Muni Update

June 4, 2018



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

 

Municipal Market Recap

Prices on municipals started the week on Tuesday stronger across the curve. They were mixed the rest of the week. On Wednesday and Thursday the front-end strengthened, while bonds maturing 10 years and longer were steady. On Friday the front-end strengthened, while bonds maturing 10 years and longer weakened.  Volume for the week is projected to be $9.56B, which is well above last week’s $2.16B in issuance. This higher level of issuance is expected to be easily digested given the high level of redemptions that started last week and will run for the next few months. These projected high levels of redemptions should contribute to keeping demand strong for municipals going forward.

Municipal bond funds reported investors put cash into funds for a fourth week in a row, as weekly reporting funds experienced inflows of $77.249MM, after experiencing inflows of $232.801MM the week prior. The four-week moving average was positive at $171.080MM, after being a positive $65.590MM the week prior. Investors still facing low 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 as yields rise.

This week’s economic calendar is much quieter than last week’s when we saw strong data from reports covering business investment, home prices, construction spending, consumption, personal income, consumer confidence, manufacturing, and job gains.  As for this week, the important reports to watch include Tuesday’s ISM Non-Manufacturing Index and JOLTs Job Openings data, the April Trade Balance on Wednesday, and Wholesale Inventories on Friday.

Last week the yield on the two-year maturity on the MMD Triple-A Scale fell one basis point (bp) from Thursday to Friday and ended the week at 1.74%. Meanwhile, the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose five bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 2.44% and 2.92%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell eight bps, while the yield on the 10-year GO bond fell five bps and the yield on the 30-year GO bond fell three bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale fell one bp from Thursday to Friday and ended the week at 1.71%. Meanwhile the yield on the 10-year maturity rose two bps and the yield on the 30-year maturity rose four bps on the MMA Triple-A Scale from Thursday to Friday, and they ended the week at 2.42% and 2.98%, respectively. Overall, week-over-week the yield on the two-year GO bond fell five bps, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell four bps.

On Tuesday prices on U.S. Treasuries were stronger across the curve. On Wednesday prices reversed course and weakened across the curve. On Thursday they reversed course again and strengthened across the curve. On Friday they reversed course one more time and weakened across the curve. Overall, week-over-week the yield on the 10-year maturity fell five bps and closed the week at 2.88%. Meanwhile the yield on the two-year maturity fell one bp week-over-week and closed the week at 2.47%. This resulted in a 2s/10s spread of 41 bps, four bps tighter than last week’s 2s/10s spread of 45 bps. The yield on the 30-year maturity fell six bps week-over-week and finished the week at 3.03%.

 

Volume to be $9.56B for the Trading Week

Total volume for the coming week is estimated to be $9.56B, which is well above the $2.16B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $6.54B in negotiated deals and approximately $3.02B in competitive sales.

Leading the negotiated sector this week is a $1.2B deal from the California Municipal Finance Authority. The Series 2018 A and B senior lien revenue bonds for the automated people mover project is schedule to price on Tuesday. The deal is rated BBB-plus by Fitch Ratings (Fitch), which also assigned a stable outlook to the credit.  The Port of Seattle plans to offer $567.38MM of Series 2018 A and B intermediate lien revenue bonds subject to the alternative minimum tax (AMT) on Tuesday. The deal is rated A1 by Moody’s Investors Service (Moody’s), A+ by S&P Global Ratings (S&P) and AA- by Fitch. Also on Tuesday, the State of Connecticut plans to offer $500.0MM of Series 2018 C and D GO bonds, after a one-day retail order period. The deal is rated A1 by Moody’s, A+ by S&P and Fitch and AA- by Kroll Bond Rating Agency.

On the competitive front, the New Mexico Finance Authority is selling $423.75MM of Series 2018A state transportation refunding revenue subordinate lien bonds on Thursday. The deal is rated AA by S&P. On Tuesday, Ohio is competitively selling $300.0MM of Series 2018A common schools GOs. The deal is rated AA+ by Fitch. Also on Tuesday, Clark County School District, Nevada is competitively selling $200.0MM of Series 2018A limited tax GO building bonds.

 

Municipal Bond Funds Post Inflows for a Fourth Week        

Municipal bond funds posted inflows last week, as market participants put cash into funds for a fourth week, according to the latest data from Lipper. The weekly reporting saw inflows of $77.249MM, after experiencing inflows of $232.801MM the week prior. The four-week moving average remained positive at $171.080MM, after being a positive $65.590MM the week prior.

Long-term municipal bond funds had inflows of $165.844MM in the latest week, after inflows of $154.282MM the week prior. Intermediate-term funds had inflows of $129.236MM, after experiencing inflows of $141.916MM the week prior. National funds had inflows of $328.046MM, after inflows of $301.718MM the week prior. High-yield municipal funds reported inflows of $224.989MM in the latest week, after inflows of $166.008MM the week prior. Exchange traded funds reported inflows of $165.757MM, after inflows of $105.053MM 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 last Friday, June 1st. We continue to encourage participants to utilize extension swaps (sell short paper eight-years and in, and roll out to the 15-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- and five-year  maturities tightened, with the largest tightening occurring in the five-year maturity, five bps. Meanwhile the spreads on two-, 10-, 15- and 30-year maturities widened week-over-week, with the largest widening occurring in the 30-year maturity, 17 bps. The spread on the three-year maturity was unchanged  week-over-week.

