Muni Update

June 5, 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 $50.837MM in outflows in the latest reporting week, after experiencing inflows of $394.498MM the week prior. The four-week moving average remained positive at $344.028MM, after being a positive $388.683MM the week prior. All other funds posted mixed results for the week. Investors still facing negative rates overseas continue to find higher-yielding U.S. assets attractive. 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. This 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 beginning to show growth.

U.S. Treasury prices started the holiday-shortened trading week stronger and strengthened again on Wednesday. Thursday saw prices retreat and give back some of the gains posted over the previous two days. On Friday prices rebounded and posted gains on the day across the curve. Prices for municipals were also stronger on Tuesday and Wednesday. On Thursday they were mixed, as prices in the front- and long-ends of the curve weakened, while prices on intermediate maturities were steady. On Friday municipals, like U.S. Treasuries, strengthened across the curve. Volume for the trading week is projected to be $7.83B, which is well above last week’s revised level of $3.25B. This week’s level of increased issuance volume, coupled with secondary market opportunities should be easily absorbed by a municipal market that has, as mentioned already, begun a stronger period of demand due to redemptions over the next few months.

This week’s economic calendar is light and is highlighted by today’s release of the May ISM Non-Manufacturing Index. The index is expected to show a slight tick lower after a strong April report. Covering a very broad swath of economic activity in the U.S., the report will be a key variable heading into next Wednesday’s Federal Open Markets Committee (FOMC) decision. Also released today will be the May Labor Market Conditions Index, the April Factory Orders, and the final revision to the April Durable Goods Orders report. As for the remainder of the week, the JOLTs job openings report will be released Tuesday, with consumer credit on Wednesday, the Fed’s Household Flow of Funds report on Thursday, and April’s wholesale inventories report on Friday.

Last week the yield on the two-year maturity on the MMD Triple-A Scale fell two basis points (bps) from Thursday to Friday and ended the week at 0.88%. Meanwhile, the yield on the 10-year maturity fell four bps and the yield on the 30-year maturity fell six bps on the MMD Triple-A Scale from last Thursday to Friday, and they finished the week at 1.86% and 2.69%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell four bps, while the yield on the 10-year GO bond fell nine bps and the yield on the 30-year GO bond fell 11 bps.

Last week the yields on the two- and 10-year maturities on the MMA Triple-A Scale each fell one bp from Thursday to Friday and they ended the week at 0.97% and 2.08%, respectively. Meanwhile, the yield on the 30-year maturity fell two bps on the MMA Triple-A Scale from Thursday to Friday and finished the week at 2.92%. Overall, week-over-week the yield on the two-year maturity fell one bp, while the yields on the 10- and 30-year maturities each fell seven bps.

Prices on U.S. Treasuries started last week stronger and strengthened again on Wednesday. On Thursday they weakened across the curve and on Friday they bounced back and posted gains across the curve. Overall, week-over-week the yield on the 10-year maturity fell eight bps and closed the week at 2.16%. Meanwhile the yield on the two-year maturity fell one bp week-over-week and closed the week at 1.28%. This resulted in a week-over-week 2s/10s spread of 88 bps, seven bps tighter than last week’s 2s/10s spread of 95 bps. The yield on the 30-year maturity fell 10 bps week-over-week and finished the week at 2.81%.

 

New Issue Volume is Expected to be $7.83B

Total volume for the trading week is estimated to be $7.83B, which is well above the $3.25B in last week’s issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $5.13B in negotiated deals and approximately $2.71B in competitive sales, according to data from Thomson Reuters. There are 19 transactions scheduled that are larger than $100.00MM, with two of them, including the largest, being note deals.

