Muni Update

June 29, 2020


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


Municipal Market Recap

Municipal prices were steady on Monday and Tuesday across the curve. On Wednesday municipal prices were mixed, as the front- and long-ends of the maturity curve were unchanged, while prices on intermediate maturities weakened. On Thursday and Friday municipal prices were once again 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 being 140.63% last Friday, compared with 125.71% the week before.

This week’s projected level of new-issue offerings is $7.2B, which is notable given this is a holiday-shortened trading week. This level of new-issue supply 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, especially given that for July investors will be receiving $39.2B in redeemed bond proceeds. This makes July the third heaviest month of the year, behind June which saw $43.5B in redemptions and August which will see $42.3B. The bulk of the July redemptions will happen on July 1st, when issuers return $31.2B in principal. As additional refunding bonds come to market, the amount of bonds to be called could go higher.

Investors in municipal bond funds put cash into funds for a seventh week in a row, as evidenced by the latest tax-exempt weekly reporting funds data showing that funds experienced inflows of $1.475B after experiencing inflows of $1.710B the week prior. The four-week moving average was a positive $1.787B, after being in the green at $1.692B 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%, 0.90%, and 1.63%, respectively. Overall, week-over-week the yields on the two- and 30-year General Obligation (GO) bonds were unchanged, while the yield on the 10-year GO bond rose two basis points (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 yields on the two-, 10-, and 30-year GO bonds were unchanged.


New-Issue Volume is Forecasted to be $7.2B for the Week

Total new-issue offerings for the trading week per IHS Markit Ipreo is estimated to be $7.2B. This week’s projected issuance is comprised of $6.8B in negotiated deals and $450.0MM in competitive sales. Leading the way this week is the Massachusetts School Building Authority’s two offerings of social bonds totaling $1.450B. The Authority’s $350.0MM of tax-exempts are set to be priced on Monday, while the $1.095B of taxables are slated to be priced on Tuesday. The deals are rated Aa2 by Moody’s Investors Service (Moody’s), AA+ by Standard and Poor’s Global Ratings (S&P), and AAA by Fitch Ratings (Fitch).

Heading up the slate of big note sales this week is Los Angeles County, California, which plans to price $1.2B of tax and revenue anticipation notes (TRANs) on Tuesday. Following close behind is the Port Authority of New York and New Jersey, which plans to offer $1.1B of taxable notes. The Philadelphia School District, Pennsylvania, plans to offer up $550.0MM of TRANs. The TRANs are set to price on Tuesday.


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

Investors in municipal bond funds put cash into funds for a seventh week in a row, as tax-exempt weekly reporting funds experienced inflows of $1.475B in the latest week, after experiencing inflows of $1.710B the week prior. The four-week moving average was a positive $1.787B, after being in the green at $1.692 the week prior.

Long-term municipal bond funds had inflows of $768.699MM in the latest week after experiencing inflows of $989.972B the week prior. Intermediate-term funds had outflows of $26.351MM after inflows of $121.558MM the week prior. National funds had inflows of $1.275B after experiencing inflows of $1.589B the week prior. High-yield municipal funds reported inflows of $46.020MM in the latest week, after inflows of $148.262MM the week prior. Exchange traded funds reported inflows of $286.184MM, after inflows of $470.235MM 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 few 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, to pick up more yield with little to no drop-off in credit quality. Week-over-week, bank qualified spreads widened, with the largest widening occurring in the 15-year maturity, seven bps.


Daily Overview of the General Market for the Week Ending June 26th

Last Monday municipal prices were steady, as a few of the smaller new issues of the week’s projected $5.8B 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 mixed on Monday, as U.S. stocks experienced a roller coaster session. Stocks opened lower in the morning before paring their losses and ending the session in positive territory. The Dow finished up 153 points or 0.6%, while the S&P finished up 0.7% and the NASDAQ was up 1.1%. On the day, the yield on the two-year maturity was unchanged, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio fell to 123.9% on Monday from Friday’s level of 125.7%, while the 30-year municipal-to-Treasury ratio bumped up to 111.6% on Monday from Friday’s level of 110.9%.

Last Tuesday prices on municipals were steady, as several new-issue offerings were priced, including the $263.0MM offering of unlimited tax school building and refunding bonds by the Lewisville Independent School District, Texas. 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 mixed on Tuesday, while U.S. stocks finished higher, as hopes for a coronavirus vaccine rose and U.S.-China trade fears dissipated. The Dow finished up 131 points, or 0.5%, while the S&P finished up 0.4% and the NASDAQ finished up 0.7%. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 122.2% on Tuesday from Monday’s level of 123.9%, while the 30-year municipal-to-Treasury ratio fell to 109.4% on Tuesday from Monday’s level of 111.6%.

Last Wednesday municipals prices were mixed, as a variety of new-issue offerings came to market including the retail pricing of the Commonwealth of Massachusetts’ $671.495.0MM offering of tax-exempt GO and GO refunding bonds. On the day, the yields on the two- and 30-year GO bonds were unchanged, while the yield on the 10-year GO bond rose two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasurys were also mixed on Wednesday, as U.S. stocks tumbled for the session and ended sharply in the red. Investors worrying about rising COVID-19 infection rates rising in parts of the country, quarantine requirements for intra-US travel and newly proposed tariffs on EU imports all contributed to stocks being down. The three major stock indexes recorded their worst performance in nearly two weeks. The Dow ended down 710 points or 2.7%, while the S&P fell 2.6% and the NASDAQ fell 2.2%. On the day, 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 five bps. The 10-year municipal-to-Treasury ratio rose to 130.4% on Wednesday from Tuesday’s level of 122.2%, while the 30-year municipal-to-Treasury ratio rose to 113.2% on Wednesday from Tuesday’s level of 109.4%.

Last Thursday municipals prices were steady, as the last of the week’s new-issue offerings came to market including the institutional pricing of the restructured and upsized Commonwealth of Massachusetts’ $945.615MM of tax-exempt GO refunding bonds for institutions after a one-day retail order period. The deal was upsized from the original amount of $670.510MM. 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 strengthened last Thursday, as U.S. stocks rose heading into session close, with financials leading advances after regulators eased some post-financial crisis restrictions for big banks. The Dow finished up 299 points or 1.2%, while the S&P and NASDAQ both rose 1.1%. On the day, the yields on the two-. 10-, and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio rose to 132.4% on Thursday from Wednesday’s level of 130.4%, while the 30-year municipal-to-Treasury ratio rose to 114.0% on Thursday from Wednesday’s level of 113.2%.

Last Friday prices on municipals were steady, as market participants started looking ahead to the holiday-shortened trading week’s supply slate of $7.2B in expected new-issue offerings 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 on Friday, as U.S. stocks sold off sharply to end the week, as investors grow increasingly worried about the economic outlook. The Dow finished down 730 points, or 2.8%, while the S&P was down 2.4% and the NASDAQ was down 2.6%. On the day, the yield on the two-year maturity was unchanged, while the yield on the 10-year maturity fell four bps and the yield on the 30-year maturity fell six bps. The 10-year municipal-to-Treasury ratio rose to 140.6% on Friday from Thursday’s level of 132.4%, while the 30-year municipal-to-Treasury was rose to 119.0% on Friday from Thursday’s level of 114.0%.






Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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