July 8, 2019
In this week’s Municipal Market Update, we highlight the following:
- Municipals prices were mixed on Monday, stronger on Tuesday and Wednesday, and weaker 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 Treasurys for the week;
- New issue offerings are forecasted to be just under $7.0B for the trading week;
- Municipal bond funds post inflows for a 26th week;
- Demand in the Bank Qualified (BQ) market remains strong;
- Day-by-day recap of activity in the General Market.
Municipal Market Recap
Municipal prices were mixed on Monday, as short and long maturities were steady, while intermediate maturities weakened. On Tuesday and Wednesday municipal prices strengthened across the curve. On Friday municipal prices weakened across the curve. Issuance for the week is forecasted to be just under $7.0B, which is well above last week’s revised level of $200.0MM in issuance. Last week’s low level of issuance was expected given the shortened trading week due to the early close on last Wednesday and the full close on last Thursday, July 4th. This week’s significantly higher level of projected new issue offerings, together with secondary market opportunities should provide market participants with a number of opportunities, especially given the continued strong demand in the municipal market. Driving this strong demand in the municipal market is a combination of high redemption flows and inflows into municipal bond mutual funds, which continues to be strong at this time.
Data for the first half of 2019 reflected a good six months for municipal investors, as the Bloomberg Barclays Municipal bond index registered a 5.09% total year-to-date return through June 30th. In addition, overall credit conditions have generally improved as evidenced by upgrades from all three rating agencies exceeding downgrades. Finally, as mentioned above the favorable supply and demand dynamics so far this year have been supportive of municipals outperforming relative to U.S. Treasurys.
Investors in municipal bond funds put cash into funds for a 26th week, as weekly reporting funds experienced inflows of $1.220B, after experiencing inflows of $4.688B the week prior. Investors still facing low rates overseas continue to find higher-yielding U.S. assets attractive, especially since municipal bonds are off to their best start in five years. Municipal securities have been bolstered by low supply and strong demand. All these factors, should have both traditional and non-traditional market participants continuing to look for opportunities in the U.S. municipal market.
Last week the yields on the two-, 10-, and 30-year maturities on the MMD Triple-A Scale all rose two basis points (bps) from Wednesday to Friday and they ended the week at 1.24%, 1.62%, and 2.29%, respectively. Overall, week-over-week the yields on the two- and 10-year General Obligation (GO) bonds each fell one bp, while the yield on the 30-year GO bond fell two bps.
Last week the yields on the two-, 10-, and 30-year maturities on the MMA Triple-A Scale each rose one bp from Wednesday to Friday and they ended the week at 1.33%, 1.81%, and 2.46%, respectively. Overall, week-over-week the yields on the two-, 10-, and 30-year GO bonds each fell two bps.
New Issue Volume is Forecasted to be $7.0B for Trading Week
Total new issuance for the trading week per IHS Markit Ipreo is estimated to be less than $7.0B, which is well above last week’s trading volume of $200.0MM in issuance, according to revised data from Refinitiv. Last week’s low level of issuance was expected given the shortened trading week due to the early close on last Wednesday and full close last Thursday, July 4th. This week’s new issue offerings include 22 deals scheduled for $100.0MM or larger in par and five of them will be offered competitively.
Topping the negotiated slate is the Trustees of the California State University System that plan to offer $543.72MM of revenue bonds. The offerings consist of both a 2019A tax-exempt piece and a Series 2019B taxable piece. The bonds are schedule for offering on Thursday. They are rated Aa2 by Moody’s Investors Service (Moody’s) and AA- by Standard and Poor’s Global Ratings (S&P).
On Wednesday the Massachusetts Port Authority plans to offer $461.215MM of revenue bonds consisting of a Series 2019B bonds that are subject to the alternative minimum tax (AMT) and a Series 2019C of AMT bonds. The offerings are rated Aa2 by Moody’s, and AA by S&P and Fitch Ratings (Fitch).
Also on Wednesday, after a one day retail order period, the New York City Municipal Water Finance Authority plans to offer $400.0MM of tax-exempt fixed-rate second general resolution revenue bonds. The deal is rated Aa1 by Moody’s and AA+ by S&P and Fitch.
