June 1, 2020
In this week’s Municipal Market Update, we highlight the following:
- Municipal prices started the week mixed, and were steady daily for the rest of the week, 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;
- New-issue offerings are forecasted to be $6.85B for the trading week;
- Municipal bond funds posted Inflows for a third week in a row;
- Demand in the Bank Qualified (BQ) market remains strong;
- Day-by-day recap of activity in the General Market.
Municipal Market Recap
Municipal prices started the week mixed, as the front-end strengthened, while prices on bonds maturing 10 years and longer were steady. They were then steady daily across the curve for the rest of the week. Last week, even with the economic fallout of the coronavirus pandemic driving local governments toward what may be their biggest fiscal crisis in decades, a rally in the bond market was leaving yields flirting with zero. That marks a dramatic shift from two months ago, when yields were surging as waves of panicked selling raced through Wall Street. Municipal securities are now headed toward their biggest monthly gain since 2009, driving yields on top-rated bonds due in 2021 to just 0.06%, down from as much as 2.8% in late March. The massive move in part tracks the U.S. Treasury market, where yields had already been hovering near zero.
This week’s projected level of new-issue offerings is $6.85B, together with various secondary market opportunities should provide market participants with various opportunities to meet demand, especially given the continued strong demand in the municipal market as the summer redemption season starts on June 1st, when $20.1B of maturing or called bond proceeds will be returned to investors. When including this amount, total scheduled redemptions for the next three months are approximately $120.5B, but that total can grow as current refunding deals are brought to market. The coming wave of reinvestment demand and the already steady level of demand for bonds from both bank qualified buyers and general market buyers, as well as bond funds, will easily digest the pace of new issuance. These factors combined with lighter dealer inventories could provide positive technical support for the municipal bond market.
Investors in municipal bond funds put cash into funds for a third week, as evidenced by the latest tax-exempt weekly reporting funds data showing that funds experienced inflows of $ 1.092B after experiencing inflows of $1.840B the week prior. The four-week moving average was a positive $776.244MM, after being in the green at $189.374MM the week prior. Investors still facing low or negative rates overseas continue to find positive-yielding U.S. assets attractive despite the recent outflows.
Last week the yields on the two-, 10-, and 30-year maturities on the MMD Triple-A Scale were unchanged from Thursday to Friday and ended the week at 0.16%, 0.84%, and 1.65%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond fell two basis points (bps), while the yields on the 10- and 30-year GO were unchanged.
Last week the yields on the two-, 10-, and 30-year maturities on the MMA Triple-A Scale were also unchanged from Thursday to Friday and they ended the week at 0.37%, 1.29%, and 1.91%, respectively. Overall, week-over-week the yield on the two-year GO bonds fell two bps, while the yields on the 10- and 30-year GO bonds each fell one bp.
New-Issue Volume is Forecasted to be $6.85B for the Week
Total new issuance for the trading week per IHS Markit Ipreo is estimated to be $6.85B. This week’s projected issuance is comprised of $4.74B in negotiated deals and $2.11B in competitive sales. There are several negotiated deals this week that are listed as day-to-day with the largest being $1.5B triple-A taxable Yale University deal. The State of Wisconsin also has a $200.0MM taxable transportation refunding bond offering that is day-to-day.
On Tuesday, the New York City Municipal Water Finance Authority plans to price $628.0MM of water and sewer system second general resolution revenue bonds. The deal is rated Aa1 by Moody’s Investors Service (Moody’s) and AA+ by Standard and Poor’s Global Ratings (S&P) and Fitch Ratings (Fitch). The City of Henderson, Nevada plans to offer $289.0MM of GO tax-exempt utility system bonds and taxable various purpose bonds on Tuesday. The deals are rated Aa2 by Moody’s and AA by S&P. Staying with Tuesday, the San Jose-Evergreen Community College District of Santa Clara County, California will price $225.0MM of GOs on Tuesday. The deal is rated Aa1 by Moody’s and AA+ by S&P.
On Wednesday the Washington Metropolitan Area Transit Authority plans to offer $545.0MM of dedicated revenue bonds. The deal is rated AA by S&P and AA+ by Fitch.
The Department of Water and Power of the City of Los Angeles has $240.0MM of water system refunding revenue bonds coming on Thursday. The Texas Department of Housing and Community Affairs plans to price $175.0MM of single-family mortgage revenue bonds on Tuesday. The deal is rated Aaa by Moody’s and AA+ by S&P. The State of Maine has $141.0MM of GOs, tax-exempt and a small taxable portion of bonds for sale also on Thursday. The deals are rated Aa2 by Moody’s and AA by S&P.
Other notable negotiated deals this week include a $430.0MM City of Riverside, California taxable pension obligation offering. The deal is rated AA by S&P and AA- by Fitch. The Massachusetts Bay Transportation Authority plans to offer $392.0MM of subordinated sales tax bonds. This deal is rated Aa3 by Moody’s and AA by S&P. The California County Tobacco Securitization Agency will price $359.0MM of Tobacco Settlement bonds on behalf of the Los Angeles County Securitization Corporation.