The County of Los Angeles plans to price $800.0MM of 2017-2018 tax and revenue anticipation notes (TRANs) on Tuesday. The deal is rated MIG 1 by Moody’s Investors Service (Moody’s), and SP-1+ S&P Global Ratings (S&P) and F-1+ by Fitch Ratings (Ratings). The City of Chicago plans to offer two deals totaling $599.265MM. The first will be a $399.705MM second lien wastewater transmission revenue bonds offering, featuring a project series and a refunding series on Tuesday. This deal is rated A by S&P, AA- by Fitch and Kroll Bond Rating Agency (Kroll). On Wednesday, the city will be back with the other piece, a $199.56MM offering of second lien water revenue refunding bonds. This deal is rated A by S&P, AA- by Fitch and AA by Kroll.

The competitive market will be busy with five deals larger than $100.0MM. On Thursday, Clark County, Nevada, is scheduled to sell two deals totaling $624.25MM. It will be broken down into a $562.685MM offering of GO limited tax building and refunding bonds and a $61.565MM offering of GO limited tax refunding bonds, additionally secured by pledge revenue. Both deals are rated AA- by S&P. Back in the negotiated market, the Metropolitan Washington Airport Authority will offer $533.79MM of system revenue refunding alternative minimum tax bonds (AMT) on Tuesday. The deal is rated Aa3 by Moody’s and AA- by S&P and Fitch.

 

Municipal Bond Funds Post Outflows for the Week      

Municipal bond funds posted outflows last week, as market participants pulled cash out of funds, according to the latest data from Lipper. Weekly reporting funds reported $50.837MM of outflows for the most recent week. These followed inflows of $394.498MM the week prior, according to Lipper. The four-week moving average was still in the green at a positive $344.028MM, after being in the green at a positive $388.683MM the week prior.

Long-term municipal bond funds also had outflows, losing $106.029MM in the latest week after rising $238.275MM the week prior. Intermediate-term funds had outflows of $96.676MM after experiencing inflows of $8.640MM the week prior. National funds had inflows of $77.134MM after inflows of $447.135MM the week prior. High-yield municipal funds reported outflows of $7.485MM in the latest reporting week, after inflows of $171.583MM the week prior. Exchange traded funds saw inflows of $64.657MM, after experiencing inflows of $50.978MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong 

The new issue calendar for this week is heavier than last week. This together with strong bid lists should contribute to meeting market participants growing demand, as they search for opportunities and prep for coming redemptions on June 1st, 15th and 30th. In addition, the attractive slope of the BQ yield curve has participants continuing to utilize swaps to extend out the curve. Spreads were mixed last week. The spreads on the one- and five-year maturities were unchanged week-over-week, while the spreads on the two- and three-year maturities tightened three and one bp, respectively. Meanwhile, the spreads on the 10-, 15- and 30-year maturities all widened week-over-week, with the largest widening occurring in both the 15- and 30-maturities, 3 bps each.

 

Daily Overview of the General Market for the Week Ending June 2nd

Last Tuesday prices on municipal bonds were stronger across the curve, as participants positioned themselves for the upcoming trading week’s $4.83B in new issue supply. 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 on Tuesday, as U.S. Stocks fell back from record highs set last Friday. Energy and financial sectors led the S&P to a daily loss of 0.1%. The losses in commodities materialized even as the U.S. Dollar remained near its six-month low. On the day, the yield on the two-year maturity fell one bp, while the yields on the 10- and 30-year maturities each fell three bps. The 10-year municipal-to-Treasury ratio rose to 87.3% on Tuesday from Friday’s level of 87.0%, while the 30-year municipal-to-Treasury ratio was unchanged from Friday’s level of 96.2%.

Last Wednesday prices on municipals again finished stronger across the curve, as the bulk of the week’s new issue supply swept into the 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 each fell three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished stronger last Wednesday, as U.S. assets were little changed Wednesday as the major equity indices moved less than 0.1% (lower), and the U.S. Dollar dropped 0.3%. Energy and financials continued to lead losses within the S&P. Energy companies lost value as crude prices fell 2.0% on the day. On the month, a 2.5% gain for the NASDAQ outpaced a 1.2% gain for the S&P and a 0.3% gain for the Dow. On the day, the yields on the two- and 10-year maturities each fell one bp, while the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio fell to 86.4% on Wednesday from Tuesday’s level of 87.3%, while the 30-year municipal-to-Treasury ratio fell to 95.8% on Wednesday from Tuesday’s level of 96.2%.

