Muni Update

July 23, 2018


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

 

Municipal Market Recap

Prices on municipals were mixed daily for the week. On Monday the front-end strengthened, while the long-end weakened and intermediate maturities were steady. On Tuesday bonds maturing 10 years and in were steady, while bonds maturing on the long-end weakened. On Wednesday the front- and long-ends were steady, while intermediate maturities strengthened. On Thursday bonds in the front-end were steady, while bonds maturing 10 years and longer strengthened. On Friday the front- and long-ends weakened, while intermediate maturities were steady. Volume for the week is projected to be $5.3B, which is below last week’s $8.1B in revised issuance. Demand continues to outpace supply due to redemptions. This level of new issue supply together with secondary market opportunities should provide market participants with opportunities to fill their needs.

Municipal bond funds reported investors put cash into funds last week, as weekly reporting funds experienced inflows of $1.26B, after experiencing inflows of $650.966MM the week prior. The four-week moving average was positive at $535.401MM, after being a positive $382.277MM 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 yields on the two- and 30-year maturities on the MMD Triple-A Scale each rose from Thursday to Friday and they ended the week at 1.57% and 2.91%, respectively. Meanwhile the yield on the 10-year maturity was unchanged on the MMD Triple-A Scale from Thursday to Friday and ended the week at 2.39%. Overall, week-over-week the yield on the two-year general obligation (GO) bond was unchanged, while the yield on the 10-year GO bond fell two basis points (bps) and the yield on the 30-year GO bond rose two bps.

Last week the yields on the one-, two-, three- and 15-year maturities on the MMA Triple-A Scale were all unchanged from Thursday to Friday and they ended the week at 1.50%, 1.59%, 1.71%, and 2.67%, respectively. Overall, week-over-week the yields on the two-year GO bonds fell two bps, while the yield on the 30-year GO bond was unchanged.

Prices on U.S. Treasuries were mixed daily through Friday. Overall, week-over-week the yield on the 10-year maturity rose six bps and closed the week at 2.89%. Meanwhile the yield on the two-year maturity rose one bp week-over-week and closed the week at 2.60%. This resulted in a 2s/10s spread of 29 bps, five bps wider than last week’s 2s/10s spread of 24 bps. The yield on the 30-year maturity rose 10 bps week-over-week and finished the week at 3.03%.

 

Volume to be $5.3B for the Trading Week

Total volume for the coming week is estimated to be $5.3B, which is below the $8.1B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar is comprised of $3.35B in negotiated offerings and $1.85B of competitive sales.

Topping this week’s slate is a $1.15B New York City Transitional Finance Authority (NYC TFA) offering on Wednesday. The NYC TFA Fiscal 2019 Series A Subseries A1 tax-exempt future tax secured subordinate bonds are rated Aa1 by Moody’s Investors Service (Moody’s) and AAA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch).

Also Wednesday, the TFA is competitively selling $300.0MM of taxable bonds in two sales consisting of $165.5MM of Fiscal 2019 Series A Subseries A3 future tax secured subordinate bonds and $134.5MM of Fiscal 2019 Series A Subseries A2 future tax secured subordinate bonds. The NYC TFA was just in the market last week with negotiated and competitive sales of building aid revenue bonds totaling $1.04B.

Another returning issuer that was in the market this month is the Dormitory Authority of the State of New York (DASNY). The Dorm Authority sold $1.8B of bonds the week of July 9th. DASNY will price $559.0MM of Series 2018A tax-exempt and Series 2018B taxable revenue bonds for the Montefiore Obligated Group on Wednesday. The deal is rated Baa2 by Moody’s and BBB by S&P.

Also, on Wednesday, the Idaho Health Facilities Authority will price $315.85MM of Series 2018B revenue bonds for St. Luke’s Health System. The deal is rated A3 by Moody’s and A- by S&P. On Tuesday the California Infrastructure and Economic Development Bank’s Series 2018A, B, C and D revenue bonds in index mode of LIBOR floating-rate notes will price. The deal is rated A2 by Moody’s.

 

Municipal Bond Funds Posted Inflows for a Second Week       

Municipal bond funds posted inflows, as market participants put cash into funds for a second week, according to the latest data from Lipper. The weekly reporting saw inflows of $1.26B, after experiencing inflows of $650.966MM the week prior. The four-week moving average was a positive $535.401MM, after being a positive $382.277MM the week prior.

