Muni Update

June 15, 2020


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


Municipal Market Recap

Municipal prices started the week steady across the curve. On Tuesday, municipal prices were mixed, as the front-end weakened, while bonds maturing 10 years and longer strengthened. On Wednesday, municipal prices were once again steady across the curve. On Thursday municipal prices were a repeat of Tuesday’s price action, as the front-end weakened, while bonds maturing 10 years and longer strengthened. On Friday municipal prices were mixed again, as the front-end weakened, while bonds maturing 10 years and longer were steady. Last week municipal to Treasury relative value ratios rose as evidenced by the 10-year municipal-to-Treasury ratio on state and local debt maturing in 10 years was 119.97% last Friday, compared with 97.80% the week before. Note, the 10-year municipal-to-Treasury ratio was 168.12% a month earlier.

This week’s projected level of new-issue offerings is $11.6B, 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 started on June 1st, when $20.1B of maturing or called bond proceeds were returned to investors. When including this amount, total scheduled redemptions for the summer months is 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, should easily digest this week projected level of new-issue offerings.

The total size of the municipal bond market (as measured by par amount outstanding) increased by 0.2% in the first quarter of 2020, according to the newest market data published by the Federal Reserve. But the total market value of the municipal bond market declined by 1.5% in the first quarter to $4,087.1B due to the selloff in March when the ICE BofAML Municipal Bond Index was down 3.75%. Because of the positive returns in January and February, the index lost only -0.68% for the quarter. Since the end of the quarter, the index has returned 2.1%, as of June 10th. Solid performance is expected to continue due to the strong technical support provided by the heavy flow of bond redemptions, positive flows into municipal bond mutual funds and ETFs (exchange-traded funds) and the manageable pace of new issuance.

Investors in municipal bond funds put cash into funds for a fifth week, as evidenced by the latest tax-exempt weekly reporting funds data showing that funds experienced inflows of $2.759B after experiencing inflows of $1.206B the week prior. The four-week moving average was a positive $1.724B, after being in the green at $1.180B 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 yield on the two-year maturity on the MMD Triple-A Scale rose two basis points (bps) from Thursday to Friday and ended the week at 0.24%. Meanwhile the yields on the 10- and 30-year maturities on the MMD Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 0.85% and 1.61%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond rose five bps, while the yield on the 10-year GO bond fell four bps and the yield on the 30-year fell nine bps.

Last week the yields on the two-, 10-, and 30-year maturities on the MMA Triple-A Scale were unchanged from Thursday to Friday and ended the week at 0.36%, 1.25%, and 1.86%, respectively. Overall, week-over-week the yield on the two-year GO bonds fell two bps, while the yield on the 10-year GO bond fell six bps and the yield on the 30-year GO bond fell eight bps.


New-Issue Volume is Forecasted to be $11.6B for the Week

Total new issuance for the trading week per IHS Markit Ipreo is estimated to be $11.6B. This week’s projected issuance is comprised of $10.4B in negotiated deals and $1.2B in competitive sales. Of this total amount, there are 25 deals on the calendar over $100.0MM in par, with the largest being a $1.3B New York State Urban Development Corporation (NYS UDC) offering of general purpose state personal income tax revenue bonds on Wednesday, after a one-day retail order period on Tuesday. The NYS UDC also plans to separately offer $487.0MM of taxable bonds on Wednesday.

Also, this week, the Ford Foundation plans to offer $1.0B of taxable corporate CUSIP social bonds on Thursday. The deal is rated Triple-A by both Moody’s Investors Service (Moody’s) and Standard and Poor’s Global Ratings (S&P). Back to Wednesday, the Texas Transportation Commission plans to offer $795.0MM of taxable GO highway improvement refunding bonds. This deal is also rated Triple-A by both Moody’s and S&P. The Geisinger Authority of Montour County, Pennsylvania plans to offer $768.0MM of health system revenue bonds. The deal is rated A1 by Moody’s and AA- by S&P.

There is only one competitive issue over $100.0MM on the calendar this week. Henrico County, Virginia is selling $118.456MM of GO bonds on Tuesday in two issues. The deals consist of $103.68MM of tax-exempt Series 2020A GO public improvement bonds, and $14.785MM of taxable Series 2020B GO refunding bonds. The deals are rated Triple – A by Moody’s, S&P and Fitch Ratings (Fitch).


Municipal Bond Funds Posted Inflows for a Fifth Week in a Row

Investors in municipal bond funds put cash into funds for a fifth week, as tax-exempt weekly reporting funds experienced inflows of $2.759B in the latest week, after experiencing inflows of $1.206B the week prior. The four-week moving average was a positive $1.724B, after being in the green at $1.180B the week prior.

Long-term municipal bond funds had inflows of $1.555B in the latest week after experiencing inflows of $349.431MM the week prior. Intermediate-term funds had inflows of $307.069MM after inflows of $124.738MM the week prior. National funds had inflows of $2.560B after experiencing inflows of $1.653B the week prior. High-yield municipal funds reported inflows of $593.509MM in the latest week, after inflows of $195.145MM the week prior. Exchange traded funds reported inflows of $528.605MM, after inflows of $517.983MM 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, which started 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.

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 from new-issue offerings. Along with outright purchases of Bank Qualified municipals with a five-to-nine-year call window, 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 mixed, as the one-year maturity was unchanged, while the two- and three-year maturities tightened, with the largest tightening occurring in the three-year maturity, seven bps. Meanwhile the week-over-week spreads on the five-, 10-, 15-, and 30-year maturities all widened, with the largest widening occurring in the 30-year maturity, 15 bps.


Daily Overview of the General Market for the Week Ending June 12th

Last Monday municipal prices were steady, as a few new-issues of the week’s projected $8.5B in new-issue offerings 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.

Last Monday, prices on U.S. Treasurys were mixed, as U.S. stocks finished higher for the session on continued optimism over last Friday’s strong employment report and ahead of this week’s Federal Reserve monetary policy meeting. The Dow finished up 443 points, or 1.6% for the sixth straight session, while the S&P was up 1.2% and the NASDAQ was up 1.1%. On the day, the yield on the two-year maturity was steady, while the yields on the 10- and 30-year maturities each fell three bps. The 10-year municipal-to-Treasury ratio rose to 101.1% on Monday from last Friday’s level of 97.8%, while the 30-year municipal-to-Treasury ratio rose to 103.0% on Monday from last Friday’s level of 101.2%.

Last Tuesday prices on municipals were mixed, as several new-issue deals were priced and market participants kept one eye on the Federal Open Market Committee (FOMC), which began its two-day monetary policy meeting. While the FOMC isn’t expected to make any rate changes, participants will be watching its release of economic projections and the virtual press conference held by Chair Jerome Powell after the meeting ends on Wednesday afternoon. On the day, the yield on the two-year GO bond rose two bps, while the yield on the 10-year GO bond fell one bp and the yield on the 30-year GO bond fell two bps, according to the final read of the MMD Triple-A Scale.

Last Tuesday, prices on U.S. Treasurys strengthened, as U.S. stocks closed mixed for the session. After a relatively unexciting morning session, stocks moved lower, as investors weighed the prospects of a protracted economic recovery following the coronavirus lockdowns and protests across American cities continue. The Dow finished down 300 points, or 1.1%, while the S&P was down 0.8% and the NASDAQ was up 0.3%. On the day, the yield on the two-year maturity fell two bps, while the yield on the 10-year maturity fell four bps and the yield on the 30-year maturity fell six bps. The 10-year municipal-to-Treasury ratio rose to 104.8% on Tuesday from Monday’s level of 101.1%, while the 30-year municipal-to-Treasury ratio rose to 105.7% on Tuesday from Monday’s level of 103.0%.

Last Wednesday municipals prices were steady across the curve, as a variety of new-issue offerings came to market and the Federal Reserve left interest rates unchanged and committed to maintaining its unprecedented stimulus plan until the economy has weathered recent events. 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.

Last Wednesday, prices on U.S. Treasurys strengthened, as U.S. stocks finished mixed for the session. The DOW and the S&P logged their second straight day of losses, 1.0% and 0.5%, respectively, while the NASDAQ closed at an all-time high for the third day in a row. It was the first time the NASDAQ finished above 10,000 points. On the day, the yield on the two-year maturity fell three bps, while the yield on the 10-year maturity fell nine bps and the yield on the 30-year maturity fell six bps. The 10-year municipal-to-Treasury ratio rose to 117.3% on Wednesday from Tuesday’s level of 104.8%, while the 30-year municipal-to-Treasury ratio rose to 109.8% on Wednesday from Tuesday’s level of 105.7%.

Last Thursday municipals prices were mixed, as the municipal market resumed its rally and market participants saw a number of large new-issue offerings that came to market, get repriced to sharply lower yields. On the day, the yield on the two year GO bond rose one bp, while the yield on the 10-year GO bond fell three bps and the yield on the 30-year GO bond fell seven bps, according to the final read of the MMD Triple-A Scale.

Last Thursday, U.S. Treasury prices were also mixed, as U.S. stocks plummeted for the session. A somber economic outlook from the US Federal Reserve and the two millionth coronavirus case in the United States had investors questioning whether they had boosted the stock market too far, too fast. The Dow fell 1,854 points or 6.9%, while the S&P fell 5.7% and the NASDAQ fell 5.1%. The NASDAQ had soared to all-time highs on each of the past three sessions and climbed above 10,000 points for the first time ever. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year GO bond fell nine bps and the yield on the 30-year maturity fell 12 bps. The 10-year municipal-to-Treasury ratio rose to 128.8% on Thursday from Wednesday’s level of 117.3%, while the 30-year municipal-to-Treasury ratio rose to 114.2% on Thursday from Wednesday’s level of 109.8%.

Last Friday prices on municipals were mixed, as market participants started looking ahead to the expected $11.6B in new-issue long-term debt to be offered next week. On the day, the yield on the two-year GO bond rose 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.

Last Friday, U.S. Treasury prices were mixed, as U.S. stocks staged a rebound-on Friday, as they attempted to recover following the sharpest selloff in three months on Thursday. Though the rally lost some steam in the afternoon, with stocks even briefly turning red, the major indexes ended the day higher. The Dow finished up 477 points, or 1.9%, after having risen more than 800 points in the morning. The S&P ended up 1.3%, and the NASDAQ finished 1.0% higher. On the day, the yield on the two-year maturity was unchanged, while the yield on the 10-year maturity rose five bps and the yield on the 30-year maturity rose four bps. The 10-year municipal-to-Treasury ratio fell to 119.7% on Friday from Thursday’s level of 128.8%, while the 30-year municipal-to-Treasury ratio fell to 111.0% on Friday from Thursday’s level of 114.2%.






Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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