Muni Update

June 12, 2017



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

 

Municipal Market Recap

Municipal bond funds recorded inflows for the week, as weekly reporting funds experienced $985.092MM of inflows in the latest reporting week, after experiencing outflows of $50.837MM the week prior. The four-week moving average was a positive $438.868MM, after being a positive $344.028MM the week prior. All other funds except the Intermediate-Term Fund posted inflows for the week. Investors still facing negative rates overseas continue to find higher-yielding U.S. assets attractive. High demand is expected to continue to outpace supply, as the market has entered the point (June 1st) with the heaviest volume of called and maturing bonds in any given year. This year the annual occurrence 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. This 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 participants are showing growth.

U.S. Treasury prices started the trading week weaker. On Tuesday prices posted gains and on Wednesday they reversed course and weakened. On Thursday prices weakened, while on Friday they were mixed. Prices for municipals started the week steady. On Tuesday they were steady in the front-end and stronger in the intermediate and long-end of the curve. On Wednesday municipal prices were steady across the curve. On Thursday and Friday they weakened across the curve. Volume for the trading week is projected to be $6.01B, which is just below last week’s revised level of $6.49B and close to the yearly per-week average. This week’s level of new issue volume, coupled with secondary market opportunities should be easily absorbed by a municipal market that has, as mentioned already, begun a stronger period of demand due to redemptions over the next few months.

This week there are a number of key economic reports. The most important data of the week will come on Wednesday, including the May retail sales data and CPI inflation report. This data is important because Personal Consumption has been weaker-than-expected through the first four months of the year and the FOMC’s forecast is dependent on a rebound, which has not be evident in the data so far. Inflation has run below the Fed’s target, to a surprising degree, making the May CPI data even more important.  Finally, these reports will be the final data the FOMC sees prior to its Wednesday afternoon rate decision.

Other key economic reports this week will include the three reports on housing, which include the June homebuilder confidence report on Thursday and the housing starts and build permits data on Friday. The housing data has been weak lately and a positive run would be a relief. Small business confidence will also be released this week, as well as consumer confidence and three manufacturing reports (the Empire Fed, Philly Fed and the May Industrial Production reports).

Last week the yield on the two-year maturity on the MMD Triple-A Scale rose one basis point (bp) from Thursday to Friday and ended the week at 0.90%. Meanwhile, the yields on the 10- and 30-year maturities each rose two bps on the MMD Triple-A Scale from last Thursday to Friday, and they finished the week at 1.87% and 2.71%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose two bps, while the yield on the 10-year GO bond rose one bp and the yield on the 30-year GO bond rose  two bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale was unchanged from Thursday to Friday and ended the week at 0.97%.  Meanwhile, the yields on the 10- and 30-year maturities each rose one bp on the MMA Triple-A Scale from Thursday to Friday and they finished the week at 2.09% and 2.93%, respectively. Overall, week-over-week the yield on the two-year maturity was unchanged, while the yields on the 10- and 30-year maturities each fell one bp.

Prices on U.S. Treasuries started last week weaker. On Tuesday they strengthened across the curve. On Wednesday and Thursday they weakened across the curve. On Friday they were mixed and prices on maturities 10 years and in weakened, while the long-end was steady. Overall, week-over-week the yield on the 10-year maturity rose four bps and closed the week at 2.20%. Meanwhile the yield on the two-year maturity rose five bps week-over-week and closed the week at 1.33%. This resulted in a week-over-week 2s/10s spread of 87 bps, one bp tighter than last week’s 2s/10s spread of 88 bps. The yield on the 30-year maturity rose four bps week-over-week and finished the week at 2.85%.

 

New Issue Volume is Expected to be $6.01B

Total volume for the trading week is estimated to be $6.01B, which is below the $6.49B in last week’s issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $4.93B in negotiated deals and approximately $1.08B in competitive sales, according to data from Thomson Reuters. There are 15 scheduled negotiated deals bond sales larger than $100.0MM and one competitive deal.

The Wisconsin Public Finance Authority, a conduit issuer, will issue $1.1B for the New Jersey Sports and Exposition Authority. The total sale is comprised of two offerings totaling $1.1B for the American Dream at The Meadowlands Project. These are the largest offerings of the week and are comprised of an $800.0MM offering of limited obligation pilot revenue bonds and $300.0MM of limited obligation grant revenue bonds. Both will price on Wednesday and they are unrated.

Morgan Stanley is scheduled to price the state of Mississippi’s $449.86MM of GO bonds on Thursday. The deal is rated Aa2 by Moody’s Investors Service (Moody’s) and AA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch). On Tuesday the State of Wisconsin is set to price a $342.0MM offering of GO refunding bonds.  The deal is rated Aa2 by Moody’s and AA by S&P and Fitch. The New York City Housing Development Corporation plans to price $272.73MM of multi-family housing revenue sustainable neighborhood bonds on Tuesday, after a one-day retail order period. The deal is rated Aa2 by Moody’s and AA+ by S&P.

The lone large competitive deal of the week will take place on Thursday when the Rock Hill School District Number 3, South Carolina auctions off $110.0MM of GO bonds. The deal is rated Aa1 by Moody’s and AA by S&P.

