Muni Update

June 19, 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 $394.878MM of inflows in the latest reporting week, after experiencing inflows of $985.092MM the week prior. The four-week moving average was positive at $430.908MM, after being in the green at $438.868MM the week prior. All other funds posted inflows for the week. 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. In addition, investors still facing negative 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 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 the front-end was steady, while intermediate maturities and longer strengthened. On Wednesday prices rose across the curve. On Thursday maturities 10 years and in weakened, while the long-end was steady. On Friday they were mixed, as prices on maturities 10 years and in were stronger, while the long-end was steady. Prices on municipals also started the week weaker. On Tuesday they were steady 10 years and in, and weaker in the long-end. On Wednesday the front-end was steady, while prices on maturities 10 years and longer strengthened. On Thursday prices were weaker across the curve. On Friday they were mixed, as the front-end was weaker, while prices on bonds maturing 10 years and longer were steady. Volume for the trading week is projected to be $11.78B, which is over three times last week’s revised level of $3.47B. This week’s level of new issue volume, coupled with secondary market opportunities should be easily absorbed by a municipal market that is in a stronger period of demand, due to redemptions over the next few months.

This week’s economic releases are light, as the only major reports this week are May’s existing home sales report on Wednesday and new home sales report on Friday. Usually, these wouldn’t be significant on a stand-alone basis. However, given the recent trend of weakness across the housing data as a whole, analysts will scrutinize these reports for signs of a positive turnabout. Existing home sales are expected to have declined 0.4% in May, while economists are looking for a 3.8% bounce back in the pace of new homes sold.

Last week the yield on the two-year maturity on the MMD Triple-A Scale rose two basis point (bp) from Thursday to Friday and ended the week at 0.96%. Meanwhile, the yields on the 10- and 30-year maturities were unchanged on the MMD Triple-A Scale from last Thursday to Friday, and they finished the week at 1.86% and 2.70%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose six bps, while the yields on the 10- and 30-year GO bonds each fell one bp.

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale were all unchanged from Thursday to Friday and ended the week at 0.98%, 2.08%, and 2.90%, respectively. Overall, week-over-week the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity fell three bps.

Prices on U.S. Treasuries started last week weaker. On Tuesday they were mixed. On Wednesday they strengthened across the curve, while on Thursday they reversed course and weakened. On Friday they were mixed, as prices on maturities 10 years and in strengthened, while the long-end was steady. Overall, week-over-week the yield on the 10-year maturity fell five bps and closed the week at 2.15%. Meanwhile the yield on the two-year maturity fell one bp week-over-week and closed the week at 1.32%. This resulted in a week-over-week 2s/10s spread of 83 bps, four bps tighter than last week’s 2s/10s spread of 87 bps. The yield on the 30-year maturity fell seven bps week-over-week and finished the week at 2.78%.

 

New Issue Volume is Expected to be $11.78B

Total volume for the trading week is estimated to be $11.78B, which is just over three times the $3.47B in last week’s issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $7.74B in negotiated deals and approximately $4.04B in competitive sales, according to data from Thomson Reuters. There are 29 deals on the schedule that are $100.0MM or greater, including 10 competitive sales. The last time new issue volume was estimated to be this high was the week of January 16, when it was estimated at $13.7B. Market participants will have options across the board when it comes to ratings, as the larger deals that are scheduled range from Georgia’s triple-A rated bonds to the American Dream bonds, which are not rated.

Georgia is expected to sell roughly $1.41B of GO bonds in four separate competitive sales on Tuesday. The sales will include $430.54MM and $358.11MM of straight GO bonds, $352.45MM of GO refunding bonds and $273.45MM of taxable GO bonds. All of the deals are rated triple-A by Moody’s Investors Service (Moody’s), S&P Global Ratings (S&P) and Fitch Ratings (Fitch). The New York City Transitional Finance Authority (NYC TFA) is set to sell one negotiated and two competitive deals this week that total $1.50B in par. The negotiated offering is comprised of $800.0MM future tax secured subordinate bonds and is to be offered Wednesday, following a two-day retail order period. The NYC TFA will also sell two competitive sales totaling $250.0MM of taxable negotiated future tax secured subordinate bonds. The deals are rated Aa1 by Moody’s and triple-A by S&P and Fitch.

Also this week the Chicago O’Hare Airport will offer $825.125MM of general airport senior lien revenue refunding bonds featuring both non-alternative minimum tax (AMT) and AMT bonds on Tuesday. The deal is rated A by S&P and Fitch. The American Dream at the Meadowlands will once again attempt to price the $1.1B of limited obligation pilot revenue bonds in two sales. Originally they were scheduled to price last week, but because of some logistical issues, the deals had to be postponed to this week. We note that no specific date for this week has been given for the sales.

In the competitive arena, the Commonwealth of Massachusetts is selling roughly $784.85MM of GO consolidated loan and GO refunding bonds in three separate sales on Tuesday. The deals are rated Aa1 by Moody’s, AA by S&P and AA+ by Fitch.

 

Municipal Bond Funds Post Inflows for a Second Week      

Municipal bond funds posted inflows for a second week, as market participants put cash back into funds, according to the latest data from Lipper. Weekly reporting funds reported $394.878MM of inflows for the most recent week. These followed inflows of $985.092MM the week prior, according to Lipper. The four-week moving average was positive at $430.908MM, after being in the green at $438.868MM the week prior.

