Muni Update

June 26, 2017


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

 

Municipal Market Recap

Municipal bond funds recorded outflows for the week, as weekly reporting funds experienced $890.590MM of outflows in the latest reporting week, after experiencing inflows of $394.787MM the week prior. The four-week moving average was positive at $109.636MM, after being in the green at $430.908MM the week prior. All other funds posted mixed results 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 they strengthened across the curve. The rest of the week they were mixed. Prices on municipals in the front and intermediate areas of the curve were range bound for the week. Meanwhile the long-end was steady until Thursday, when it strengthened. On Friday prices on municipals in the long-end were steady. Volume for the trading week is projected to be $6.82B, which is below last week’s revised level of $10.60B. 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 calendar contains a number of key releases and starts off the week with the May Durable Goods Orders report.  Tuesday will be highlighted by Fedspeakers Williams, Harker, Yellen, and Kashkari. In addition to Tuesday’s Fedspeak, the Conference Board will release its June consumer confidence index (expected to ease) and the S&P Case-Shiller index is projected to show a steady 5.9% YoY pace of home price appreciation. Williams will speak again on Wednesday and the Census Bureau will provide a leading indication for May’s trade results, always an important report for projecting GDP growth each quarter. Also on Wednesday, the latest data on accumulation of wholesale and retail inventories will be released and pending home sales are expected to show another positive data point for the housing sector for May. Thursday’s major report will be the final revision to 1Q GDP 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 yields on the two-, 10- and 30-year maturities on the MMD Triple-A Scale were all unchanged from Thursday to Friday and ended the week at 0.96%, 1.86% and 2.69%, respectively. Overall, week-over-week the yields on the two- and 10-year general obligation (GO) bonds were unchanged, while the yield on the 30-year GO bond fell one basis point (bp).

Last week the yields on the two- and 10-year maturities on the MMA Triple-A Scale were all unchanged from Thursday to Friday and ended the week at 0.99% and 2.05%, respectively. Meanwhile, the yield on the 30-year maturity on the MMA Triple-A Scale rose one bp from Thursday to Friday and ended the week at 2.88%. Overall, week-over-week the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell two bps.

Prices on U.S. Treasuries started last week weaker. On Tuesday they were stronger. The rest of the week they were mixed. Overall, week-over-week the yield on the 10-year maturity fell one bp and closed the week at 2.14%. Meanwhile the yield on the two-year maturity rose two bps week-over-week and closed the week at 1.34%. This resulted in a week-over-week 2s/10s spread of 80 bps, three bps tighter than last week’s 2s/10s spread of 83 bps. The yield on the 30-year maturity fell seven bps week-over-week and finished the week at 2.71%.

 

New Issue Volume is Expected to be $6.82B

Total volume for the trading week is estimated to be $6.82B, which is below last week’s $10.60B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $5.16B in negotiated deals and approximately $1.66B in competitive sales, according to data from Thomson Reuters. There are only 10 deals scheduled that are $100.0MM or larger, with three of those being competitive deals.

The largest deal of the week, the Dormitory Authority of the State of New York will price $1.72B of state personal income tax revenue general purpose bonds on Wednesday, following a one-day retail order period. The deal is rated Aa1 by Moody’s Investors Service (Moody’s) and triple-A by S&P Global Ratings (S&P). The New York Metropolitan Transportation Authority plans to sell $500.0MM of revenue climate bonds on Thursday, following a one-day retail order period. The certified green bonds are rated A1 by Moody’s and AA- by S&P and Fitch Ratings (Fitch). The Department of Water and Power of the City of Los Angeles plans to offer $375.0MM of power system revenue bonds on Wednesday. The deal is rated Aa2 by Moody’s and AA- by S&P and Fitch.

The largest competitive offering will come from the Commonwealth of Virginia Transportation Board, as it will auction off $255.405MM of transportation capital projects revenue bonds on Wednesday. The deal is rated Aa1 by Moody’s and AA+ by S&P and Fitch.

 

Municipal Bond Funds Post Outflows for the Week      

Municipal bond funds posted outflows for the week, as market participants pulled cash out of funds, according to the latest data from Lipper. Weekly reporting funds reported $890.590MM of outflows for the most recent week. These followed inflows of $394.787MM the week prior, according to Lipper. The four-week moving average was positive at $109.636MM, after being in the green at $430.908MM the week prior.

