell four bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 2.00% and 2.79%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell four bps, while the yield on the 10-year GO bond fell five bps and the yield on the 30-year GO bond fell six bps. We also note that municipals have been closely tracking U.S. Treasuries, and the MMD-UST ratios remain steady.

Last week the yields on the two-, 10-, and 30-year maturities on the MMA Triple-A Scale each fell two bps from Thursday to Friday and they ended the week at 1.04%, 2.14% and 2.96%, respectively. Overall, week-over-week the yield on the two-year maturity fell one bp, while the yields on both the 10- and 30-year maturities each fell four bps.

Prices on U.S. Treasuries started last week weaker and on Tuesday they were mixed. On Wednesday they strengthened, while on Thursday they weakened, giving back some of Wednesday’s gains. On Friday they finished stronger across the curve. Overall, week-over-week the yield on the 10-year maturity fell seven bps and closed the week at 2.32%. Meanwhile the yield on the two-year maturity fell six bps week-over-week and closed the week at 1.34%. This resulted in a week-over-week 2s/10s spread of 98 bps, one bp tighter than last week’s 2s/10s spread of 99 bps. The yield on the 30-year maturity fell two bps week-over-week and finished the week at 2.91%.

 

New Issue Volume is Expected to be $7.66B

Total volume for the trading week is estimated to be $7.66B, which is just below last week’s $7.42B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $3.99B in negotiated deals and approximately $3.67B in competitive sales, according to data from Thomson Reuters. While volume this week is close to last week’s revised level, the makeup of the calendar this week is different in that the largest negotiated deal is around $600.0MM and there are more competitive sales than negotiated. For the week, there are 19 deals scheduled that are $100.0MM or larger, with four of them being competitive deals.

Activity this week really kicks off on Tuesday, when the Dormitory Authority of the State of New York (DASNY) plans to offer four separate sales totaling $1.35B. The offerings will be comprised of three tax-exempt state sales tax revenue bonds and one taxable offering. The New Jersey Turnpike Authority plans to offer $597.715MM of revenue bonds and revenue taxable bonds, also on Tuesday. The deal is rated A2 by Moody’s Investors Service (Moody’s), A+ by S&P Global Ratings (S&P) and A by Fitch Ratings (Fitch).

The Georgia State Road Tollway Authority plans to offer $353.0MM of federal highway grant anticipation and federal highway grant reimbursement revenue refunding bonds on Wednesday. Back to Tuesday, the San Diego Regional Airport Authority plans to offer $310.425MM of subordinate airport revenue bonds featuring both alternative minimum tax (AMT) bonds and non-AMT bonds.

In the competitive arena, North Carolina is set to auction off $554.03MM of limited obligation refunding bonds on Thursday. The deal is rated Aa1 by Moody’s and AA+ by S&P and Fitch.

 

Municipal Bond Funds Posted Outflows for a Second Week      

Municipal bond funds posted outflows for the second week, as market participants once again pulled cash out of funds, according to the latest data from Lipper. Weekly reporting funds reported $172.555MM of outflows for the most recent week. These followed outflows of $458.306MM the week prior, according to Lipper. The four-week moving average was negative at $256.274MM, after being in the red at $114.416MM the week prior.

Long-term municipal bond funds had inflows of $77.841MM in the latest week after outflows of $305.061MM the week prior. Intermediate-term funds had outflows of $145.902MM after outflows of $106.962MM the week prior. National funds had outflows of $177.995MM after outflows of $402.531MM the week prior. High-yield municipal funds reported inflows of $75.010MM in the latest reporting week, after outflows of $208.683MM the week prior. Exchange traded funds saw outflows of $9.757MM, after inflows of $2.624MM 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 is slightly above last week’s level and this together with strong bid lists should contribute to meeting market participants growing demand, especially 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 spreads across the curve widened week-over-week, with the largest widening occurring in the five-year maturity, nine bps.