In the competitive arena, San Jose, California is selling $502.26MM of GO bonds in three offerings on Tuesday. The sales are projected to consist of $173.4MM of Series 2019A-1 disaster preparedness, public safety, and infrastructure GOs, $170.37MM of Series 2019B Taxable GOs, and $158.49MM of Series 2019C refunding, libraries, parks, and public safety project GOs. The offerings are rated Aa1 by Moody’s and AA+ by S&P and Fitch.
Charleston, South Carolina is set to price $135.23MM of waterworks and sewer system capital improvement revenue bonds on Wednesday. The deal is rated triple-A by Moody’s and S&P. The deal will be priced using BVAL, not the MMD which is the traditional curve used by the market. This comes a few weeks after Lansing, Michigan, priced a $325.0MM utility deal using BVAL.
Municipal Bond Funds Post Inflows for a 26th Week
Investors in municipal bond funds put cash into funds for a 26th week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $1.220B in the latest week, after experiencing inflows of $1.668B the week prior. At the time of publication of this piece no other Lipper data had become available.
Demand in the Bank Qualified (BQ) Market Remains Strong
The BQ market continues to see good 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 municipal paper due in large part to having to replace rolloffs due to redemptions. Larger BQ participants continue to find attractive opportunities, both in size and structure (15+ years) in both BQ and general market paper, due in part to the lower tax rates from tax reform and attractive yields. Other market participants continue to find opportunities in both primary offerings and secondary market BQ opportunities, to address their needs, although we are seeing more BQ buyer’s crossing over and buying GM paper for the first time.
We continue to encourage participants to utilize extension swaps, especially given the strong bids for short paper by retail investors in high tax states, as a way to roll out the curve for more yield with little to no drop-off in credit quality. Week-over-week, bank qualified spreads tightened, with the largest tightening occurring in the two- and three-year maturities, 11 bps.
Daily Overview of the General Market for the Week Ending July 5th
Last Monday prices on municipals were mixed, as the first deals of the holiday-shortened trading week 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.
Prices on U.S. Treasurys were weaker, as U.S. stocks posted gains for the session. The Dow rose 0.44%, while the S&P was up 0.77% and the NASDAQ was up 1.06%. On the day, the yields on the two-, 10-, and 30-year maturities each rose three bps. The 10-year municipal-to-Treasury ratio fell to 80.8% on Monday from last Friday’s level of 81.5%, while the 30-year municipal-to-Treasury ratio fell to 90.6% on Monday from last Friday’s level of 91.7%.
Last Tuesday prices on municipals were stronger, as little supply came to market ahead of Wednesday’s early session close before the Thursday’s Fourth of July holiday. On the day, the yield on the two-year GO bond fell one bp, 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.
Prices on U.S. Treasurys strengthened, as U.S. stocks posted gains in an inconsistent session of ups and downs. 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 rose to 81.8% on Tuesday from Monday’s level of 80.8%, while the 30-year municipal-to-Treasury ratio rose to 91.3% on Tuesday from Monday level of 90.6%.
Last Wednesday prices on municipals strengthened, as the municipal market saw little activity and closed early ahead of the July 4th holiday. On the day, the yields on the two-, 10-, and 30-year GO bonds each fell two bps, according to the final read of the MMD Triple-A Scale.
Prices on U.S. Treasurys were mixed, as U.S. stocks posted gains for the session. On the day, the yield on the two-year maturity was steady, 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 slipped to 81.6% on Wednesday from Tuesday’s levels of 81.8%, while the 30-year municipal-to-Treasury rose to 91.9% on Wednesday from Tuesday’s level of 91.3%.
Last Friday, prices on municipals weakened, as market participants were looking ahead to the coming week’s $6.9B in new issue offerings. On the day, the yields on the two-, 10-, and 30-year GO bonds each rose two bps, according to the final read of the MMD Triple-A Scale.
U.S. Treasury prices finished the day weaker, as stocks posted losses for the session. On the day, the yield on the two-year maturity rose 10 bps, while the yield on the 10-year maturity rose eight bps and the yield on the 30-year maturity rose seven bps. The 10-year municipal-to-Treasury fell to 79.4% on Friday from Wednesday’s level of 81.6%, while the 30-year municipal-to-Treasury fell to 90.2% on Friday from Wednesday’s level of 91.9%.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP