Muni Update

July 9, 2018


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

 

Municipal Market Recap

Prices on municipals were mixed, as the front-end weakened and bonds maturing 10 years and longer were steady. On Tuesday prices strengthened across the curve. On Wednesday the market was closed in observance of the July 4th holiday. On Thursday bonds maturing 10 years and in were steady, while the long-end strengthened. On Friday the front-end was steady, while bonds maturing 10 years and longer strengthened. Volume for the week is projected to be $6.6B, which is well above last week’s $4.6MM in revised issuance. The rebound is not unexpected given that the bond markets return to a full week of activity. Demand continues to outpace supply, due to redemptions, so this higher level of new issue supply will provide market participants with opportunities in both the new issue market and the secondary market to fill needs.

Municipal bond funds reported investors pulled cash out of funds for the first time since May 2nd, as weekly reporting funds experienced outflows of $189.260MM, after experiencing inflows of $421.387MM the week prior. The four-week moving average remained positive at $331.939MM, after being a positive $426.625MM 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.

This week’s economic calendar brings a few important reports including tomorrow’s Small Business Confidence report and the May JOLTs Job Openings report.  Small business remains near its highest level on record and job openings are at their highest level on record.  Thursday will bring the June CPI report, which is expected to show last year’s weaker reports continue to roll off, resulting in an artificially-inflated headline index. Headline CPI is expected to increase to 2.9% YoY.  This index should stick close to 3.0% for the remainder of the year, on base-effects primarily, before pulling back early next year.

Last week the yield on the two-year maturity on the MMD Triple-A Scale was unchanged from Thursday to Friday and ended the week at 1.64%. Meanwhile the yields on the 10- and 30-year maturities each fell two basis points (bps) on the MMD Triple-A Scale from Thursday to Friday, and they ended the week at 2.43% and 2.90%, respectively. 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 three bps and the yield on the 30-year GO bond fell four bps.

Last week the yields on the two- and 30-year maturities on the MMA Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 1.63% and 2.97%, respectively. Meanwhile the yield on the 10-year maturity on the MMA Triple-A Scale fell one bp from Thursday to Friday and ended the week at 2.39%. Overall, week-over-week the yields on the two-, 10- and 30-year GO bonds each fell one bp.

On Monday U.S. Treasury prices finished the day weaker across the curve. On Tuesday they reversed course and strengthened across the curve. On Thursday prices were mixed, as the front-end weakened, while bonds in the intermediate maturity ranges strengthened and those on the long-end were steady. On Friday prices strengthened across the curve. Overall, week-over-week the yield on the 10-year maturity fell two bps and closed the week at 2.82%. Meanwhile the yield on the two-year maturity rose one bp week-over-week and closed the week at 2.53%. This resulted in a 2s/10s spread of 29 bps, three bps tighter than last week’s 2s/10s spread of 32 bps. The spread between the two- and 10-year Treasury yields has fallen to its lowest level since 2007, the period immediately preceding the most recent financial crisis in the U.S. The yield on the 30-year maturity fell four bps week-over-week and finished the week at 2.93%.

 

Volume to be $6.6B for the Trading Week

Total volume for the coming week is estimated to be $6.6B, which is well above the $4.6MM in issuance last week, according to revised data from Thomson Reuters. Note, however, last week’s lower level of issuance was due in large part to the financial markets being closed last Wednesday in observance of Independence Day and the municipal bond market also closing early last Tuesday. This week’s calendar is comprised of $5.5B in negotiated offerings and $1.2B of competitive sales.

California names will dominate this week’s negotiated offerings. The Trustees of the University of California System plan to price $668.74MM of Series 2018A revenue bonds and Series 2018B taxable revenue bonds on Thursday, after a one-day retail order period. Also on Thursday the Los Angeles Department of Airport’s plans to offer $424.0MM of Series 2018C subordinate revenue bonds, subject to the alternative minimum tax (AMT). The Los Angeles County Facilities Incorporated plans to offer $301.86MM of lease revenue bonds for the Vermont Corridor County administration building on Thursday. The issue consists of Series A tax-exempts and Series B taxables.

On Tuesday Atlanta will price $279.0MM of Series 2018B water and wastewater revenue and refunding bonds. On Wednesday the Maine Health and Higher Educational Facilities Authority plans to price $183.87MM of revenue bonds. The issue consists of Series 2018A tax-exempts and Series 2018B taxables.

In the competitive arena, the Massachusetts School Building Authority is selling $200.0MM of Series 2018B subordinated dedicated sales tax revenue bonds on Tuesday. On Wednesday, the Metropolitan Atlanta Rapid Transit Authority is selling $168.25MM of Series 2018A sales tax revenue bonds.

In the short-term competitive sector, Colorado plans to offer over $900.0MM of notes in two separate offerings. The first will be $310.0MM of Series 2018A education loan program tax and revenue anticipation notes (TRANS) on Tuesday, to be followed by $600.0MM of Series 2018 general fund TRANS on Thursday.

 

Municipal Bond Funds Post Outflows for the Week        

Municipal bond funds posted outflows last week, as market participants pulled cash out of funds for the first time since May 2nd, according to the latest data from Lipper. The weekly reporting saw outflows of $189.260MM, after experiencing inflows of $421.387MM the week prior. The four-week moving average remained positive at $331.939MM, after being a positive $426.625MM the week prior.

Long-term municipal bond funds had outflows of $25.904MM in the latest week after inflows of $357.320MM the week prior. Intermediate-term funds had inflows of $25.976MM after inflows of $84.352MM the week prior. National funds had outflows of $108.311MM after inflows of $426.190MM the week prior.  High-yield municipal funds reported inflows of $94.315MM in the latest week, after experiencing inflows of $179.487MM the week prior. Exchange traded funds reported outflows of $14.571MM, after inflows of $216.906MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The BQ market continues to see strong 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 BQ paper, as participants search for opportunities to address the forecasted $137.0B in redemptions this summer that started on June 1st. We continue to encourage participants to utilize extension swaps (sell short paper eight-years and in, and roll out to the 12- to 20-year maturity area of the curve or longer), as a way to pick up more yield with little to no drop-off in credit quality. This is especially true in specialty states that have high individual tax rates and a strong retail presence, as retail investors are driving the demand for short paper (eight years and in), as they look to add additional tax free income opportunities. Week-over-week, bank qualified spreads were mixed, as the spreads on the one- and five-year maturities widened, with the largest widening occurring in the five-year maturity, two bps. Meanwhile the spreads on two, three, 10-, 15- and 30-year maturities all tightened week-over-week, with the largest tightening occurring in the 30-year maturity, six bps.

 

Daily Overview of the General Market for the Week Ending July 6th

Last Monday prices on municipals were mixed, as market participants stayed mostly on the sidelines ahead of the July 4th holiday. On the day, the yield on the two-year GO bond rose one bp, while the yields on the 10- and 30-year GO bonds were steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker on the day, as U.S. stocks traded mixed. On the day, the yield on the two-year maturity rose five bps, while the yield on the 10- and 30-year maturities each rose two bps. The 10-year municipal-to-Treasury ratio fell to 86.0% on Monday from last Friday’s level of 86.6%, while the 30-year municipal-to-Treasury ratio fell to 98.3% on Monday from last Friday’s level of 99.0%.

Last Tuesday’s shortened trading day saw prices on municipal bonds finish stronger across the curve, ahead of the July 4th holiday on Wednesday. On the day, the yields on the two-, 10- and 30-year GO bonds each fell one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also stronger, as U.S. stocks bucked the global trend in an abbreviated session Tuesday, erasing an early jump and pulling back to close near the lows of the day. On the day, the yield on the two-year maturity fell four bps, while the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio was unchanged from on Tuesday from Monday’s level of 86.0%, while the 30-year municipal-to-Treasury ratio rose to 99.0% on Tuesday from Monday’s level of 98.3%.

Last Thursday prices on municipals were mixed, as the minutes from the latest Federal Reserve meeting suggested that despite expectations of gradual rate hikes, monetary policy is nearing the point where it is no longer accommodative. On the day, the yields on the two- and 10-year GO bonds were steady, while the yield on the 30-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mixed, as the Treasury curve finished flatter after the Fed’s June Minutes signaled support for continued gradual rate increases. The popular 2s/10s spread fell to a new cycle low of 28 bps (or 0.28%). Meanwhile, U.S. stocks rallied as they returned from the Fourth of July holiday, with strength in tech pushing the NASDAQ (+1.1%) out in front of the Dow (+0.8%) and S&P 500 (+0.9%). 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 was steady. The 10-year municipal-to-Treasury ratio bumped up to 86.3% on Thursday from Tuesday’s level of 86.0%, while the 30-year municipal-to-Treasury ratio fell to 98.7% on Thursday from Tuesday’s level of 99.0%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to the coming week’s $6.6B in new issuance offerings. 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 two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as U.S. stocks traded higher for the session. On the day, the yields on the two- and 10-year maturities each fell two bps, while the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio slipped to 86.1% on Friday from Thursday’s level of 86.3%, while the 30-year municipal-to-Treasury ratio bumped up to 99.0% on Friday from Thursday’s level of 98.7%.

 



 

 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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