 

Daily Overview of the General Market for the Week Ending June 1st

Last Tuesday prices on municipals were stronger, as market participants were eyeing the $3.41B supply slate for the week. On the day, the yield on the two-year GO bond fell three bps, while the yields on the 10- and 30-year GO bonds each fell eight bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger on the day, as the political crisis in Italy and Spain deepened, triggering risk-off trading across capital markets. U.S. stocks opened moderately weaker and, as the day progressed, the S&P 500 tumbled 1.2% by close, only slightly better than the 1.4% drop for European stocks, but better than its -1.6% intraday low. The U.S. Dollar benefited from the beat-up Euro and reached its strongest level since November. On the day, the yield on the two-year maturity fell 16 bps, while the yield on the 10-year maturity fell 15 bps and the yield on the 30-year maturity fell 11 bps. The 10-year municipal-to-Treasury ratio rose to 86.7% on Tuesday from last Friday’s level of 85.0%, while the 30-year municipal-to-Treasury ratio rose to 96.3% on Tuesday from last Friday’s level of 95.5%.

Last Wednesday prices on municipals were mixed, as the first of the week’s new offerings came to market. On the day, the yield on the two-year GO bond fell two bps, while the yields on the 10- and 30-year GO bonds were steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices reversed course on Wednesday and weakened across the curve, as U.S. markets took advantage of easing political tensions in Italy to recoup some of their losses from yesterday’s sell-off. The Dow and S&P 500 both gained more than 1.2%, as Italian equities led a widespread recovery across Europe. The U.S. Dollar had its worst day since January, as the Euro bounced back. On the day, the yield on the two-year maturity rose 10 bps, while the yield on the 10-year maturity rose seven bps and the yield on the 30-year maturity rose five bps. The 10-year municipal-to-Treasury ratio fell to 84.6% on Wednesday from Tuesday’s level of 86.7%, while the 30-year municipal-to-Treasury ratio fell to 94.7% on Wednesday from Tuesday’s level of 96.3%.

Last Thursday prices on municipals were mixed, as the last of the week’s larger new issues came to market. On the day, the yield on the two-year GO bond fell two bps, while the yields on the 10- and 30-year GO bonds were steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as Thursday’s market focus shifted away from Italian politics to announcements regarding tariffs on trade flows between the U.S. and several of its largest trading partners. Just after U.S. markets opened, Commerce Secretary Ross disclosed that the U.S. would allow exemptions to steel and aluminum tariffs for the EU, Canada, and Mexico to expire at midnight. Stocks tumbled and remained lower as the various countries’ responses rolled in. On the day, the yields on the two- and 10-year maturities each fell two bps, while the yield on the 30-year maturity fell four bps. 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 rose to 96.0% on Thursday from Wednesday’s level of 94.7%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to this week’s $9.56B new issue calendar. On the day, the yield on the two-year GO bond fell one bp, while the yield on the 10-year GO bond rose three bps and the yield on the 30-year GO bond rose five bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day weaker across the curve. On the day, the yield on the two-year maturity rose seven bps, while the yield on the 10-year maturity rose five bps and the yield on the 30-year maturity rose four bps. The 10-year municipal-to-Treasury ratio fell to 84.7% on Friday from Thursday’s level of 85.2%, while the 30-year municipal-to-Treasury ratio rose to 96.4% on Friday from Thursday’s level of 96.0%.

 




 

Municipal Bond Volume Shows Signs of Life (The Bond Buyer)

Municipal bond issuance rose for the third month in a row in May, raising expectations that volume is on a path toward normalcy. May 2018 volume was still down to $30.92B from the $38.71B a year earlier, according to Thomson Reuters data. Issuers completed 985 transactions, off from the 1,203 in May 2017. One month from the halfway point of the year and municipal volume is sitting at $125.60B, roughly 22.0% lower than the $161.69B of municipal sales at this point a year ago.

Supply has picked in the second quarter from the first quarter, when volume reflected the absence of deals that were issued in fourth quarter of 2017, as municipalities sold bonds early ahead of the tax legislation. In May, new-money issuance increased 53.3% to $23.82B on 820 deals, up from $15.60B on 794 deals a year earlier. Refunding volume dwindled to $5.39B on 135 deals from $12.21B on 293 deals a year earlier. Combined new-money and refunding issuance plummeted 85.2% to $1.61B, while the issuance of revenue bonds dropped 22.3% to $19.21B, and GO bond sales fell to $11.71B from $14.0B. Negotiated deal volume was down to $21.41B and competitive sales increased by 45.3% to $9.19B. Taxable bond volume dipped to $2.53B from $3.61B, while tax-exempt issuance decreased by 20.5% to $26.68B. Minimum tax bonds dipped to $1.71B from $1.53B.

Fixed-rate bond issuance fell to $28.91B from $36.13B, while sales of variable-rate short put bonds dropped 68.0% to $490.0MM and long variable-rate deals rose 48.7% to $1.19B from $799.0MM.

Three of the 10 sectors showed year-over-year increases, as electric power transactions more than tripled to $988.0MM from $306.0MM, transportation deals rose to $5.92B from $3.77B and general purpose bonds gained to $6.41B from $5.87B. The other seven sectors were in the red, with the biggest drops coming from environmental facilities, which fell to $41.9MM from 436.9MM; development, which was at $466.0MM compared with $3.0B; and health care at $1.93B from $4.44B.

California continues to have the most issuance among states so far in 2018. The Golden State has issued $19.56B; New York is second with $15.67B; Texas is third with $12.19B; Pennsylvania is next with $7.35B; and New Jersey rounds out the top five with $4.78B.

 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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