 

Daily Overview of the General Market for the Week Ending July 14th

Last Monday prices on municipals were mixed, as the New York City Transitional Finance Authority’s $1.1B offering of building aid revenue bonds was priced for retail investors and the Chicago Public Schools came to market with an unrated bond deal. On the day the yields on the two- and 10-year GO bonds were unchanged, 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 last Monday were stronger across the curve, as the NASDAQ gained 0.4%, while the S&P added just 0.1% and the Dow slipped less than six points. On the day, the yield on the two-year maturity fell three bps, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 86.5% on Monday from the prior Friday’s level of 85.8%, while the 30-year municipal-to-Treasury ratio rose to 98.0% on Monday from the prior Friday’s level of 97.3%.

Last Tuesday prices on municipals were steady across the curve, as the New York City Transitional Finance Authority’s $1.1B offering of building aid revenue bonds had their pricing accelerated by a day, with the retail order period curtailed and the bonds pricing for institutions. 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 last Tuesday were mixed, as the biggest bout of volatility in Tuesday’s session was sparked by a tweet (and subsequent media storm) from Donald Trump Jr. that included a copy of an email chain between him and others about a pre-election meeting with an attorney allegedly linked to the Russian government. For stocks, the tumble was temporary and the major indices spent the rest of the day reclaiming lost ground. The NASDAQ gained 0.3% while the Dow and S&P were almost unchanged by the close. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity was steady. The 10-year municipal-to-Treasury ratio rose to 86.9% on Tuesday from the prior Monday’s level of 86.5%, while the 30-year municipal-to-Treasury ratio on Tuesday was unchanged from Monday’s level of 98.0%.

Last Wednesday prices on municipals finished the day mixed, as a Port Authority of New York and New Jersey sale hit the market and a deal from the Chicago Transit Authority was postponed until next week. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond fell two bps and the yield on the 30-year GO bond fell three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as Fed Chairperson Yellen’s prepared remarks were released before markets opened and ahead of her actual Senate testimony, rousing U.S. assets early. Those remarks included a comment that she believes inflation’s response to the economy is the key uncertainty right now and echoed a Tuesday comment from Governor Brainard that the Fed may not have much further to go to get the overnight rate to its neutral level. The U.S. Dollar initially tumbled, but recovered to almost unchanged after a swift strengthening against the Euro and sharp weakening against the Canadian Dollar. Equity investors cheered Yellen’s tone and pushed all three major indices to strong daily gains and the Dow to a new record high. On the day, the yields on the two- and 30-year maturities each fell three bps, while the yield on the 10-year maturity fell four bps. The 10-year municipal-to-Treasury ratio rose to 87.5% on Wednesday from Tuesday’s level of 86.9%, while the 30-year municipal-to-Treasury ratio was unchanged on Wednesday from Tuesday’s level of 98.0%.

Last Thursday prices on municipals were mixed, as the last of the week’s offerings hit the primary market. On the day, the yield on the two-year GO bond fell two 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 were weaker, as the Dow gained (+0.1%) for a third consecutive day and closed at a new record high for the second time this week. The S&P and NASDAQ both added 0.2% but fell short of notching a new record. Sovereign yields came under (upward) pressure after a pre-market report in the Wall Street Journal indicated the ECB may announce tapering of its QE program at its September meeting. This follows recent indications that the ECB may be turning less dovish on monetary policy. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity rose two bps and the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 86.8% on Thursday from Wednesday’s level of 87.5%, while the 30-year municipal-to-Treasury ratio fell to 96.9% on Thursday from Wednesday’s level of 98.0%.

Last Friday prices on municipals finished the week stronger across the curve, as market participants prepped for the estimated $7.66B in new issue paper expecting to come to market. On the day, the yield on the two-year GO bond fell two bps, while the yield on the 10-year 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. Treasuries also finished the day stronger across the curve. On the day, the yields on the two- and 10-year maturities each fell two bps, while the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio fell to 86.2% on Friday from Thursday’s level of 86.8%, while the 30-year municipal-to-Treasury ratio fell to 95.9% on Friday from Thursday’s level of 96.9%.

 







Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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