In the competitive space, Portland, Oregon plans to offer $164.0MM of taxable bonds on Wednesday, while Miami-Dade County, Florida plans to offer $169.0MM of taxable GOs bonds on Thursday.
Municipal Bond Funds Posted Inflows for a Third Week in a Row
Investors in municipal bond funds put cash into funds for a third week, as tax-exempt weekly reporting funds experienced inflows of $ 1.092B in the latest week, after experiencing inflows of $1.840B the week prior. The four-week moving average was a positive $776.244MM, after being in the green at $189.374MM the week prior.
Long-term municipal bond funds had inflows of $740.931MM in the latest week after experiencing inflows of $1.916B the week prior. Intermediate-term funds had outflows of $102.658MM after inflows of $138.070MM the week prior. National funds had inflows of $996.906MM after experiencing inflows of $1.277B the week prior. High-yield municipal funds reported inflows of $106.727MM in the latest week, after inflows of $773.521MM the week prior. Exchange traded funds reported inflows of $220.758MM, after inflows of $605.643MM the week prior.
Demand in the Bank Qualified (BQ) Market Remains Strong
The expected level of new-issue paper this week, coupled with BQ and General Market (GM) secondary market opportunities should provide BQ market participants with various opportunities to fill their needs. BQ participants continue to have significant demand for municipal paper due in large part to having to replace rolloffs due to redemptions over the next three months, starting on June 1st. Larger BQ participants (in particular C-Corps), continue to find attractive opportunities, both in size and structure in general market paper, due in part to the lower tax rates from tax reform, attractive spreads, and lower costs of funds currently. Meanwhile general market participants have been aggressing pursuing bank qualified new-issue offerings due in part to a drop-off is overall issuance in May, as demand continues to soar.
While currently you can buy anywhere along the curve and pick up spread over U.S. Treasurys, we continue to see bank portfolio managers purchase municipals in the steepest part of the curve (15+ years). Along with outright purchases of Bank Qualified municipals 10 years and out, bank portfolio managers have taken advantage of the yield pickup and larger block size available in General Market (100% TEFRA) municipals in this low cost of funds environment. We also encourage participants to utilize extension swaps as a way to pick up 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 five-year maturity, 16 bps.
Daily Overview of the General Market for the Week Ending May 29th
Last Tuesday municipal prices strengthened, as a few new-issue offerings did come to market, as the first of the week’s projected $4.02B in new-issue long-term debt was offered. 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 were unchanged, according to the final read of the MMD Triple-A Scale.
Prices on U.S. Treasurys weakened, as U.S. stocks finished the session boosted by optimism about the continued gradual reopening of the economy and a new potential coronavirus vaccine. The Dow finished 530 points, or 2.2% higher, while the S&P was up 1.2% and the NASDAQ was up 0.2%. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity rose three bps and the yield on the 30-year year maturity rose six bps. The 10-year municipal-to-Treasury ratio fell to 121.7% on Tuesday from last Friday’s level of 127.3%, while the 30-year municipal-to-Treasury ratio fell to 115.4% on Tuesday from last Friday’s level of 120.4%.
Last Wednesday municipals prices were steady across the curve, as a variety of new-issue offering came 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.
Prices on U.S. Treasurys were mixed, as U.S. stocks finished higher for the session. Investor sentiment was boosted by hopes for more government stimulus, this time in the form of return-to-work cash bonuses, as the economy begins to reopen across the country. The Dow finished up 2.2%, or 553 points, while the S&P was up 1.5% and the NASDAQ finished up 0.8%. On the day, the yields on the two- and 30-year maturities each rose one bp, while the yield on the 10-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 123.5% on Wednesday from Tuesday’s level of 121.7%, while the 30-year municipal-to-Treasury ratio slipped to 114.6% on Wednesday from Tuesday’s level of 115.4%.
Last Thursday municipals prices were steady, as the last of the week’s new-issue offerings were priced, including a credit challenged low-rated $134.0MM Guam Waterworks deal. 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. Treasury prices were mixed, as U.S. stocks finished the session down. The Dow finished 147 points, or 0.6% lower, while the S&P was down 0.2% and the NASDAQ was down 0.5%. On the day, the yield on the two-year maturity fell two bps, while the yield on the 10-year maturity rose two bps and the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 120.0% on Thursday from Wednesday’s level of 123.5%, while the 30-year municipal-to-Treasury ratio fell to 112.2% on Thursday from Wednesday’s level of 114.6%.
Last Friday prices on municipals were steady for a third day in a row, as market participants started looking ahead to the expected almost $6.85B in new-issue long-term debt to be offered next week. 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. Treasury prices strengthened, as U.S. stocks were mixed for the session. The Dow was essentially unchanged, while the S&P rose 0.5% and the NASDAQ rose 1.3%. 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 six bps. The 10-year municipal-to-Treasury ratio rose to 129.2% on Friday from Thursday’s level of 120.0%, while the 30-year municipal-to-Treasury ratio rose to 117.0% on Friday from Thursday’s level of 112.2%.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP