Muni Update

July 2, 2018



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

 

Municipal Market Recap

Prices on municipals were steady across the curve on Monday and then mixed daily for the rest of the week. On Tuesday the front-end was steady, while bonds maturing 10 years and longer weakened. On Wednesday the font-end was again steady, while bonds maturing 10 years and longer strengthened. On Thursday bonds maturing 10 years and in were steady, while the long-end strengthened.  On Friday the front and long-ends were steady, while intermediate maturities strengthened. Volume for the week is projected to be $73.8MM, which is well below last week’s $4.69B in revised issuance, but nor unexpected given that financial markets will be closed on Wednesday in observance of Independence Day, and the municipal bond market will close early on Tuesday. With demand continuing to outpace supply, due to redemptions, this lower level of new issue supply will have market participants looking to secondary market opportunities to fill needs.

 

Municipal bond funds reported investors put cash into funds for an eighth week in a row, as weekly reporting funds experienced inflows of $421.387MM, after experiencing inflows of $646.014MM the week prior. The four-week moving average remained positive at $426.625MM, after being a positive $340.591MM 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 as yields rise.

 

This week’s economic calendar is packed with data including both ISM reports, the FOMC Minutes, June’s labor reports, and data on construction spending, vehicle sales, and the trade balance. The calendar kicks off this morning with the ISM Manufacturing Index (9:00 a.m. CT) which is expected to remain high. Also this morning, May’s construction spending data’s is expected to show another modest 0.5% MoM increase in construction activity, likely continuing to be driven by increased home improvement. The most important data of the week will come after the Independence Day holiday (markets closed) on Wednesday.  The FOMC’s June Meeting Minutes are scheduled for Thursday and June’s labor reports for Friday.  Economists expect another solid month of job growth but investors will be more focused on how strong wage growth was. Economists expect average hourly earnings increased 0.3% MoM bringing the YoY rate up to 2.8%.

 

Last week the yield on the two- and 30-year maturities on the MMD Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 1.64% and 2.94%. Meanwhile the yield on the 10-year maturity fell one basis point (bp) on the MMD Triple-A Scale from Thursday to Friday, and ended the week at 2.46%. Overall, week-over-week the yield on the two-year general obligation (GO) bond was unchanged, while the yields on the 10- and 30-year GO bonds each fell two bps.

 

Last week the yield on the two-year maturity on the MMA Triple-A Scale rose one bp from Thursday to Friday and they ended the week at 1.64%. Meanwhile the yields on the 10- and 30-year maturities on the MMA Triple-A Scale were unchanged from Thursday to Friday and ended the week at 2.40% and 2.98%, respectively. Overall, week-over-week the yield on the two-year GO bond fell one bp, while the yields on the 10-year GO bonds each fell two bps.

 

On Monday U.S. Treasury prices finished the day stronger across the curve. On Tuesday they were mixed, as the front-end strengthened, while bonds maturing 10 years and longer were unchanged. Wednesday was a repeat of Monday’s price action.  On Thursday they were mixed, as the front-end was steady, while bonds maturing 10 years and longer weakened. On Friday prices were mixed once again, as the front-end was steady, while bonds maturing 10 years and longer strengthened. Overall, week-over-week the yield on the 10-year maturity fell seven bps and closed the week at 2.84%. Meanwhile the yield on the two-year maturity fell four bps week-over-week and closed the week at 2.52%. This resulted in a 2s/10s spread of 32 bps, three bps tighter than last week’s 2s/10s spread of 35 bps. The spread between the two- and 10-year Treasury yields has fallen to its lowest level since 2007, the period immediately preceding the most recent financial crisis in the U.S. The yield on the 30-year maturity fell eight bps week-over-week and finished the week at 2.97%.

Volume to be $73.8MM for the Trading Week

Total volume for the coming week is estimated to be $73.8MM, which is well below the $4.69B in issuance last week, according to revised data from Thomson Reuters. Note however, with financial markets closed on Wednesday in observance of Independence Day, and the municipal bond market closing early on Tuesday, this low level of issuance is somewhat expected. This week’s calendar has no negotiated deals scheduled, just competitive sales.

 Municipal Bond Funds Post Inflows for an Eighth Week        

Municipal bond funds posted inflows last week, as market participants put cash into funds for an eighth week, according to the latest data from Lipper. The weekly reporting saw inflows of $421.387MM, after experiencing inflows of $646.014MM the week prior. The four-week moving average remained positive at $426.625MM, after being a positive $340.591MM the week prior.