Last Thursday prices on municipals were mixed, as the last of the week’s bigger deals hit the market. On the day, the yields on the two- and 30-year GO bonds each rose one bp, while the yield on the 10-year GO bond was steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day weaker across the curve, as all three major equity averages climbed to new record highs after the May ADP report rekindled a positive sentiment that the U.S. economy will benefit from further strengthening in the labor market. On the day, the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year maturities each rose one bp. The 10-year municipal-to-Treasury ratio fell to 86.0% on Thursday, from Wednesday’s level of 86.4%, while the 30-year municipal-to-Treasury was unchanged from Wednesday’s level of 95.8%.

Last Friday prices on municipals finished the week stronger, as market participants digested the release of a mixed employment report in the United States for May. The Labor Department said non-farm payrolls rose 138K in May, less than the 185K gain expected by economists polled by IFR Markets. However, the unemployment rate dropped to 4.3% last month from 4.4% in April, its lowest level since May 2001. Economists surveyed by IFR Markets had expected the jobless rate to remain steady. On the day, the yield on the two-year GO bond fell two bps, while the yield on the 10-year GO bond fell four bps and the yield on the 30-year GO bond fell six bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished stronger across the curve last Friday, as U.S. Treasury yields retreated on the mixed economic news of the day. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity fell four bps and the yield on the 30-year maturity fell six bps. Both the 10- and 30-year municipal-to-Treasury ratios were relatively unchanged from their Thursday levels of 86.0% and 95.8%, respectively, on Friday.

 




Municipal Volume Drops Again on Refunding Tailspin (the Bond Buyer)

Municipal bond issuance dropped for a fourth straight month in May, falling 19.8% from a year earlier as new money deals failed to take up the slack from a plunge in refundings. Monthly volume fell to $34.25B on 1,009 transactions from $42.71B on 1,304 deals in May of 2016, according to data from Thomson Reuters. Refundings plummeted 38.2% to $10.33B on 234 deals from $16.69B on 545 deals a year earlier. New money issuance also decreased but not as dramatically, falling 14.3% to $13.89B on 685 transactions from $16.22B on 638 deals in May 2016. The value of combined new-money and refunding deals for the month rose to $10.02B from $9.79B a year earlier.

The issuance of revenue bonds declined 25.1% to $21.38B, while GO bond sales fell 9.3% to $12.87B. Negotiated deals dropped 10.4% to $28.26B, and competitive sales decreased by 35.0% to $5.68B. Taxable bond volume more than doubled to $3.25B from $1.48B, while tax-exempt issuance decreased by 19.1% to $29.63B. Minimum tax bonds decreased to $1.36B from $4.59B. The volume of deals wrapped with bond insurance declined by 27.1% to $1.81B on 141 deals compared with $2.49B on 171 deals a year earlier.

The sectors were split evenly, with five posting year-over-year gains and five posting declines. The biggest improvement came from the development sector, which expanded to $2.59B from $831.0MM. Housing increased to $2.12B from $1.54B and education improved to $12.36B from $10.79B. On the other end of the spectrum, electric power saw the biggest drop to $205.0MM from $1.18B. Transportation fell to $3.22B, from $9.21B.

As for the different types of entities that issue bonds, only four were in the green. State governments increased sales 66.2% to $2.45B from $1.47B, districts improved to $8.88B from $7.74B, colleges and universities increased their deal total to $1.67B from $781.0MM and tribal governments went to $20.8MM from $8.5MM.

Volume decreased at least 5.7% for the other types of issuer. The biggest declines came from direct issuers, who issued no bonds this past month versus $154.0MM from the same time last year and state agencies dropping to $8.76B from $14.31B.

California retained the status of top state issuer, as it has sold $31.73B so far this year. New York is number two, with $18.04B in issuance with Texas right behind in third with $15.18B. Pennsylvania is next with $6.78B and Ohio rounds out the top 5 with $4.75B.


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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