Muni Update

June 8, 2020


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


Municipal Market Recap

Municipal prices started the week mixed, as the front end weakened, while prices on bonds maturing 10 years and longer were steady. Municipal prices were steady daily across the curve through Thursday. On Friday municipal prices were mixed again, as the front-end was steady, while prices on bonds maturing ten years and longer weakened. The ICE BofAML Municipal Bond Index returned 3.25% in May. That’s the best one-month return since September 2009 when it earned 3.95%. The impressive rally in May, however, appears to have given way to municipal participants hitting the pause button, particularly as U.S. Treasury yields rise, pushing municipal to UST relative value ratios lower. However, we note, but they are still near or above 100%.

This week’s projected level of new-issue offerings is $8.5B, 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 as the summer redemption season started on June 1st, when $20.1B of maturing or called bond proceeds were returned to investors. As noted last week, when including this amount, total scheduled redemptions for the next three months are approximately $120.5B, but that total can grow as current refunding deals are brought to market. The coming wave of reinvestment demand and the already steady level of demand for bonds from both bank qualified buyers and general market buyers, as well as bond funds, should easily digest this week projected level of new-issue offerings.

Investors in municipal bond funds put cash into funds for a fourth week, as evidenced by the latest tax-exempt weekly reporting funds data showing that funds experienced inflows of $1.206B after experiencing inflows of $1.092B the week prior. The four-week moving average was a positive $1.180B, after being in the green at $776.244MM 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 yield on the two-year maturity on the MMD Triple-A Scale was unchanged from Thursday to Friday and ended the week at 0.19%. Meanwhile the yields on the 10- and 30-year maturities on the MMD Triple-A Scale each rose five basis points (bps) from Thursday to Friday and they ended the week at 0.89% and 1.70%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond was unchanged, while the yields on the 10- and 30-year GO each rose five bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale rose one bp from Thursday to Friday and ended the week at 0.38%. Meanwhile the yields on the 10- and 30-year maturities on the MMA Triple-A Scale each rose two bps from Thursday to Friday and they ended the week at 1.31% and 1.94%, respectively. Overall, week-over-week the yield on the two-year GO bonds rose one bp, while the yield on the 10-year GO bond roe two bps and the yield on the 30-year GO bond rose three bps.


New-Issue Volume is Forecasted to be $8.5B for the Week

Total new issuance for the trading week per IHS Markit Ipreo is estimated to be $8.5B. This week’s projected issuance is comprised of $6.9B in negotiated deals and $1.6B in competitive sales. Of this total amount, there are nearly 20 deals on the negotiated calendar over $100.0MM in par, with the largest being a $3.5B revenue anticipation note (RAN) offering from the Dormitory Authority of the State of New York (DASNY). Short-term rates have been near record lows and issuers and underwriters have been increasingly interested in tapping this sector for extra savings.

On note deals this week include a competitive offering of $125.0MM of tax and revenue anticipation notes (TRANs) from Ventura County, California on Tuesday. The TRANs are rated MIG1 by Moody’s Investors Service (Moody’s) and SP1+ by Standard and Poor’s Global Ratings (S&P). On Wednesday, Fresno County, California plans to offer $100.0MM of TRANs.

This week also will bring several taxable deals to market. On Monday, Princeton University plans to offer $500.0MM of taxable corporate CUSIP refunding bonds. The deal is rated triple-A by Moody’s and S&P.  On Tuesday, the University of Michigan plans to offer $850.0MM of taxable general revenue bonds. The deal is also rated triple-A by Moody’s and S&P. Also, on Tuesday, the City of Dallas, Texas plans to offer $661.0MM of waterworks and sewer system revenue refunding bonds in two deals. One offering will consist of $296.855 in tax-exempt bonds and the other will be comprised of $364.240MM of taxable bonds. The deals are rated Triple-A by S&P and AA+ by Fitch Ratings (Fitch).

On Wednesday, Memorial Sloan Kettering Cancer Center plans to offer $500.0MM of taxable corporate CUSIP bonds. The deal is rated Aa3 by Moody’s, AA- by S&P and AA by Fitch. On Thursday, the Smithsonian Institution plans to offer $300.0MM of GO taxable corporate CUSIP bonds. The deal is rated triple-A by both Moody’s and S&P.

In the competitive bond arena, the Texas dominates the calendar. The City of Fort Worth, Texas, is selling $152.515MM of GO bonds on Tuesday and hits the market again on Wednesday to sell $169.18 million of revenue bonds. Also Tuesday, the State of Texas is selling $162.205MM of GO bonds in two offerings.


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

Investors in municipal bond funds put cash into funds for a fourth week, as tax-exempt weekly reporting funds experienced inflows of $1.206B in the latest week, after experiencing inflows of $1.092B the week prior. The four-week moving average was a positive $1.180B, after being in the green at $766.244MM the week prior.