Long-term municipal bond funds had inflows of $357.320MM in the latest week after inflows of $606.057MM the week prior. Intermediate-term funds had inflows of $84.352MM after inflows of $105.799MM the week prior. National funds had inflows of $426.190MM after inflows of $684.818MM the week prior.  High-yield municipal funds reported inflows of $179.487MM in the latest week, after experiencing inflows of $268.850MM the week prior. Exchange traded funds reported inflows of $216.906MM, after inflows of $410.136MM 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. We continue to encourage participants to utilize 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. Week-over-week, bank qualified spreads were mixed, as the spreads on the one-, two-, three and five- year maturities widened, with the largest widening occurring in the two-year maturity, eight bps. Meanwhile the spreads on 10-, 15- and 30-year maturities tightened week-over-week, with the largest tightening occurring in the 15-year maturity, three bps.

Daily Overview of the General Market for the Week Ending June 29th

Last Monday prices on municipals were unchanged, as market participants prepped for the $5.33B in new issue offering 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 stronger on the day, as U.S. stocks quickly joined a global risk sell-off that had dented global sentiment earlier in the overnight session. On the day, the yields on the two- and 30-year maturities each fell two bps, while the yield on the 10-year maturity fell three bps. The 10-year municipal-to-Treasury ratio rose to 86.1% on Monday from last Friday’s level of 85.2%, while the 30-year municipal-to-Treasury ratio rose to 97.7% on Monday from last Friday’s level of 97.1%.

Last Tuesday prices on municipals were mixed, as Los Angeles sold $1.45B of notes and the Dormitory Authority of the State of New York sold $340.0MM of lease revenue bonds. The continuation of the June-July reinvestment season made for brisk demand on Tuesday. On the day, the yield on the two-year GO bond was unchanged, while the yields on the 10- and 30-year GO bonds each rose one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed, as U.S. stocks rallied back in large part because of significantly stronger pricing for shares of energy-related companies. This sector of the S&P 500 moved up 1.4% following a notable jump in the value of crude oil. Brent crude gained 2.6% while U.S. WTI outperformed with a 3.8% rally on headlines that the U.S. would pressure allies to cut-off all oil imports from Iran by November 4th. Not doing so could subject those countries to U.S. sanctions. The targeting of Iranian crude comes after the U.S. withdrew from the Iran nuclear deal in early May and moved to re-impose sanctions on the country. Technology companies also recovered Tuesday and were among several sectors that improved to help push the overall index up a modest 0.2%. On the day, the yield on the two-year maturity fell one bp, while the yields on the 10- and 30-year maturities were each unchanged. The 10-year municipal-to-Treasury ratio rose to 86.5% on Tuesday from Monday’s level of 86.1%, while the 30-year municipal-to-Treasury ratio rose to 98.2% on Tuesday from Monday’s level of 97.7%.

Last Wednesday prices on municipals were mixed, as market participants welcomed deals from New York and California issuers. On the day the yield on the two-year GO bond fell 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.

U.S. Treasury prices were stronger on the day, as U.S. equities went on a wild ride Wednesday, initially rising on reports the U.S. wouldn’t be as restrictive as feared on foreign technology investments before tumbling back to close near their lowest ticks of the day as broader trade fears lingered. U.S. oil prices rallied more than 2.5% to a more than three-and-a-half-year high after a huge drawdown of U.S. inventories further fueled worries of shrinking global supplies. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity fell five bps and the yield on the 30-year maturity fell six bps. The 10-year municipal-to-Treasury ratio rose to 87.3% on Wednesday from Tuesday’s level of 86.5%, while the 30-year municipal-to-Treasury ratio rose to 99.3% on Wednesday from Tuesday’s level of 98.2%.

Last Thursday prices on municipals were mixed, as market participants were dormant in the afternoon, as they wrapped up a busy week of snapping up large new issues in New York and California. On the day, the yields on the two- and 10-year GO bonds were steady, while 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 also finished the day mixed, as U.S. stocks rebounded, despite disappointing closes earlier in the day across Asia and Europe. The major indexes moved in and out of positive territory during the morning session but found another gear just before lunch. The S&P 500 climbed steadily throughout the afternoon and finished up 0.6%, splitting gains for the Dow (+0.4%) and the NASDAQ (+0.8%). On the day, the yield on the two-year maturity was steady, 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 86.7% on Thursday from Wednesday’s level of 87.3%, while the 30-year municipal-to-Treasury ratio fell to 98.7% on Thursday from Wednesday’s level of 99.3%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to the week of July 9th, for a full week of activity and higher levels of issuance. However, before we get there, we have the coming week, which includes an early close for the bond markets on Tuesday, a holiday on Wednesday and just $73.8MM of competitive issuance. On the day, the yields on the two- and 30-year GO bonds were unchanged, while the yield on the 10-year GO bonds fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed. On the day, the yield on the two-year maturity was steady, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio was unchanged on Friday from Thursday’s level of 86.7%, while the 30-year municipal-to-Treasury bumped up to  99.0% on Friday from Thursday’s level of 98.7%.







Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

INTENDED FOR INSTITUTIONAL INVESTORS ONLY.
The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2021
Member FINRA/SIPC
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120