Muni Update

June 22, 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 weakened across the curve. On Wednesday municipal prices were mixed, as prices on bonds maturing 10 years and in weakened, while the long end was steady. On Thursday and Friday municipal prices were steady across the curve. Last week municipal to U.S. 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 125.71% last Friday, compared with 119.97% the week before.

This week’s projected level of new-issue offerings is $5.8B, and 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 during the summer redemption season, which  started on June 1st, and has a total scheduled redemptions for the summer months of 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’s projected level of new-issue offerings.

Investors in municipal bond funds put cash into funds for a sixth week, as evidenced by the latest tax-exempt weekly reporting funds data showing that funds experienced inflows of $1.710B after experiencing inflows of $2.759B the week prior. The four-week moving average was a positive $1.692B, after being in the green at $1.724B 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 yields on the two-, 10-, and 30-year maturities on the MMD Triple-A Scale were unchanged from Thursday to Friday and ended the week at 0.27%, 0.88%, and 1.63%, respectively. Overall, week-over-week the yields on the two- and 10-year General Obligation (GO) bonds each rose three basis points (bps), while the yield on the 30-year yield rose two 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 0.39%, 1.26%, and 1.88%, respectively. Overall, week-over-week the yield on the two-year GO bonds rose three 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.


New-Issue Volume is Forecasted to be $5.8B for the Week

Total new-issue offerings for the trading week per IHS Markit Ipreo is estimated to be $5.8B. This week’s projected issuance is comprised of $4.74B in negotiated deals and $1.1B in competitive sales. The biggest deal of the week is a $350.0MM offering from Utah County, Utah of hospital revenue bonds. The deal is slated to be priced on Thursday and is rated Aa1 by Moody’s Investors Service (Moody’s) and AA+ by Standard and Poor’s Global Ratings (S&P).

In the taxable sector, Northeastern University in Massachusetts plans to offer $300.0MM of corporate CUSIP refunding bonds on Tuesday. The deal is rated Aa1 by Moody’s. On Thursday the National Finance Authority in New Hampshire plans to offer $200.0MM of taxable federal lease revenue bonds for the Virginia Kernersville Heath Care Center Project. The deal is rated A2 by Moody’s. Also, on Thursday, IHC Health Services Incorporated plans to offer $183.0MM of taxable corporate CUSIP bonds. The deal is rated Aa1 by Moody’s and AA+ by S&P.

Deals that are day-today this week include a $300.0MM offering of taxable bonds form the Massachusetts-based Children’s Hospital Corporation and a $188.0MM offering of taxable revenue refunding bonds for National Public Radio by the District of Columbia. This deal is rated A2 by Moody’s and A+ by S&P.

In the school district sector, there are a number of deals scheduled this week from Texas school districts. Lewisville Independent School District, Texas plans to offer $266.0MM of unlimited tax school building and refunding bonds. The deal is backed by the Permanent School Fund Guarantee Program (PSF) and thus is rated Triple-A by both S&P and Fitch Ratings (Fitch). Cypress-Fairbanks Independent School District, Texas plans to offer $252.0MM of unlimited tax school building and refunding bonds backed by the PSF and is thus rated Triple-A by both Moody’s and S&P. The Ysleta Independent School District, Texas plans to offer $215.0MM of taxable unlimited tax refunding bonds backed by the PSF and is also rated Triple-A by both Moody’s and S&P. Finally, Northwest Independent School District, Texas plans to offer $176.0MM of unlimited tax school building and refunding bonds backed by the PSF, no ratings have been assigned yet.

Moving from Texas to Oregon, the Salem-Keizer School District No. 24J, Oregon plans to offer $236.0MM of GOs bonds backed by the Oregon School Bond Guaranty Act and is thus rated Aa1 by Moody’s and AA+ by S&P. There are no competitive issues over $100.0MM slated for the week.


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

Investors in municipal bond funds put cash into funds for a sixth week, as tax-exempt weekly reporting funds experienced inflows of $1.710B in the latest week, after experiencing inflows of $2.759B the week prior. The four-week moving average was a positive $1.692B, after being in the green at $1.724B the week prior.

Long-term municipal bond funds had inflows of $989.972MM in the latest week after experiencing inflows of $1.555B the week prior. Intermediate-term funds had inflows of $121.558MM after inflows of $307.069MM the week prior. National funds had inflows of $1.589B after experiencing inflows of $2.560B the week prior. High-yield municipal funds reported inflows of $148.262MM in the latest week, after inflows of $593.509MM the week prior. Exchange traded funds reported inflows of $470.235MM, after inflows of $528.605MM 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 widened, with the largest tightening widening occurring in the three-year maturity, 13 bps.


Daily Overview of the General Market for the Week Ending June 19th

Last Monday municipal prices were steady, as a few new-issues of the week’s projected $11.6B 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.

