Muni Update

July 30, 2018


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

 

Municipal Market Recap

Prices on municipals were weaker on Monday and Tuesday, as yields rose across the curve. On Wednesday prices were steady across the curve. On Thursday prices weakened again across the curve. On Friday prices were steady across the curve. Volume for the week is projected to be $4.4B, which is below last week’s $6.6B 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 $550.041MM, after experiencing inflows of $1.26MM the week prior. The four-week moving average was a positive $567.565MM, after being a positive $535.401MM 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.

Economic data this week is plentiful and starts today with June pending home sales data. Tuesday will bring personal income and personal sales data, as well as consumer confidence for July. Wednesday will be the busiest day as vehicles sales for July will be reported, as will the ADP national employment report, construction spending data and the ISM manufacturing index. Thursday will provide the markets with Jobless Claims for the week of July 28th and factory orders for June.  Friday will bring the employment situation report and the ISM non-manufacturing index, both for July.

Last week the yields on the two, 10- and 30-year maturities on the MMD Triple-A Scale were all unchanged from Thursday to Friday and they ended the week at 1.61%, 2.44% and 3.00%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose four basis points (bps), while the yield on the 10-year GO bond rose five bps and the yield on the 30-year GO bond rose eight bps.

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 1.63%, 2.43% and 3.02%, respectively. Overall, week-over-week the yield on the two-year GO bonds rose five bps, while the yield on the 10-year GO bond fell one bp and the yield on the 30-year GO bond rose three bps.

U.S. Treasuries prices on Monday were weaker across the curve. On Tuesday they were mixed, as the front- and long-ends strengthened, while intermediate maturities were steady. On Wednesday they were mixed again, as the front-end weakened, while bonds maturing 10-years and longer strengthened. On Thursday they weakened across the curve. On Friday they reversed course and strengthened across the curve. Overall, week-over-week the yield on the 10-year maturity rose seven bps and closed the week at 2.96%. Meanwhile the yield on the two-year maturity rose seven bps week-over-week and closed the week at 2.67%. This resulted in a 2s/10s that was unchanged week over week at 29 bps. The yield on the 30-year maturity rose five bps week-over-week and finished the week at 3.08%.

 

Volume to be $4.4B for the Trading Week

Total volume for the coming week is estimated to be $4.4B, which is below the $6.6B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar is comprised of $3.5B in negotiated offerings and $932.0MM of competitive sales.

The Washington State Convention Center Public Facilities District is coming to market with $974.0MM of Series 2018 lodging tax bonds and subordinate lodging tax bonds on Wednesday. The bonds will finance part of the construction associated with building an addition.

In the competitive arena, Maryland is selling two deals totaling over $500.0MM, also on Wednesday. The deals consist of $275.3MM of Bidding Group 1 state and local facilities loan of 2018 second series tax-exempt bonds and $234.71MM of Bidding Group 2 state and local facilities loan of 2018 second series tax-exempt bonds.

In the short-term competitive sector, the Miami-Dade County School District is selling $335.0MM of Series 2018 tax anticipation notes on Tuesday.

 

Municipal Bond Funds Posted Inflows for a Third Week        

Municipal bond funds posted inflows, as market participants put cash into funds for a third week, according to the latest data from Lipper. The weekly reporting saw inflows of $550.041MM, after experiencing inflows of $1.26B the week prior. The four-week moving average was a positive $567.565MM, after being a positive $535.401MM the week prior.

Long-term municipal bond funds had inflows of $408.358MM in the latest week after inflows of $583.602MM the week prior. Intermediate-term funds had inflows of $117.106MM after inflows of $530.958MM the week prior. National funds had inflows of $494.716MM after experiencing inflows of $1.17B the week prior. High-yield municipal funds reported inflows of $216.171MM in the latest week, after inflows of $313.810MM the week prior. Exchange traded funds reported inflows of $130.955MM, after inflows of $74.167MM 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 10-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. Week-over-week, bank qualified spreads tightened across the curve, with the largest tightening occurring in the two-year maturity, 27 bps.

 

Daily Overview of the General Market for the Week Ending July 27th

Last Monday prices on municipals were weaker, as market participants were eyeing the $5.3B supply slate for the week. On the day, the yield on the two-year GO bond rose one bp, while the yield on the 10-year GO bond rose three bps and the yield on the 30- year GO bond rose four bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also weaker, as stocks were mixed for the session. On the day, the yield on the two-year maturity rose four bps, while the yields on the 10- and 30-year maturities each rose six bps. The 10-year municipal-to-Treasury ratio fell to 82.0% on Monday from last Friday’s level of 82.7%, while the 30-year municipal-to-Treasury ratio fell to 95.8% on Monday from last Friday’s level of 96.4%.

Last Tuesday prices on municipal bonds were weaker, as California’s Infrastructure Economic Development Bank hit the market with a big note offering, while a New York City Transitional Finance Authority deal was offered to retail buyers. On the day, the yields on the two- and 10-year maturities each rose one bp, while the yield on the 30-year maturity rose two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as stocks posted gains for the session. 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 rose to 82.4% on Tuesday from Monday’s level of 82.0%, while the 30-year municipal-to-Treasury ratio rose to 97.1% on Tuesday from Monday’s level of 95.8%.

Last Wednesday prices on municipals were steady, as two big issuers from New York came to market. 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.

U.S. Treasury prices were mixed, as stocks posted gains for the session. On the day, the yield on the two-year maturity rose 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 82.9% on Wednesday from Tuesday’s level of 82.4%, while the 30-year municipal-to-Treasury ratio rose to 97.4% on Wednesday from Tuesday’s level of 97.1%.

Last Thursday prices on municipals were weaker, but firmer, as a lack of new issue pricing on Thursday (most deals priced Tuesday and Wednesday) made for a slow day in the market. On the day, the yields on the two- and 30-year GO bonds each rose two bps, while the yield on the 10-year GO bond rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day weaker, as stocks posted gains on the session. On the day, the yield on the two-year maturity rose three bps, while the yields on the 10- and 30-year maturities each rose four bps. The 10-year municipal-to-Treasury ratio fell to 82.2% on Thursday from Wednesday’s level of 82.9%, while the 30-year municipal-to-Treasury ratio fell to 96.8% on Thursday from Wednesday’s level of 97.4%.

Last Friday prices on municipals were steady, as market participants were looking ahead to the coming week’s $4.4B in new issuance offerings. 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.

U.S. Treasury prices finished the day stronger, as U.S. stocks traded mixed for the 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 one bp. The 10-year municipal-to-Treasury ratio bumped up to 82.4% on Friday from Thursday’s level of 82.2%, while the 30-year municipal-to-Treasury ratio rose to 97.4% on Friday from Thursday’s level of 96.8%.

 



 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

 

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