Long-term municipal bond funds had outflows of $1.078B in the latest week after experiencing inflows of $326.028MM the week prior. Intermediate-term funds had inflows of $92.321MM after inflows of $70.283MM the week prior. National funds had outflows of $904.896MM after inflows of $394.948MM the week prior. High-yield municipal funds reported inflows of $231.470MM in the latest reporting week, after inflows of $235.860MM the week prior. Exchange traded funds saw inflows of $56.529MM, after experiencing inflows of $85.244MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong 

The new issue calendar for this week falls to a more normal level of issuance. Meanwhile demand isn’t expected to waver so participants will be looking to strong bid lists to meet 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. The spreads on the one-, two- and five-year maturities all tightened week-over-week with the largest tightening occurring in the one- and two-year maturities, two bps each, while the spread on the three-year maturity was unchanged week-over-week. Meanwhile, the spreads on the 10-, 15- and 30-year maturities all widened week-over-week, with the largest widening occurring in the 30-maturity, 6 bps.

 

Daily Overview of the General Market for the Week Ending June 23rd

Last Monday prices on municipal bonds finished the day steady across the curve, as participants positioned themselves for the upcoming trading week’s $11.8B in new issue supply. On the day, the yields on the two-, 10- and 30-year GO bonds were each unchanged, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries last Monday were weaker across the curve, as the Dow and S&P both reached new records on Monday. The Dow gained 145 points, or 0.7%, as the S&P added 20 points, or 0.8%. The NASDAQ outperformed with a gain of 1.4%, but finished 83 points shy of its previous high close. The U.S. Dollar also improved as it returned to near its highest level in more than a month, following Fed Vice Chairman Dudley’s remarks. On the day, the yields on the two- and 10-year maturities each rose four bps, while the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio fell to 84.9% on Monday from the prior Friday’s level of 86.5%, while the 30-year municipal-to-Treasury ratio fell to 96.8% on Monday from the prior Friday’s level of 97.1%.

Last Tuesday prices on municipal were steady, as billions of dollars in new issue supply hit the market led by big competitive bond deals from the states of Georgia and Massachusetts, and a competitive note sale from a New York issuer. On the day, the yields on the two-, 10- and 30-year GO bonds were all unchanged, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger across the curve last Tuesday, as U.S. equities finished near their daily lows and crude prices dropped 2.0% and officially entered a bear market. Tuesday’s losses left crude down more than 20.0% from the 2017 peak reached on February 23. The S&P fell 0.7% with shares of energy companies finishing near the bottom. The Dow dropped a more modest 0.3%, while the NASDAQ led losses with a 0.8% pullback. 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 five bps. The 10-year municipal-to-Treasury ratio rose to 86.5% on Tuesday from Monday’s level of 84.9%, while the 30-year municipal-to-Treasury ratio rose to 98.5% on Tuesday from Monday’s level of 96.8%.

Last Wednesday prices on municipals again finished steady, as the long-awaited bond offering for the American Dream mall project (non-rated) in the New Jersey Meadowlands came to market and the New York City Transitional Finance Authority’s offering was priced for institutional investors. On the day, the yields on the two-, 10- and 30-year GO bonds were all unchanged, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed, as the S&P was relatively unchanged and the Dow fell 0.3%, while the NASDAQ, less affected by energy, rose 0.7%. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity was steady and the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio was unchanged on Wednesday from Tuesday’s level of 86.5%, while the 30-year municipal-to-Treasury ratio rose to 99.3% on Wednesday from Tuesday’s level of 98.5%.

Last Thursday prices on municipals were mixed, as the last of the week’s larger sales came to market, led by numerous deals from California issuers. On the day, the yields on the two- and 10-year GO bonds were each unchanged, 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 major U.S. equity averages ended Wednesday little changed, after losses in consumer staples and financials neutralized gains in health care and materials. On the day, the yield on the two-year maturity fell one bp, while the yields on the 10- and 30-year maturities were each steady. The 10-year municipal-to-Treasury ratio was unchanged from Wednesday’s level of 86.5%, while the 30-year municipal-to-Treasury ratio fell to 98.9% on Thursday from Wednesday’s level of 99.3%.

Last Friday prices on municipals finished the week steady, as market participants prepped for the coming week’s new issue offerings. On the day, the yields on the two-, 10- and 30-year GO bonds were all unchanged, according to the final read of the MMD Triple-A Scale.

U.S. Treasuries finished the day steady in the front-end and stronger 10 years and longer. 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 86.9% on Friday, from Thursday’s level of 86.5%, while the 30-year municipal-to-Treasury ratio rose to 99.3% on Friday from Thursday’s level of 98.9%.

 






Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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