July 31, 2017
In this week’s Municipal Market Update, we highlight the following:
- Prices on municipals started the trading week stable, were mixed daily through Thursday, and were steady again on Friday, as reflected by weekly data for the Municipal Market Data (MMD) Triple-A Scale; also shown are the yields for the Municipal Market Advisors (MMA) Triple-A Scale and US Treasuries for the week;
- New issue volume for week is expected to be $7.16B;
- Municipal bond funds posted inflows for the week;
- Demand in the Bank Qualified (BQ) market remains strong;
- Day-by-day recap of activity in the General Market.
Municipal Market Recap
Municipal bond funds posted inflows for a second week, as weekly reporting funds experienced $322.992MM of inflows in the latest reporting week, after experiencing inflows of $298.554MM the week prior. The four-week moving average turned negative at $2.329MM, after being in the green at $41.012MM the week prior. High demand is expected to continue to outpace supply in the municipal market, as the market is in a period 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 weaker across the curve and weakened further on Tuesday. On Wednesday prices reversed course and strengthened across the curve. On Thursday they gave back some of Wednesday’s gains, as they weakened across the curve. Prices ended the week stronger across the curve. Prices on municipals started the trading week steady. On Tuesday the front-end was steady, while the intermediate and long-end weakened. On Wednesday the two- and 30-year maturities were steady, while the 10-year maturity weakened. On Thursday the front-end was steady again, while the intermediate and long-end weakened. On Friday prices were unchanged. Volume for the trading week is projected to be $7.16B, which is above last week’s revised level of $4.16B. This higher level of issuance coupled with secondary market opportunities should address the continued strong demand in the municipal markets due to the 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 loaded with information and starts with the Pending Home Sales report, which are expected to rise 1.0% after some weak data in recent reports. Also on Monday the Chicago Purchasing Manager’s index and the Dallas Fed Manufacturing index will be released. On Tuesday the June Personal Income and Spending data and PCE inflation data will be released. We’ll also see the ISM Manufacturing Index, June Construction Spending report, and July’s vehicle sales totals. Wednesday will bring the ADP Employment report, the first estimate of Friday’s BLS nonfarm payroll report. Thursday will bring the ever-important ISM Non-Manufacturing index and then the July labor reports will be released on Friday. Also this week on Wednesday, Fed Bank Governor Mester and San Francisco Fed President Williams are both scheduled to speak.
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 ended the week at 0.94%, 1.95% and 2.74%, respectively. 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 rose five basis points (bps).
Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale were all unchanged from Thursday to Friday and they ended the week at 0.97%, 2.07% and 2.89%, respectively. Overall, week-over-week the yield on the two-year maturity was unchanged, while the yield on the 10-year maturity rose two bps and the yield on the 30-year maturity rose three bps.
Prices on U.S. Treasuries started last week weaker. On Tuesday they weakened again, while on Wednesday they strengthened. On Thursday they weakened, giving back most of Wednesday’s gains. They finished the week stronger across the curve. Overall, week-over-week the yield on the 10-year maturity rose six bps and closed the week at 2.29%. Meanwhile the yield on the two-year maturity rose one bp week-over-week and closed the week at 1.35%. This resulted in a week-over-week 2s/10s spread of 94 bps, five bps wider than last week’s 2s/10s spread of 89 bps. The yield on the 30-year maturity rose nine bps week-over-week and finished the week at 2.89%.
New Issue Volume is Expected to be $7.16B
Total volume for the trading week is estimated to be $7.16B, which is above last week’s $4.17B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $5.25B in negotiated deals and approximately $1.91B in competitive sales, according to data from Thomson Reuters. There are 19 scheduled sales larger than $100.0MM, with six of those in the competitive arena. The calendar features five transportation related offerings over $100.0MM, including the largest deal of the week.
The Bay Area Toll Authority plans to offer $1.1B of San Francisco Bay Area toll bridge revenue bonds. It is anticipated that there will be two sales of $550.0MM each. The first will consist of senior 2017 Series E bonds featuring term rates and index rate bonds and the second of fixed rate subordinate bonds. Both deals are scheduled to price on Tuesday after a one-day retail order period. The senior bonds are rated Aa3 by Moody’s Investors Service (Moody’s) and AA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch), while the subordinate bonds are rated A1 by Moody’s and AA- by S&P.
The Commonwealth of Massachusetts is set to sell $1.5B in GO bond anticipation notes on Wednesday in three separate sales of $500.0MM. The Washington Metropolitan Area Transit Authority will offer $496.5MM of gross revenue bonds on Tuesday. The deal is rated AA- by S&P and Fitch. The City of Austin, Texas is offering $313.535MM of water and wastewater system revenue refunding bonds on Tuesday. The deal is rated Aa2 by Moody’s, AA by S&P and AA- by Fitch.
The biggest competitive sale of the week will take place on Thursday, when the Metro Atlanta Rapid Transit Authority auctions off $252.835MM of sales tax revenue refunding bonds. The deal is rated Aa2 by Moody’s and AA+ by S&P.