Long-term municipal bond funds had inflows of $349.431MM in the latest week after experiencing inflows of $740.931MM the week prior. Intermediate-term funds had inflows of $124.738MM after outflows of $102.658MM the week prior. National funds had inflows of $1.653B after experiencing inflows of $996.906MM the week prior. High-yield municipal funds reported inflows of $195.145MM in the latest week, after inflows of $106.727MM the week prior. Exchange traded funds reported inflows of $517.983MM, after inflows of $220.758MM 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 three months, starting 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 10 years and out, 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, as a way to pick up more yield with little to no drop-off in credit quality. Week-over-week, bank qualified spreads tightened, with the largest tightening occurring in the 15-year maturity, 32 bps.


Daily Overview of the General Market for the Week Ending June 5th

Last Monday municipal prices were mixed, as a few new-issues of the week’s projected $6.85B in new-issue offerings came to market, including the New York City Municipal Water Finance Authority’s $630.275MM offering of water and sewer system second general resolution revenue bonds for retail, ahead of the Tuesday’s institutional pricing. On the day, the yield on the two-year GO bond rose three bps, while the yields on the 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 also mixed, and U.S. stocks finished the session higher, as economic optimism overcame worries around domestic unrest in the U.S. and the risks of the U.S.-China trade agreement potentially unraveling. The Dow finished up 92 points, or 0.4% higher, while the S&P was also up 0.4% and the NASDAQ was up 0.7%. On the day, the yield on the two-year maturity fell two bps, while the yield on the 10-year maturity rose one bp and the yield on the 30-year year maturity rose five bps. The 10-year municipal-to-Treasury ratio fell to 127.3% on Monday from last Friday’s level of 129.2%, while the 30-year municipal-to-Treasury ratio fell to 113.0% on Monday from last Friday’s level of 117.0%.

Last Tuesday prices on municipals were steady, as several new-issue deals were priced, including the institutional pricing of the $630.275MM offering of water and sewer system second general resolution revenue bonds. In addition, Illinois borrowed $1.2B of one-year, GO backed notes through the Federal Reserve’s Municipal Liquidity Facility. 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 weakened as U.S. stocks closed higher for the session. After a relatively unexciting morning session, stocks and Treasury yields moved higher, as investors weighed the prospects of a protracted economic recovery following the coronavirus lockdowns, outbreaks of violence across American cities and tensions with China. The Dow finished up 267 points, or 1.1%, while the S&P was up 0.8% and the NASDAQ was up 0.6%. On the day, the yield on the two-year maturity rose three bps, while the yields on the 10- and 30-year maturities each rose two bps. The 10-year municipal-to-Treasury ratio fell to 123.5% on Tuesday from Monday’s level of 127.3%, while the 30-year municipal-to-Treasury ratio fell to 111.5% on Tuesday from Monday’s level of 113.0%.

Last Wednesday municipals prices were steady across the curve, as a variety of new-issue offering 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 weakened, as U.S. stocks finished higher for the session and both the S&P and the NASDAQ logged their fourth straight day of gains. For the Dow it was the third in a row for gains. Market sentiment was boosted by a much better than expected ADP employment report, which shored up hopes that the worst might be over for America’s battered labor market. The Dow finished 527 points or 2.1% higher, while the S&P was up 1.4% and the NASDAQ was up 0.8%. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity rose nine bps and the yield on the 30-year maturity rose eight bps. The 10-year municipal-to-Treasury ratio fell to 109.1% on Wednesday from Tuesday’s level of 123.5%, while the 30-year municipal-to-Treasury ratio fell to 105.8% on Wednesday from Tuesday’s level of 111.5%.

Last Thursday municipals prices were steady, as the last of the week’s new-issue offerings were priced, including a $204.255MM water system revenue bond offering from the Los Angeles Department of Water and Power. 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 were mixed, as U.S. stocks finished slightly lower for the session. The Dow finished 12 points, or 0.1% lower, while the S&P was down 0.3% and the NASDAQ was down 0.7%. On the day, the yield on the two-year maturity was unchanged, while the yields on the 10- and 30-year maturities each rose five bps. The 10-year municipal-to-Treasury ratio fell to 102.4% on Thursday from Wednesday’s level of 109.1%, while the 30-year municipal-to-Treasury ratio fell to 102.5% on Thursday from Wednesday’s level of 105.8%.

Last Friday prices on municipals were mixed, as market participants started looking ahead to the expected $8.5B in new-issue long-term debt to be offered next week. On the day, the yield on the two-year GO bond was unchanged, while the yields on the 10- and 30-year GO bonds each rose five bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices weakened, as U.S. stocks surged for the session after the government reported that 2.5MM jobs were added in May and that the nation’s unemployment rate fell to 13.3%. Economists had been expecting significant job losses and a spike in the unemployment rate to near 20%. But it appears that the reopening of several states has led to more Americans than expected returning to work. The Dow soared nearly 830 points, or 3.2%, while the S&P was up 2.6% and the NASDAQ was up 2.1%. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose nine bps and the yield on the 30-year maturity rose seven bps. The 10-year municipal-to-Treasury ratio fell to 97.8% on Friday from Thursday’s level of 102.4%, while the 30-year municipal-to-Treasury ratio fell to 101.2% on Friday from Thursday’s level of 102.5%.of 112.2%.


Taxable Market

The Taxable Municipal Index has had positive returns for two months in a row (1.79% and 2.28% in April and May, respectively) and has a better YTD performance than the tax-exempt index (0.98%).






Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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