Muni Update

July 24, 2017


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

 

Municipal Market Recap

Municipal bond funds reversed course and posted inflows for the week, as weekly reporting funds experienced $298.554MM of inflows in the latest reporting week, after experiencing outflows of $172.555MM the week prior. The four-week moving average was positive at $41.012MM, after being in the red at $256.274MM 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 participation is showing growth.

U.S. Treasury prices started the trading week mixed, as the short-end weakened and the intermediate and long-end strengthened. On Tuesday they were stronger across the curve. On Wednesday prices were steady in the front- and long-ends, while the intermediate area weakened. On Thursday prices were mixed, as they weakened in the front-end and strengthened 10 years and longer. Prices ended the week stronger across the curve. Prices on municipals also started the trading week mixed, as the front- and long-ends were steady, while the intermediate area strengthened. For the rest of the week prices on municipals strengthened daily across the curve.  Volume for the trading week is projected to be $4.24B, which is below last week’s revised level of $7.46B. This lower level of issuance will have market participants looking to the secondary market for opportunities to address the continued strong demand 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 are facing and the compression in spreads, especially at the lower end of the credit quality scale.

This week’s economic calendar is packed with reports, but the most important report this week will be the Official Statement from the FOMC’s Meeting on Wednesday.  The market has no expectations for a rate hike this week and only a 42.0% chance of one more hike before year-end. The big question will be how they choose to handle the balance sheet discussion. There are two events about which they will prep the markets: the start date of the new plan and the date on which they will announce the start date. More hawkish FOMC observers expect that they could announce the start date at this week’s meeting. This seems particularly data-independent given how weak inflation currently is. Most economists seem to expect the Committee to announce the start date at their September meeting with the actual plan being implemented in December.

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 0.94%. Meanwhile, the yields on the 10- and 30-year maturities each fell two bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 1.90% and 2.69%, 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 10 bps and the yield on the 30-year GO bond fell 10 bps. We note that the municipal yield curve is now at its flattest level since the presidential election, with the five-, 10-, and 30-year rates all back where they were in the first week of November 2016.

Last week the yields on the two- and 30-year maturities on the MMA Triple-A Scale each fell one bp from Thursday to Friday and they ended the week at 0.97% and 2.86%, respectively. Meanwhile, the yield on the 10-year maturity fell two bps on the MMA Triple-A Scale from Thursday to Friday and they ended the week at 2.05%. Overall, week-over-week the yield on the two-year maturity fell seven bps, while the yield on the 10-year maturity fell nine bps and the yield on the 30-year maturity fell 10 bps.

Prices on U.S. Treasuries started last week mixed. On Tuesday they strengthened and on Wednesday and Thursday they were mixed. On Friday they finished stronger across the curve. Overall, week-over-week the yield on the 10-year maturity fell nine bps and closed the week at 2.23%. Meanwhile the yield on the two-year maturity was unchanged week-over-week and closed the week at 1.34%. This resulted in a week-over-week 2s/10s spread of 89 bps, nine bps tighter than last week’s 2s/10s spread of 98 bps. The yield on the 30-year maturity fell 11 bps week-over-week and finished the week at 2.80%.

 

New Issue Volume is Expected to be $4.24B

Total volume for the trading week is estimated to be $4.24B, which is well below last week’s $7.46B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $3.62B in negotiated deals and approximately $622.0MM in competitive sales, according to data from Thomson Reuters. There are only nine deals scheduled larger than $100.0MM and all of them are on the negotiated side.

New York City will offer $800.0MM of GO bonds on Wednesday after a two-day retail order period. The deal is rated Aa2 by Moody’s Investors Service (Moody’s) and AA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch). In addition to the large tax-exempt negotiated offering, New York will also sell $60.0MM of taxable GO bonds on Wednesday.

The Port of Seattle will offer $608.0MM of intermediate lien revenue and refunding bonds featuring tax-exempt, taxable and alternative-minimum tax (AMT) bonds. It is scheduled to be broken down into $17.33MM of Series 2017A bonds, $266.0MM of Series 2017B taxable and $324.8MM of Series 2017C AMT bonds. The Series B bonds are expected to price on Monday and the other two offerings on Tuesday. The deals are rated A1 by Moody’s, A+ by S&P and AA- by Fitch.

After those transactions, the size of deals drops off substantially. The City of Philadelphia will offer $152.85MM of water and wastewater revenue refunding bonds on Tuesday. The deal is rated A1 by Moody’s and A+ by S&P and Fitch.  The Washington Economic Finance Authority will offer $125.22MM of environmental facilities revenue bonds for the Columbia Pulp 1, LLC Project on Wednesday.

The largest competitive sale will take place on Tuesday, as Alexandria, Virginia, will be pricing $94.93MM of GO capital improvement bonds. The deal is rated triple-A by Moody’s and S&P.

 

Municipal Bond Funds Posted Inflows for the Week       

Municipal bond funds posted inflows for the week, as market participants put cash back into funds, according to the latest data from Lipper. Weekly reporting funds reported $298.554MM of inflows for the most recent week. These followed outflows of $172.555MM the week prior, according to Lipper. The four-week moving average was positive at $41.012MM, after being in the red at $256.274MM the week prior.