Municipal Bond Funds Posted Inflows for the Week
Municipal bond funds posted inflows for the second week, as market participants put cash into funds, according to the latest data from Lipper. Weekly reporting funds reported $322.992MM of inflows for the most recent week. These followed inflows of $298.554MM the week prior, according to Lipper. The four-week moving average turned negative at $2.329MM, after being positive at $41.012MM the week prior.
Long-term municipal bond funds had inflows of $229.732MM in the latest week after inflows of $183.175MM the week prior. Intermediate-term funds had inflows of $70.336MM after experiencing inflows of $84.015MM the week prior. National funds had inflows of $431.650MM after inflows of $342.243MM the week prior. High-yield municipal funds reported inflows of $188.672MM in the latest reporting week, after inflows of $39.178MM the week prior. Exchange traded funds saw inflows of $123.905MM, after inflows of $7.650MM the week prior.
Demand in the Bank Qualified (BQ) Market Remains Strong
The new issue calendar for the week picks up from last week’s lighter calendar. This together with strong bid lists should contribute to meeting market participants continued 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 the spread on the one-year maturity was unchanged week-over week. Meanwhile, spreads on all other maturities tightened week-over-week, with the largest tightening occurring in the 15-year maturity, seven bps.
Daily Overview of the General Market for the Week Ending July 28th
Last Monday prices on municipals were steady, as a few deals priced for retail and institutional investors. On the day the yields on the two-, 10- and 30-year GO bonds were unchanged, according to the final read of the MMD Triple-A Scale.
Prices on U.S. Treasuries last Monday were weaker, and as yields rose, so did the U.S. Dollar. The move in the currency was only minor and driven mainly by an easing Euro. The Euro had reached a 30-month high with the close last Friday. The higher yields also coincided with the financials sector’s first place finish within the S&P. Technology was the only other sector to notch a gain and the broader index closed down 0.1%. The Dow also slipped, falling 0.3%, but tech’s strength pushed the NASDAQ 0.4% higher to a new record close. On the day, the yields on the two- and 10-year maturities each rose two bps, while the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell on Monday to 84.4% from the prior Friday’s level of 85.2%, while the 30-year municipal-to-Treasury ratio fell to 95.1% on Monday from the prior Friday’s level of 96.1%.
Last Tuesday prices on municipals were mixed, as deals from New York City, Philadelphia and the Port of Seattle hit the market. On the day the yield on the two-year GO bond was steady, 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 across the curve, as all three major equity indices climbed on the day and crude prices rallied almost 5.0% in their biggest daily gain since November and are up 6.0% so far this week. 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 eight bps. The 10-year municipal-to-Treasury ratio fell to 82.8% on Tuesday from Monday’s level of 84.4%, while the 30-year municipal-to-Treasury ratio fell to 93.8% on Tuesday from Monday’s level of 95.1%.
Last Wednesday prices on municipals finished the day mixed, as the Federal Reserve voted to keep interest rates unchanged and New York City swept into the marketplace with almost $1.0B in two offerings that were well received by buyers. Offerings from Virginia and Georgia issuers also hit the market. On the day, the yields on the two- and 30-year GO bonds were steady, 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 finished the day stronger, as U.S. stocks closed higher and the U.S. Dollar sank to a new 15-month low. All the moves occurred after the Fed elected to leave rates unchanged and signaled a potential September announcement of the start date for balance sheet normalization. On the day, the 2-year yield fell 4.0 bps to 1.36%, the 5-year yield dropped 6.0 bps to 1.83%, and the 10-year yield shed 4.6 bps to 2.29%. The U.S. Dollar tracked yields lower, touching its weakest level since May 3, 2016. In addition to the Fed decision, the U.S. Dollar was also under pressure after hawkish comments from an ECB Governor boosted the Euro. On the day, the yields on the two- and 10-year maturities each fell four bps, while the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 84.7% on Wednesday from Tuesday’s level of 82.8%, while the 30-year municipal-to-Treasury ratio rose to 94.1% on Wednesday from Tuesday’s level of 93.8%.
Last Thursday prices on municipals finished the day mixed again, as the last of the week’s new deals priced. 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 rose one bp, according to the final read of the MMD Triple-A Scale.
U.S. Treasury prices were weaker on the day, as the NASDAQ and S&P both partially pared earlier losses and the Dow managed to return to positive territory to close at a new all-time high. The U.S. Dollar was the top performing major currency and managed to recover most of Wednesday’s post-Fed decision sell-off. Crude prices rose for a fourth consecutive day as U.S. WTI took its weekly tally to +7.4% and closed above $49 per barrel for the first time since late May. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity rose four bps and the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 84.4% on Thursday from Wednesday’s level of 84.7%, while the 30-year municipal-to-Treasury ratio fell to 93.5% on Thursday from Wednesday’s level of 94.1%.
Last Friday prices on municipals finished the week steady, as market participants prepped for the estimated $7.16B in new issue paper expecting to come to market. On the day, the yields on the two-, 10- and 30- year GO bonds were unchanged, according to the final read of the MMD Triple-A Scale.
U.S. Treasuries finished the day stronger across the curve. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity fell two 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 84.4%, while the 30-year municipal-to-Treasury ratio rose to 94.8% on Friday from Thursday’s level of 93.5%.
Senior Vice President
Vining Sparks IBG, L.P.