Muni Update

June 11, 2018



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

 

Municipal Market Recap

Prices on municipals were mixed daily through Wednesday. On Monday bonds maturing 10 years and in were steady, while the long-end weakened. On Tuesday the front-end strengthened, while bonds maturing 10 years and longer were steady. On Wednesday the front-end strengthened, while bonds maturing 10 years and longer weakened. On Thursday and Friday prices were steady across the curve. Volume for the week is projected to be $5.55B, which is below last week’s $9.32B in revised issuance. This lower level of issuance is expected given that issuers are wary, as the Federal Reserve gathers for a monetary policy meeting starting on Tuesday. This lower level of issuance should be easily digested given the high level of redemptions that started at the beginning of the month and should contribute to keeping demand strong for municipals going forward.

Municipal bond funds reported investors put cash into funds for a fifth week in a row, as weekly reporting funds experienced inflows of $189.487MM, after experiencing inflows of $77.249MM the week prior. The four-week moving average remained positive at $176.621MM, after being a positive $171.080MM the week prior. Investors still facing low 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 as yields rise.

This week’s economic calendar contains a number of reports that include May’s CPI report, as it gives the Fed a last data point to consider as they convene in Washington on Tuesday. Also this week we will get May’s retail sales data, jobless claims report, the New York State Manufacturing Survey and Consumer Sentiment. However, all these items will be overshadowed by the highly anticipated meeting between President Trump and North Korea’s Kim Jong Un that will take place in Singapore on Tuesday. This could be the first of several volatile days for markets this week, as it is sure to draw potentially market-moving headlines. Also this week we have the Fed meeting that will start on Tuesday and end on Wednesday. The FOMC is expected to announce on Wednesday another 25-bp increase in its target range to 1.75% to 2.00%. More important will be changes to the Statement, the updated projections, and any color given by Chair Powell in his press conference.

Last week the yields on the two-, 10- and 30-year maturities on the MMD Triple-A Scale fell were all unchanged from Thursday to Friday and ended the week at 1.69%, 2.46%, and 2.98%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell five basis points (bps), while the yield on the 10-year GO bond rose two bps and the yield on the 30-year GO bond rose six bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale fell one bp from Thursday to Friday and ended the week at 1.69%. Meanwhile the yields on the 10- and 30-year maturities were unchanged on the MMA Triple-A Scale from Thursday to Friday, and they ended the week at 2.43% and 3.02%, respectively. Overall, week-over-week the yield on the two-year GO bond fell two bps, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity rose four bps.

On Monday U.S. Treasuries prices finished the day weaker across the curve. On Tuesday they reversed course and strengthened across the curve. On Wednesday they reversed course again and weakened across the curve. On Thursday they reversed course once again and strengthened across the curve. On Friday they were mixed as the front- and long-end maturities were steady, while intermediate maturities weakened. Overall, week-over-week the yield on the 10-year maturity rose six bps and closed the week at 2.94%. Meanwhile the yield on the two-year maturity rose three bps week-over-week and closed the week at 2.50%. This resulted in a 2s/10s spread of 44 bps, three bps wider than last week’s 2s/10s spread of 41 bps. The yield on the 30-year maturity rose five bps week-over-week and finished the week at 3.08%.

 

Volume to be $5.55B for the Trading Week

Total volume for the coming week is estimated to be $5.55B, which is below the $9.32B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $4.0B in negotiated deals and approximately $1.55B in competitive sales. New York issuers will dominate the market this week. On Monday the New York City Municipal Water Finance Authority will offer $370.08MM. The Fiscal 2018 Series FF water and sewer system second resolution revenue bonds are Aa1 by Moody’s Investors Service (Moody’s) and AA+ by S&P Global Ratings (S&P) and Fitch Ratings (Fitch).

On Tuesday the New York City Housing Development Corporation plans to sell $553.09MM of Series 2018C multi-family housing revenue sustainable neighborhood bonds. The deal is rated Aa2 by Moody’s and AA+ by S&P. On Thursday, the New York Metropolitan Transportation Authority (NY MTA) is slated to competitively sell $1.6B of transportation revenue bond anticipation notes in two sales consisting of $800.0MM of Series 2018B-1 and $800.0MM of Series 2018B-2.

Leaving New York, the Massachusetts Development Finance Agency plans to offer $436.0MM of Series 2018J revenue bonds for Caregroup on Wednesday. The deal is rated Baa1 by Moody’s and A- by S&P. In the competitive arena, Wayne County, Michigan is selling $156.29MM of Series 2018 taxable limited tax general obligation revenue notes.

 

Municipal Bond Funds Post Inflows for a Fifth Week        

Municipal bond funds posted inflows last week, as market participants put cash into funds for a fifth week, according to the latest data from Lipper. The weekly reporting saw inflows of $189.487MM, after experiencing inflows of $77.249MM the week prior. The four-week moving average remained positive at $176.621MM, after being a positive $171.080MM the week prior.

