Muni Update

June 25, 2018


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

 

Municipal Market Recap

Prices on municipals were steady across the curve on Monday. On Tuesday they strengthened across the curve. Starting on Wednesday prices were mixed daily for the rest of the week. On Wednesday the front-end strengthened while intermediate maturities weakened and the long-end was steady. On Thursday bonds maturing 10 years and in were steady, while the long-end strengthened.  On Friday the front-end was steady, while bonds maturing 10 years and longer weakened. Volume for the week is projected to be $5.33B, which is just below last week’s $6.42B in revised issuance. With demand continuing to outpace supply, due to redemptions, this lower level of new issue supply will have market participants also looking to secondary market opportunities to fill needs.

Municipal bond funds reported investors put cash into funds for a seventh week in a row, as weekly reporting funds experienced inflows of $646.014MM, after experiencing inflows of $449.614MM the week prior. The four-week moving average remained positive at $340.591MM, after being a positive $237.288MM the week prior. Investors still facing low rates overseas continue to find higher-yielding U.S. assets attractive. These factors, plus the high level of municipal redemptions over the next few months, should have both traditional and non-traditional market participants continuing to look for opportunities, especially as yields rise.

This week’s economic calendar is busy and kicks off today with the May New Home Sales report.  New home sales and construction-related activity have been the stronger side of housing, as limited existing-home inventory, higher mortgage rates, rising prices, and rising construction costs have all weighed on housing activity. On Tuesday we will get consumer confidence for June and on Wednesday May’s Durable Goods Orders data will be released. Also on Wednesday, the final revision to 1Q GDP will be released, but it should be a nonevent considering we’re already at the end of 2Q. Finally, Friday’s calendar could be the most important with the latest data on personal income and spending and May’s PCE inflation data.

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 1.64%. Meanwhile the yields on the 10- and 30-year maturities each rose one basis point (bp) on the MMD Triple-A Scale from Thursday to Friday, and they ended the week at 2.46% and 2.96%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell two bps, while the yield on the 10-year GO bond was unchanged and the yield on the 30-year GO bond fell three 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 1.65%, 2.42% and 3.00%, respectively. Overall, week-over-week the yields on the two- and 10-year GO bonds each fell two bps, while the yield on the 30-year maturity fell three bps.

On Monday U.S. Treasury prices finished the day weaker across the curve. On Tuesday they reversed course and strengthened across the curve. On Wednesday they reversed course again and weakened across the curve. On Thursday they were mixed, as the front-end was steady, while bonds maturing 10 years and longer strengthened. On Friday prices were mixed, as the front- and long-end maturities were steady, while intermediate maturities weakened. Overall, week-over-week the yield on the 10-year maturity fell one bp and closed the week at 2.91%. Meanwhile the yield on the two-year maturity rose one bp week-over-week and closed the week at 2.56%. This resulted in a 2s/10s spread of 35 bps, two bps tighter than last week’s 2s/10s spread of 37 bps. The yield on the 30-year maturity was unchanged week-over-week and finished the week at 3.05%.

 

Volume to be $5.33B for the Trading Week

Total volume for the coming week is estimated to be $5.33B, which is just below the $6.42B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $3.99B in negotiated deals and approximately $1.34B in competitive sales. On Tuesday, Los Angeles is selling $1.54B of 2018 tax and revenue anticipation notes (TRANs). The TRANs are rated MIG1 by Moody’s Investors Service (Moody’s) and SP1+ by S&P Global Ratings (S&P).

On Wednesday, the City of Angels will sell $321.81MM of GO bonds, consisting of $276.24MM of Series 2018A taxable social bonds; $34.995MM of tax-exempt Series 2018B GO refunding bonds; and $10.57MM of taxable Series 2018C GO refunding bonds. The bonds are rated AA by S&P.

In the negotiated sector, the Dormitory Authority of the State of New York (DASNY) is coming to market with a $342.68MM deal. DASNY’s Series 2018-1 municipal health facilities improvement program lease revenue bonds, New York City issue, will price on Wednesday after a one-day retail order period. The offering is secured by rental payments from the city, according to a release from the city. In the event the city does not make a rental payment when due, the state comptroller is required to pay DASNY the unpaid rentals out of state Medicaid payments otherwise due to the city or to be paid to providers on behalf of the city. Both city and state payments are subject to annual appropriation. The deal is rated Aa2 by Moody’s and AA- by S&P.

The Connecticut Health and Educational Facilities Authority plans to offer $300.0MM of revenue bonds for Yale University on Tuesday. The deal is rated triple-A by Moody’s and S&P.

 

Municipal Bond Funds Post Inflows for a Seventh Week        

Municipal bond funds posted inflows last week, as market participants put cash into funds for a seventh week, according to the latest data from Lipper. The weekly reporting saw inflows of $646.014MM, after experiencing inflows of $449.487MM the week prior. The four-week moving average remained positive at $340.591MM, after being a positive $237.288MM the week prior.