Long-term municipal bond funds had inflows of $326.028MM in the latest week after experiencing inflows of $636.005MM the week prior. Intermediate-term funds had inflows of $70.283MM after inflows of $97.336MM the week prior. National funds had inflows of $394.948MM after inflows of $947.171MM the week prior. High-yield municipal funds reported inflows of $235.860MM in the latest reporting week, after experiencing inflows of $336.996MM the week prior. Exchange traded funds saw inflows of $85.244MM, after inflows of $113.843MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong 

The new issue calendar for this week picks up and this rise in issuance coupled with strong bid lists should contribute to meeting market participants growing demand, as they search for opportunities and prep for coming redemptions. In addition, the attractive slope of the BQ yield curve has participants continuing to utilize swaps to extend out the curve. Spreads week-over-week were flat for the one-year maturity and wider for all other maturities across the curve, with the largest widening occurring in the 30-year maturity, nine bps.

 

Daily Overview of the General Market for the Week Ending June 16th

Last Monday prices on municipal bonds finished the day weaker across the curve, as participants positioned themselves for the upcoming trading week’s $6.01B in new issue supply. On the day, the yield on the two-year GO bond rose three bps, while the yields on the 10- and 30-year GO bonds each rose one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries last Monday were also weaker across the curve, as the NASDAQ more than halved an early morning sell-off of 1.6% to avoid its worst two-day stretch since the Brexit vote almost a year ago. Losses for the Dow and S&P weren’t as severe, as both fell less than 0.2%. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio was unchanged on Monday from the prior Friday’s level of 85.0%, while the 30-year municipal-to-Treasury ratio fell to 94.8% on Monday from the prior Friday’s level of 95.1%.

Last Tuesday prices on municipal bonds were steady 10 years and in and weaker in the long-end, as the State of Wisconsin came to market with a sale of GO  bonds and investors awaited the Federal Open Market Committee’s (FOMC) decision on interest rates. On the day, the yields on the two- and 10-year GO bonds were unchanged, while the yield on the 30-year GO bond rose one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were steady in the front-end and stronger 10 years and longer, as tech companies recovered Tuesday to help the Dow and S&P reach new all-time record highs. However, due to the severity of the downturn for the NASDAQ over the previous two sessions, the index’s 0.7% gain left the tech-heavy index 100 points shy of its previous record close. The U.S. Dollar weakened but remained in its relatively well-defined, month-long trading range that developed after a steep drop in mid-May. Crude prices finished essentially unchanged after a volatile session. On the day, the yield on the two-year maturity was unchanged, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio rose to 85.5% on Tuesday from Monday’s level of 85.0%, while the 30-year municipal-to-Treasury ratio rose to 95.5% on Tuesday from Monday’s level of 94.8%.

Last Wednesday prices on municipals finished steady in the front-end and stronger 10 years and longer, as the FOMC voted to hike the Fed funds target rate by 25 bps to between 1.0% and 1.25%. On the day, the yield on the two-year GO bond was unchanged, while the yields on the 10- and 30-year GO bonds each fell four bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger across the curve, as early morning disappointment in the May inflation and retail sales data shook markets out of their weekly slumber. The U.S. Dollar weakened sharply and equity futures rose as did the current indices when trading opened. Those moves held until the FOMC announced its fourth hike of the cycle. Markets differed in their response to the Fed news. The U.S. Dollar recovered nearly all of its early losses to end the day unchanged. Stocks diverged as the S&P and NASDAQ slipped, while the Dow climbed to a new record high. Elsewhere, oil prices fell 3.7% to a seven month low after a surprising build in U.S. gasoline inventories. On the day, the yield on the two-year maturity fell two bps, while the yield on the 10-year maturity fell six bps and the yield on the 30-year maturity fell eight bps. The 10-year municipal-to-Treasury ratio rose to 86.0% on Wednesday from Tuesday’s level of 85.5%, while the 30-year municipal-to-Treasury ratio rose to 96.8% on Wednesday from Tuesday’s level of 95.5%.

Last Thursday prices on municipals were weaker, as the last of the week’s larger sales came to market, led by issues from Mississippi and Hawaii. On the day, the yield on the two- and 30-year GO bonds each rose one bp, while the yield on the 10-year GO bond rose two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed, as the U.S. Dollar was lifted by the rebound in Treasury yields and gained against every major currency. The energy sector also weighed on equities as crude prices fell another 1.1%, closing below $45.00 per barrel in back-to-back sessions for the first time since mid-November. Crude prices are down 14.0% since their most recent peak on May 23 and have completely erased all gains since OPEC announced an extension of production cuts last November. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity rose two bps and the yield on the 30-year maturity was steady. The 10-year municipal-to-Treasury ratio was relatively unchanged from Wednesday’s level of 86.0%, while the 30-year municipal-to-Treasury rose to 97.1% on Thursday from Wednesday’s level of 96.8%.

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

U.S. Treasury finished the week mixed, as prices on maturities 10 years and in strengthened, while the long-end was steady. On the day, the yield on the two-year maturity fell three bps and the yield on the 10-year maturity fell one bp, while the yield on the 30-year maturity was unchanged. The 10-year municipal-to-Treasury ratio rose to 86.5% on Friday, from Thursday’s level of 86.0%, while the 30-year municipal-to-Treasury ratio was unchanged on Friday from Thursday’s level of 97.1%.





Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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