Long-term municipal bond funds had inflows of $583.602MM in the latest week after inflows of $438.059MM the week prior. Intermediate-term funds had inflows of $530.958MM after inflows of $168.848M the week prior. National funds had inflows of $1.17B after experiencing inflows of $621.558MM the week prior. High-yield municipal funds reported inflows of $313.810MM in the latest week, after inflows of $313.919MM the week prior. Exchange traded funds reported inflows of $74.167MM, after inflows of $22.877MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The BQ market continues to see good two way flows with both buying and selling from market participants. For banks, the primary focus of activity over the past four months has been selling shorter (6 years and in) maturities with lower yields and reinvesting out on the curve (12+ years). This trade has worked extremely well for banks because of the higher tax rates out of retail investors who have been buying the shorter paper with extremely low take-out yields. Banks who have invested in certain high tax states (CA, NY or NJ) have seen take-out yields less than 70% of treasuries.

For this week, we expect to see a continuation of the extension swap. With July roll-off money to be reinvested, BQ participants will look to the longer-end of the curve to pick up yield. New issue supply this week is expected to remain somewhat light, so look to the secondary market to provide opportunities for buyers of longer BQ paper. Certain structures such as 4% coupons with a ten-year call and a 15-year maturity have widened throughout this summer and have reached some attractive yields to the call date with 3% raw yields attainable with certain states. Last week, we saw BQ municipals tighten compared to treasuries. Spreads on the 10- and 30-year maturities saw spreads tighten by 7 bps and 9 bps, respectively.

 

Daily Overview of the General Market for the Week Ending July 20th

Last Monday prices on municipals were mixed, as the New York City Transitional Finance Authority (NYC TFA) continued to round up retail orders on its big building aid revenue bond sale and secondary market action remained muted ahead of a sizable new issue slate. On the day, the yield on the two-year GO bond fell one bp, while the yield on the 10-year GO bond was steady and 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 were also mixed, as stocks also traded mixed for the session. The NASDAQ slipped 0.3% with one of the sharpest intraday declines coinciding with a pullback in shares of Amazon Inc. The online retail giant’s much-anticipated Prime Day event was tarnished by reports of technical glitches that preceded it’s shares tumbling from up 1.6% to a more modest 0.5% gain. Tech also weighed on the Dow but better-than-expected earnings from Bank of America boosted financials. On the day, the yield on the two-year maturity was steady, while the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose four bps. The 10-year municipal-to-Treasury ratio fell to 84.3% on Monday from last Friday’s level of 85.2%, 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 deals from New Jersey, New York City and Texas issuers came to market. 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 also mixed, as stocks posted gains. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity was steady and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio was unchanged on Tuesday from Monday’s level of 84.3%, while the 30-year municipal-to-Treasury ratio rose to 98.7% on Tuesday from Monday’s level of 98.0%.

Last Wednesday prices on municipals were mixed, as the market saw offerings from a number of different issuers, including The District of Columbia, the City and County of San Francisco Public Utility Commission, the Fairfax County industrial Development Authority and the Del Mar College District, Texas. On the day the yields on the two- and 30-year GO bonds were steady, while the yield on the 10-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were mixed, as stocks traded mostly higher for the session. The Dow gained 0.3% as the S&P 500 added 0.2% and the NASDAQ ended almost exactly where it began. Within the S&P, the strength was centered in financials and industrials as six of the remaining nine sectors slipped below their previous close. On the day, the yield on the two-year maturity fell two bps, 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 83.3% on Wednesday from Tuesday’s level of 84.3%, while the 30-year municipal-to-Treasury ratio fell to 97.7% on Wednesday from Tuesday’s level of 98.7%.

Last Thursday prices on municipals were mixed, as the last of the week’s new issue offerings came to market. 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 one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mixed, as stocks posted gains on the session. On the day, the yield on the two-year maturity was steady, while the yields on the 10- and 30-year maturities each fell two bps. The 10-year municipal-to-Treasury ratio bumped up to 83.6% on Thursday from Wednesday’s level of 83.3%, while the 30-year municipal-to-Treasury ratio bumped up to 98.0% on Thursday from Wednesday’s level of 97.7%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to the coming week’s $5.3B in new issuance offerings. On the day, the yields on the two- and 30-year GO bonds each rose one bp, while the yield on the 10-year GO bond was steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed, as U.S. stocks traded higher for the session. On the day, the yield on the two-year maturity was steady, while the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose six bps. The 10-year municipal-to-Treasury ratio fell to 82.7% on Friday from Thursday’s level of 83.6%, while the 30-year municipal-to-Treasury ratio fell to 96.4% on Friday from Thursday’s level of 98.6%.

 

Taxable Market

 

 

 

 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

 

Justin Sparks

Vining Sparks

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