Long-term municipal bond funds had inflows of $606.057MM in the latest week after inflows of $394.458MM the week prior. Intermediate-term funds had inflows of $105.799MM after inflows of $208.625MM the week prior. National funds had inflows of $684.818MM after inflows of $420.991MM the week prior.  High-yield municipal funds reported inflows of $268.850MM in the latest week, after experiencing inflows of $322.355MM the week prior. Exchange traded funds reported inflows of $410.136MM, after inflows of $172.711MM 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-, 15- and 30-year  maturities tightened, with the largest tightening occurring in the one-year maturity, eight bps. Meanwhile the spreads on three, five and 10-year maturities widened week-over-week, with the largest widening occurring in the five-year maturity, three bps.

  

Daily Overview of the General Market for the Week Ending June 22nd

Last Monday prices on municipals were unchanged, as market participants prepped for the $7.0B in new issue offering scheduled for the week. On the day, the yields on the two-, 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, as U.S. stocks opened down, but recovered steadily throughout the session to close mixed for the day. Crude prices had slumped overnight Sunday to add to Friday’s sharp declines but turned higher to close near their daily peaks. U.S. WTI finished up more than 1.0% following reports OPEC was considering a smaller supply increase than was previously floated by several major OPEC players. On the day, the yields on the two-, 10- and 30-year maturities each rose one bp. The 10-year municipal-to-Treasury ratio slipped to 84.6% on Monday from last Friday’s level of 84.9%, while the 30-year municipal-to-Treasury ratio slipped to 97.7% on Monday from last Friday’s level of 98.0%.

Last Tuesday prices on municipals were stronger, as bonds from Georgia, Denver and New Mexico were issued in the competitive arena amid strong demand. On the day, the yield on the two-year GO bond fell one bp, while the yield on the 10-year GO bond fell two bps and the yield on the 30-year GO bond fell three bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also stronger, as trade tensions between the U.S. and China contributed to U.S. stocks declining. The Dow dropped 1.2% and closed down for a sixth consecutive session, its longest losing streak since an eight-day run in March 2017. Tuesday’s losses were just enough to push the blue-chip index back into negative territory for the year. The S&P 500 lost 0.5%, while the NASDAQ moved down just over 0.3%. Other markets affected by the pan-Pacific posturing on trade include oil, as prices dropped Tuesday and are down 2.7% since last Thursday. U.S. soybeans, also towards the top of the China list for possible tariffs, extended their recent decline and are now at their lowest level since September 2016. On the day, the yield on the two-year maturity fell two bps, while the yields on the 10- and 30-year maturities each fell four bps. The 10-year municipal-to-Treasury ratio rose to 85.1% on Tuesday from Monday’s level of 84.6%, while the 30-year municipal-to-Treasury ratio bumped up to 98.0% on Tuesday from Monday’s level of 97.7%.

Last Wednesday prices on municipals were mixed, as California’s $1.7B tobacco bond deal was repriced and note deals from Idaho and Houston hit the market. The California tobacco deal saw $15.0B in orders and was five to six times oversubscribed, even after the deal was tightened 15 to 18 bps from the initial scale. On the day the yield on the two-year GO bond fell 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.

U.S. Treasury prices were weaker on the day, as U.S. stocks were mixed. The NASDAQ moved up 0.7% (new record) and the S&P 500 gained 0.2%, while the Dow declined 0.2%. The Dow’s drop was its seventh in a row. In other markets, U.S. WTI gained after the EIA showed the largest drawdown of inventories since January. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose four bps. The 10-year municipal-to-Treasury ratio fell to 84.6% on Wednesday from Tuesday’s level of 85.1%, while the 30-year municipal-to-Treasury ratio fell to 96.7% on Wednesday from Tuesday’s level of 98.0%.

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 yields on the two- and 10-year GO bonds were steady, while the yield on the 30-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mixed, as the global selling of equities resumed, which resulted in pushing down U.S. equities on Thursday and handed the Dow its eighth consecutive daily decline. The 30-component index fell just under 200 points, or 0.8%, and the duration of its losing streak now matches its longest since a nine-day run in 1978. The S&P 500 fell a slightly smaller 0.6%, while the NASDAQ underperformed with its 0.9% decline. On the day, the yield on the two-year maturity was steady, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 85.2% on Thursday from Wednesday’s level of 84.6%, while the 30-year municipal-to-Treasury ratio was unchanged on Thursday from Wednesday’s level of 96.7%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to this week’s $5.33B new issue calendar. 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 rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed. On the day, the yields on the two- and 30-year maturities were steady, while the yield on the 10-year maturity rose one bp. The 10-year municipal-to-Treasury ratio was unchanged on Friday from Thursday’s level of 85.2%, while the 30-year municipal-to-Treasury ratio bumped up to 97.0% on Friday from Thursday’s level of 96.7%.

 

 





Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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