Long-term municipal bond funds had inflows of $113.984MM in the latest week after inflows of $165.844MM the week prior. Intermediate-term funds had inflows of $153.045MM after inflows of $129.236MM the week prior. National funds had inflows of $183.181MM after inflows of $328.046MM the week prior.  High-yield municipal funds reported inflows of $147.159MM in the latest week, after experiencing inflows of $224.989MM the week prior. Exchange traded funds reported inflows of $115.358MM, after inflows of $165.757MM 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 15- 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. Week-over-week, bank qualified spreads tightened across the curve, with the largest tightening occurring in the 10-, 15- and 30-year maturities, five bps each.

 

Daily Overview of the General Market for the Week Ending June 8th

Last Monday prices on municipals were mixed, as market participants were eyeing the $9.56B supply slate for the week. On the day, the yields on the two- and 10-year GO bonds were steady, while the yield on the 30-year GO bond rose two bps, 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 started the week off on the right foot. The S&P 500 registered back-to-back gains for the first time since May 14th to reach its highest level since March 16th. The daily improvement was preceded by strength in overnight futures trading amid a solid day for equities globally. Last Friday’s stronger-than-expected payroll report seemed to give global growth sentiment a spark again on Monday. On the day, the yields on the two- and 30-year maturities each rose five bps, while the yield on the 10-year maturity rose six bps. The 10-year municipal-to-Treasury ratio fell to 83.0% on Monday from last Friday’s level of 84.7%, while the 30-year municipal-to-Treasury ratio fell to 95.5% on Monday from last Friday’s level of 96.4%.

Last Tuesday prices on municipals were mixed, as municipal participants were rewarded with a slew of supply, led by issuers in California, Seattle, Ohio and Connecticut. 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 were steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger on the day, and despite separate reports covering two major components of the U.S. economy reinforcing the story of solid domestic growth, stocks mostly treaded water. The Dow (down) and S&P 500 (up) changed by less than 0.1%, while another day of strength for technology companies secured a second-straight record close for the NASDAQ. On the day, the yield on the two-year maturity fell 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 83.6% on Tuesday from Monday’s level of 83.0%, while the 30-year municipal-to-Treasury ratio bumped up to 95.8% on Tuesday from Monday’s level of 95.5%.

Last Wednesday prices on municipals were mixed, as market participants saw a bunch of new deals come to market, led by the Lower Colorado River Authority’s $292.0MM offering of refunding revenue bonds. On the day, the yield on the two-year GO bond fell four bps, while the yield on the 10-year maturity rose two bps and the yield on the 30-year GO bond rose four bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices reversed course on Wednesday and weakened across the curve, as the Dow rebounded 1.4% Wednesday to lead a strong day for U.S. stocks that saw the blue-chip index close above 25,000 for the second time since March. The S&P 500 climb for a fourth straight session, and the NASDAQ registered its third consecutive record close. 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 six bps. The 10-year municipal-to-Treasury ratio fell to 82.6% on Wednesday from Tuesday’s level of 83.6%, while the 30-year municipal-to-Treasury ratio fell to 95.2% on Wednesday from Tuesday’s level of 95.8%.

Last Thursday prices on municipals were steady, as the last of the week’s big new issue offerings came to market. Market participants also expressed concern that next week’s new issue offerings may be light ahead of the Federal Reserve monetary policy meeting. Expectations are the Fed will raise interest rates by 0.25%. 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 finished the day stronger, as technology-related stocks turned lower, ending a four-day win streak for the NASDAQ that included three new record-high closes. The Dow and S&P 500, shielded somewhat from the tech rout by gains in other sectors, fared more favorably. The Dow gained 0.4%, while the S&P ended the day essentially flat. On the day, the yield on the two-year maturity fell two bps, while the yields on the 10- and 30-year maturities each fell five bps. The 10-year municipal-to-Treasury ratio rose to 84.0% on Thursday from Wednesday’s level of 82.6%, while the 30-year municipal-to-Treasury ratio rose to 96.8% on Thursday from Wednesday’s level of 95.2%.

Last Friday prices on municipals were steady, as market participants were looking ahead to this week’s $5.55B new issue calendar, as well as to the Federal Reserve’s monetary policy meeting. 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 finished the day mixed. On the day, the yields on the two- and 30-year maturities were steady, while the yield on the 10-year maturity rose one bp. The 10-year municipal-to-Treasury ratio fell to 83.7% on Friday from Thursday’s level of 84.0%, while the 30-year municipal-to-Treasury ratio was unchanged on Friday from Thursday’s level of 96.8%.

 

 



 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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