Prices on U.S. Treasurys were also steady on Monday, as U.S. stocks experienced a roller coaster session. Stocks opened sharply lower in the morning before paring some of their losses. Trading continued to be volatile as the day dragged on, but all major stock indexes ended the day in positive territory. The Dow covered more than 1,000 points between its low and high points and closed 158 points or 0.6% higher. The S&P finished up 0.8% and the NASDAQ was up 1.4%. On the day, the yields on the two-, 10-, and 30-maturities were steady. The 10- and 30-year municipal-to-Treasury ratios were unchanged on Monday from last Friday’s levels of 119.7% and 111.0%, respectively.

Last Tuesday prices on municipals weakened, as several new-issue deals were priced including the New York State Urban Development Corporation’s $1.3B offering of tax-exempt general purpose, state personal income tax revenue bonds for retail investors ahead of Wednesday’s institutional pricing. 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.

Prices on U.S. Treasurys also weakened on Tuesday, while the U.S. stocks finished sharply higher, even after paring some of their impressive gains from the opening bell. Surprisingly strong retail sales data for May, retail sales jumped 17.7%, after collapsing in April and investors remaining excited about measures from the Federal Reserve to ease strain on markets all contributed to the gains for the session. The Dow finished up 527 points, or 2.0%, while the S&P finished up 1.9% and the NASDAQ finished up 1.8%. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity rose four bps and the yield on the 30-year maturity rose nine bps. The 10-year municipal-to-Treasury ratio fell to 116.0% on Tuesday from Monday’s level of 119.7%, while the 30-year municipal-to-Treasury ratio fell to 105.8% on Tuesday from Monday’s level of 111.0%.

Last Wednesday municipals prices were mixed, as a variety of new-issue offerings came to market including the institutional pricing of the New York State Urban Development Corporation’s $1.3B offering of tax-exempt general purpose, state personal income tax revenue bonds. On the day, the yield on the two-year 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 was unchanged, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasurys strengthened on Wednesday, as U.S. stocks finished the session mixed. Momentum that had carried the stock market rally over the past few days faded on Wednesday, as the number of new COVID-19 infections rose in some areas. The Dow fell 170 points or 0.7%, while the S&P ended down 0.4%. Meanwhile the NASDAQ ended the session higher for the fourth day in a row finishing up 0.2%. On the day, the yields on the two- and 30-year maturities each fell two bps, while the yield on the 10-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 118.9% on Wednesday from Tuesday’s level of 116.0%, while the 30-year municipal-to-Treasury ratio rose to 107.2% on Wednesday from Tuesday’s level of 105.8%.

Last Thursday municipals prices were steady, as the last of the week’s new-issue offerings came to market including the Ford Foundation’s $1.0B offering of taxable bonds, aimed at providing direct grants to non-profit organizations. 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 were mixed last Thursday, as were U.S. stocks for the session. The Dow fell 39 points or 0.2%, while the S&P rose 0.1% and the NASDAQ rose 0.3%. On the day, the yield on the two-year maturity was unchanged, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell five bps. The 10-year municipal-to-Treasury ratio rose to 123.9% on Thursday from Wednesday’s level of 118.9%, while the 30-year municipal-to-Treasury ratio rose to 110.9% on Thursday from Wednesday’s level of 107.2%.

Last Friday prices on municipals were steady, as market participants started looking ahead to the slimmed-down supply slate of $5.8B in expected new-issue long-term debt next week. On the day, the yields on the two-, 10-, and 30-year GO bond were unchanged, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were mixed, as were U.S. stocks on the session for a second day. The Dow finished down 208 points, or 0.8%, while the S&P ended down also 0.6%. The NASDAQ finished relatively unchanged for the session. On the day, the yields on the two- and 30-year maturities were unchanged, while the yield on the 10-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 125.7% on Friday from Thursday’s level of 123.9%, while the 30-year municipal-to-Treasury was unchanged on Friday from Thursday’s level of 110.9%.


Taxable Bonds

Sales of taxable bonds by states, cities, and others like colleges and hospitals have surged this year because rates have fallen so low that they’re a viable alternative to tax-exempt securities, which carry federal regulations limiting how the funds can be used. The jump in issuance, coupled with the Fed’s aggressive push to buy corporate debt, has opened a disconnect between the two fixed-income markets. Investment-grade corporate debt yields have tumbled to 1.57 percentage points more than U.S. Treasurys from more than 3.5 percentage points in March, according to Bloomberg Barclays Indices. But those on municipal securities, which historically have far less risk of defaulting, haven’t tumbled nearly as much and are still yielding about 1.9 percentage points more than the benchmark. State and local governments, plus institutions like colleges and hospitals which have the ability to also sell tax-exempt bonds, have sold $62.5B in taxable debt this year, according to data compiled by Bloomberg. That’s more than four times what was sold during the same period a year ago and just $20.0B shy of what was issued during all of 2019.






Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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