Muni Update

June 18, 2018


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

 

Municipal Market Recap

Prices on municipals were mixed on Monday and Tuesday. On Monday bonds maturing in the front-end strengthened, while bonds maturing 10 years and longer were steady. On Tuesday the front-end strengthened again, while bonds maturing 10 years and longer weakened. On Wednesday prices weakened across the curve. On Thursday prices were mixed, as the front-end was steady, while bonds maturing 10 years and longer strengthened. Friday was a repeat of Thursday’s price activity. Volume for the week is projected to be $7.0B, which is just above last week’s $6.76B in revised issuance. This level of issuance combined with secondary market opportunities should provide market participants with a number of opportunities.

Municipal bond funds reported investors put cash into funds for a fifth week in a row, as weekly reporting funds experienced inflows of $449.614MM, after experiencing inflows of $189.487MM the week prior. The four-week moving average remained positive at $237.288MM, after being a positive $176.621MM 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 is fairly light and kicks off this morning with the June report on homebuilder confidence, which remains very high.  May’s housing starts and building permits are scheduled for Tuesday, existing home sales for Wednesday, and the FHFA home price index on Thursday.  Also scheduled for Thursday is the release of the Fed’s most recent round of bank stress tests.

Apart from all of the housing data, there are several Fed speakers on the tape, including comments from the new New York Fed Bank President (permanent FOMC voter) Williams today. A hat-trick of central bank chiefs will speak on Wednesday, Powell, Draghi, and Kuroda. OPEC meets on Friday and is expected to raise supply caps, which has already pushed oil prices down 10.0% from their May peak of $72.24 per barrel to $64.96 this morning.  Perhaps most important to the markets, the tit for tat trade tariffs between the U.S. and China will remain in the headlines along with NAFTA negotiations.

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 1.66%. Meanwhile the yield on the 10-year maturity fell one basis point (bp) and the yield on the 30-year maturity fell two bps on the MMD Triple-A Scale from Thursday to Friday, and they ended the week at 2.48% and 2.99%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell three 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 one bp.

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale each fell one bp from Thursday to Friday and ended the week at 1.67%, 2.44% and 3.03%, respectively. Overall, week-over-week the yield on the two-year GO bond fell two bps, while the yields on the 10- and 30-year maturities each  rose one bp.

On Monday U.S. Treasury prices finished the day weaker across the curve. On Tuesday through Thursday they were mixed. On Tuesday the front-end weakened, while bonds 10 years and longer were steady. On Wednesday bonds 10 years and in weakened, while the long-end was steady. On Thursday the front-end was steady, while bonds maturing 10 years and longer strengthened. On Friday prices rose across the curve. Overall, week-over-week the yield on the 10-year maturity fell two bps and closed the week at 2.92%. Meanwhile the yield on the two-year maturity rose five bps week-over-week and closed the week at 2.55%. This resulted in a 2s/10s spread of 37 bps, seven bps tighter than last week’s 2s/10s spread of 44 bps. The yield on the 30-year maturity fell three bps week-over-week and finished the week at 3.05%.

 

Volume to be $7.0B for the Trading Week

Total volume for the coming week is estimated to be $7.0B, which is just above the $6.76B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $4.77B in negotiated deals and approximately $2.33B in competitive sales. Leading off the week’s slate will be the Golden State Tobacco Securitization Corporation’s $1.7B of Series 2018A-1 tobacco settlement asset-backed bonds on Wednesday. The deal consists of serial bonds running from 2030 to 2035 and $1.25B of turbo term bonds, which are made up of $250.0MM of bonds due June 1, 2036, with an expected average life of 3.97 years and $1.0B of bonds due June 1, 2047, with an expected average life of 21.02 years. S&P Global Ratings (S&P) assigned the bonds structured finance preliminary ratings as follows: BBB for the 2030 to 2035 serial maturities and a BBB- rating for the 2036 turbo term bonds. S&P did not rate the turbo term bonds due June 1, 2047.

Also coming on Wednesday, the Pennsylvania Turnpike Commission plans to price $490.0MM of Series 2018A-2 turnpike revenue bonds. The deal is rated A1 by Moody’s Investors Service (Moody’s), A+ by Fitch Ratings (Fitch) and AA- by Kroll Bond Ratings Agency (Kroll).

In the competitive arena, Georgia is coming to market with about $1.23B of GO bonds in four sales on Tuesday. The deals consist of $411.655MM of Series 2018A Tranche 1 GOs, $428.95MM of Series 2018A Tranche 2 GOs, $210.445MM of Series 2018B Tranche 1 taxable GOs and $178.65MM of Series 2018B Tranche 2 taxable GOs. The deals are rated triple-A by Moody’s, S&P and Fitch.

In the short-term competitive sector, Idaho is selling $550.MM of Series 2018 tax anticipation notes on Wednesday. The deal is rated MIG1 by Moody’s, SP1+ by S&P and F1+ by Fitch.

 

Municipal Bond Funds Post Inflows for a Sixth Week        

Municipal bond funds posted inflows last week, as market participants put cash into funds for a sixth week, according to the latest data from Lipper. The weekly reporting saw inflows of $449.614MM, after experiencing inflows of $189.487MM the week prior. The four-week moving average remained positive at $237.288MM, after being a positive $176.621MM the week prior.

Long-term municipal bond funds had inflows of $394.458MM in the latest week after inflows of $113.984MM the week prior. Intermediate-term funds had inflows of $208.625MM after inflows of $153.045MM the week prior. National funds had inflows of $420.991MM after inflows of $183.181MM the week prior.  High-yield municipal funds reported inflows of $322.355MM in the latest week, after experiencing inflows of $147.159MM the week prior. Exchange traded funds reported inflows of $172.711MM, after inflows of $115.358MM 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 were mixed, as the spreads on the one-, two-, three, and five-year  maturities tightened, with the largest tightening occurring in the two-year maturity, five bps. Meanwhile the spreads on 10-, 15- and 30-year maturities widened week-over-week, with the largest widening occurring in the 30-year maturity, five bps.

 

Daily Overview of the General Market for the Week Ending June 15th

Last Monday prices on municipals were mixed, as market participants were able to take part in the retail pricing of large sales by both New York City water and housing issuers, ahead of their institutional pricing on Tuesday. 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 steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker on the day and U.S. stocks inched higher amid a global rally Monday, as the Dow ended just above flat and the S&P 500 and NASDAQ managed 0.11% and 0.19% gains, respectively. On the day, the yields on the two- and 10-year maturities each rose two bps, while the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio fell to 83.1% on Monday from last Friday’s level of 83.7%, while the 30-year municipal-to-Treasury ratio fell to 96.4% on Monday from last Friday’s level of 96.8%.

Last Tuesday prices on municipals were mixed, as the dominant market tone was a wait and see ahead of Wednesday’s Federal Open Market Committee’s (FOMC) announcement, which was expected to include a 25 bps increase in the Fed Funds rate. 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 rose two bps each, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed, as equities were mostly steady and the Dow ended essentially flat for a second day and the S&P 500 was up just under 0.2%. Strength in the tech sector boosted the NASDAQ 0.6%. On the day, the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year maturities were steady. The 10-year municipal-to-Treasury ratio rose to 83.8% on Tuesday from Monday’s level of 83.1%, while the 30-year municipal-to-Treasury ratio rose to 97.1% on Tuesday from Monday’s level of 96.4%.

Last Wednesday prices on municipals were weaker, as the FOMC boosted the federal funds rate target 25 bps to a range of 1.75% to 2% and released a more hawkish Summary of Economic Projections, or “dot plot,” which now projects two more rate hikes this year.  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 prices were mixed on the day, as the FOMC meeting came to a close and the Fed announced a quicker expected path of rate hikes, sending equities lower and creating volatility for the U.S. Dollar. After hovering around unchanged for the first half of trading, the major indexes dropped immediately following the Fed’s announcement and finished near their lows of the day. On the day, the yield on the two-year maturity rose five bps, while the yield on the 10-year maturity rose two bps and the yield on the 30-year maturity was unchanged. The 10-year municipal-to-Treasury ratio bumped up to 84.0% on Wednesday from Tuesday’s level of 83.8%, while the 30-year municipal-to-Treasury ratio rose to 97.7% on Wednesday from Tuesday’s level of 97.1%.

Last Thursday prices on municipals were mixed, as the last of the week’s big new issue offerings came to 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 one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mixed. On the day, the yield on the two-year maturity was steady, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio rose to 84.4% on Thursday from Wednesday’s level of 84.0%, while the 30-year municipal-to-Treasury ratio rose to 98.1% on Thursday from Wednesday’s level of 97.7%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to this week’s $7.0B new issue calendar. On the day, the yield on the two-year GO bond was steady, 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.

U.S. Treasury prices finished the day stronger across the curve. On the day, the yield on the two-year maturity fell four bps, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio rose to 84.9% on Friday from Thursday’s level of 84.4%, while the 30-year municipal-to-Treasury ratio was unchanged on Friday from Thursday’s level of 98.1%.

 



 

 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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