 

Municipal Bond Funds Post Inflows for the Week      

Municipal bond funds reversed course and posted inflows last week, as market participants put cash back into funds, according to the latest data from Lipper. Weekly reporting funds reported $985.092MM of outflows for the most recent week. These followed outflows of $50.837MM the week prior, according to Lipper. The four-week moving average rose to a positive $438.868MM, after being in the green at a positive $344.028MM the week prior.

Long-term municipal bond funds had inflows of $636.005MM in the latest week after experiencing outflows of $106.029MM the week prior. Intermediate-term funds had outflows of $97.336MM after outflows of $96.676MM the week prior. National funds had inflows of $947.171MM after inflows of $77.134MM the week prior. High-yield municipal funds reported inflows of $336.996MM in the latest reporting week, after experiencing outflows of $7.485MM the week prior. Exchange traded funds saw inflows of $113.843MM, after inflows of $64.657MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong 

The new issue calendar for this week is slightly lighter than last week, but is close to the yearly per-week average. This together with strong bid lists should contribute to meeting market participants growing demand, as they search for opportunities and prep for coming redemptions on June 1st, 15th and 30th. In addition, the attractive slope of the BQ yield curve has participants continuing to utilize swaps to extend out the curve. Spreads were tighter last week across the curve, with the largest tightening occurring in the 30-year maturity, 21 bps.

 

Daily Overview of the General Market for the Week Ending June 9th

Last Monday prices on municipal bonds finished the day steady across the curve, as participants positioned themselves for the upcoming trading week’s $7.83B in new issue supply. 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 across the curve, as an uneventful day for stocks left the major equity indices marginally below Friday’s closing levels. Gains in energy shares and consumer staples only partially offset losses in utilities, materials, and industrials. Oil prices fell and have now moved lower in six sessions out of the last eight as OPEC’s announcement that it would extend production cuts has failed to boost prices. On the day, the yields on the two- and 30-year maturities rose two bps, while the yield on the 10-year maturity rose one bp. The 10-year municipal-to-Treasury ratio fell to 85.7% on Monday from the prior Friday’s level of 86.1%, while the 30-year municipal-to-Treasury ratio fell to 95.1% on Monday from the prior Friday’s level of 95.7%.

Last Tuesday prices on municipal bonds were steady in the front-end and stronger 10 years and longer, as the first new issue offerings of the week hit the market. 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 three bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger across the curve on Tuesday, as early morning trends held to Tuesday’s close with stocks falling 0.3%. The U.S. Dollar also dropped on the day to its weakest level since October 5 of last year. On the day, the yield on the two-year maturity fell one bp, while the yields on the 10- and 30-year maturities each fell two bps. The 10-year municipal-to-Treasury ratio fell to 85.1% on Tuesday from Monday’s level of 85.7%, while the 30-year municipal-to-Treasury ratio fell to 94.7% on Tuesday from Monday’s level of 95.1%.

Last Wednesday prices on municipals finished steady across the curve, as a number of issuers came to market including the City of Chicago, which brought a water 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 finished the day weaker, as plunging oil prices was a major market story from Wednesday’s session. Not only did gasoline supplies grow by the second largest amount since January, but the significant drawdown of crude stocks projected in Tuesday’s industry data failed to materialize. The other market story was a midday recovery in stock prices following the release of the prepared statement former FBI Director Comey will make in his Senate testimony. While the statement won’t put the controversy to bed, it apparently wasn’t as damaging as markets had feared. The Dow and S&P both turned positive after the statement was released and gained 0.2% on the day. On the day, the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year maturities each rose three bps. The 10-year municipal-to-Treasury ratio fell to 83.9% on Wednesday from Tuesday’s level of 85.1%, while the 30-year municipal-to-Treasury ratio fell to 93.7% on Wednesday from Tuesday’s level of 94.7%.

Last Thursday prices on municipals were weaker, as the last of the week’s big deals hit the market. On the day, the yield on the two-year GO bond rose one bp, while the yield on the 10-year GO bond rose two bps and the yield on the 30-year GO bond rose three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day weaker across the curve, as U.S. stocks inched higher Thursday and the NASDAQ posted a solid 0.4% gain, setting a new all-time record high. On the day, the yields on the two-, 10- and 30-year maturities each rose one bp. The 10-year municipal-to-Treasury ratio rose to 84.5% on Thursday, from Wednesday’s level of 83.9%, while the 30-year municipal-to-Treasury rose to 94.4% on Thursday from Wednesday’s level of 93.7%.

Last Friday prices on municipals finished the week weaker, as market participants prepped for the coming week’s new issue offerings. 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 each rose two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury finished the week mixed, as priced on maturities 10 years and in weakened, while being steady on the long-end. On the day, the yields on the two- and 10-year maturities each rose one bp, while the yield on the 30-year maturity was unchanged. The 10-year municipal-to-Treasury ratio rose to 85.0% on Friday, from Thursday’s level of 84.5%, while the 30-year municipal-to-Treasury ratio rose to 95.1% on Friday from Thursday’s level of 94.4%.




 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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