Long-term municipal bond funds had inflows of $183.175MM in the latest week after inflows of $77.841MM the week prior. Intermediate-term funds had inflows of $84.015MM after outflows of $145.902MM the week prior. National funds had inflows of $342.243MM after outflows of $177.995MM the week prior. High-yield municipal funds reported inflows of $39.178MM in the latest reporting week, after inflows of $75.010MM the week prior. Exchange traded funds saw inflows of $7.650MM, after outflows of $9.757MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong 

The lighter new issue calendar for the trading week will have market participants looking to strong bid lists to meet their growing demand, 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 on the one-, two-, three-, and five-year maturities all tightened week-over-week, with the largest tightening occurring in the one-year maturity, 10 bps. Meanwhile, the spreads on the 10-, 15-, and 30-year maturities all widened week-over-week, with the largest widening occurring in the 15- and 30-year maturities, two bps each.

 

Daily Overview of the General Market for the Week Ending July 21st

Last Monday prices on municipals were mixed, as market participants prepped for the coming week’s $7.66B in new issue offerings. On the day the yields on the two- and 30-year GO bonds were unchanged, while the yield on the 10-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries last Monday were also mixed, as were the three major indices by the close of the day. The U.S. Dollar was essentially flat, as gains against the Yen and British pound were offset by losses against the Euro. Commodity prices were mixed as struggles in the energy and agricultural space offset gains in metals. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio on Monday was unchanged from the prior Friday’s level of 86.2%, while the 30-year municipal-to-Treasury ratio rose to 96.5% on Monday from the prior Friday’s level of 95.9%.

Last Tuesday prices on municipals were stronger across the curve, as the competitive arena heated up with the Dormitory Authority of the State of New York’s offering of four bond sales totaling almost $1.5B. The state of New Mexico also brought two sales to market that totaled almost $370.0MM. 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 five bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also stronger last Tuesday, as the big three equity indices diverged notably as the Dow fell 0.3%, the Nasdaq rallied 0.5% (new record high), and the S&P’s 0.1% gain (new record high) put it right in the middle. The Senate’s health care saga continued throughout the day. Enough Senators came out against a clean repeal of the ACA to dim the chances for any sort of health care reform and increased concerns about the likelihood of meaningful tax reform. The U.S. Dollar remained weaker after the health care failure, closing at its lowest level since late August. 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 four bps. The 10-year municipal-to-Treasury ratio fell to 85.8% on Tuesday from Monday’s level of 86.2%, while the 30-year municipal-to-Treasury ratio fell to 96.1% on Tuesday from Monday’s level of 96.5%.

Last Wednesday prices on municipals finished the day stronger, as offerings from Virginia and Georgia issuers hit the 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 each fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed, as all three major equity indices climbed to new all-time highs. The NASDAQ gained 0.6%, while the S&P added 0.5% in a close second place finish. The Dow gained 0.3%. Crude prices jumped after the EIA reported a larger-than-expected drawdown in crude inventories of 4.7MM barrels. Gasoline inventories also dropped last week, with the 4.4MM barrel decline the biggest since the week ended March 3rd. U.S. crude closed at $47.14, the highest level in six weeks. On the day, the yields on the two- and 30-year maturities were each unchanged, while the yield on the 10-year maturity rose one bp. The 10-year municipal-to-Treasury ratio fell to 85.0% on Wednesday from Tuesday’s level of 85.8%, while the 30-year municipal-to-Treasury ratio fell to 95.8% on Wednesday from Tuesday’s level of 96.1%.

Last Thursday prices on municipals finished the day stronger, as North Carolina sold more than $600.0MM in bonds. On the day, the yield on the two- and 10- year GO bonds each fell one bp, while the yield on the 30-year GO bond fell two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were mixed on the day, as the NASDAQ edged 0.1% higher Thursday (third straight record close) and the Dow dropped 0.1% and the S&P barely changed. In currencies, the U.S. Dollar closed at an 11-month low as the Euro surged to its strongest level against the greenback in 30 months (January 2015) and the report on the Special Counsel heightened the political uncertainty. Comments from Draghi that recent strength in the common currency had received some attention by ECB officials and that the group would discuss potential QE changes in the autumn appeared to be the catalyst for the Euro’s gains. Oil prices fell after briefly touching their highest levels in six weeks. On the day, the yield on the two-year maturity rose one bp, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio was unchanged on Thursday from Wednesday’s level of 85.0%, while the 30-year municipal-to-Treasury ratio fell to 95.4% on Thursday from Wednesday’s level of 95.8%.

Last Friday prices on municipals finished the week stronger across the curve, as market participants prepped for the estimated $4.24B in new issue paper expecting to come to market. 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 two 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 yield on the two-year maturity fell two bps, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell four bps. The 10-year municipal-to-Treasury ratio rose to 85.2% on Friday from Thursday’s level of 85.0%, while the 30-year municipal-to-Treasury ratio rose to 96.1% on Friday from Thursday’s level of 95.4%.





Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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