Muni Update

March 12, 2018


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

 

Municipal Market Recap

Municipal bond funds reported investors put cash into funds, as weekly reporting funds experienced inflows of $406.753MM, after experiencing outflows of $590.943MM the week prior. The four-week moving average was a negative $70.049MM, after being in the red at $3.010MM 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.

On Monday municipal bond prices were mixed, as the front-end was steady, while bonds maturing 10 years and longer weakened. On Tuesday prices were unchanged across the curve. On Wednesday bond prices on the short-end weakened, while prices on bonds maturing 10 years and longer were steady. Thursday’s municipal price action was a repeat of Wednesday’s. On Friday prices weakened across the curve. Volume for the trading week is projected to be $6.05B, which is below last week’s revised level of $7.99B in issuance. This week’s projected level of issuance, while below last week’s level, is above the average weekly issuance level so far this year, which has been around $4.0B. In 2017 the average weekly level of issuance was just over $6.0B. Some market participants believe that lower issuance volume and tax reform are still plaguing some market participants.

This week’s economic calendar is fairly busy with reports on small business confidence (Tue), homebuilder confidence (Thu), building permits and housing starts (Fri), the January Job Openings and Labor Turnover release (Fri), and consumer confidence (Fri). The most important news, however, should be the February CPI inflation (Tue) and February retail sales (Wed). Also on the radar this week is Senator Crapo’s bank regulatory relief bill, which the Senate is expected to pass. The bill leaves a lot of discernment in Fed hands, but its main selling point is that it raises the heightened supervision threshold for large banks from $50B to $250B.

Last week the yields on the two-, 10- and 30-year maturities on the MMD Triple-A Scale each rose two basis point (bps) from Thursday to Friday and they ended the week at 1.56%, 2.49% and 3.07%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose five bps, while the yields on the 10- and 30-year GO bonds each rose four bps.

Last week the yields on the two- and 30-year maturities on the MMA Triple-A Scale each rose two bps from Thursday to Friday and ended the week at 1.62% and 3.10%, respectively. Meanwhile, the yield on the 10-year maturity on the MMA Triple-A Scale rose one bp from Thursday to Friday and ended the week at 2.45%. Overall, week-over-week the yields on the two- and 10-year GO bonds each rose two bps, while the yield on the 30-year GO bond rose three bps.

On Monday, prices on U.S. Treasuries were mixed, as the front-end strengthened, while bonds maturing 10 years and longer weakened. On Tuesday prices on both the front- and long-ends of the curve weakened, while intermediate maturities were steady. On Wednesday prices on bonds 10 years and in were steady, while the long-end weakened. On Thursday prices in the front-end were steady, while bonds maturing 10 years and longer strengthened. On Friday they weakened across the curve. Overall, week-over-week the yield on the 10-year maturity rose three bps and closed the week at 2.89%. Meanwhile the yield on the two-year maturity rose two bps week-over-week and closed the week at 2.27%. This resulted in a week-over-week 2s/10s spread of 62 bps, one bp wider than last week’s 2s/10s spread of 61 bps. The yield on the 30-year maturity rose three bps week-over-week, and finished the week at 3.16%.

 

Volume to be $6.05B for the Trading Week

Total volume for the coming week is estimated to be $6.05B, which is below the $7.99B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $3.57B in negotiated deals and approximately $2.48B in competitive sales. There are 15 sales scheduled $100.0MM or larger, with six coming via the competitive route.

The New York City Transitional Finance Authority (NYC TFA) will offer $1.0B of building aid revenue bonds on Wednesday, after a two-day retail order period. The deal is rated Aa2 by Moody’s Investors Service (Moody’s), AA by S&P Global Ratings (S&P) and AA by Fitch Ratings (Fitch).

Other notable deals this week include the University of Connecticut, which will offer $152.0MM in student fee revenue bonds on Wednesday, after a two-day retail order period. The deal is rated Aa2 by Moody’s and AA- by S&P. On Thursday the Golden State Tobacco Securitization Corporation will offer $110.775MM. The deal is rated and A1 by Moody’s and A+ by S&P and Fitch, respectively.

In the competitive market the largest deal of the week will come from the Dormitory Authority of the State of New York (DASNY). DASNY plans to sell a total of $1.33B in five separate sales on Tuesday.

 

Municipal Bond Funds Posted Inflows for the Week       

Municipal bond funds posted inflows last week, as market participants reversed course and pulled out of funds, according to the latest data from Lipper. The weekly reporters saw $406.753MM of inflows, after experiencing outflows of $590.943MM the week prior. The four-week moving average was a negative $70.049MM, after being in the red at $3.010MM the week prior.

Long-term municipal bond funds had inflows of $218.275MM in the latest week after outflows of $492.084MM the week prior. Intermediate-term funds had inflows of $201.010MM after experiencing inflows of $29.617MM the week prior. National funds had inflows of $383.340MM after outflows of $373.190MM the week prior. High-yield municipal funds reported inflows of $127.660MM in the latest week, after outflows of $221.998MM the week prior. Exchange traded funds reported outflows of $97.946MM, after inflows of $1.276MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The BQ market continues to see good activity, even with the lighter 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 due in part to having to replace rolloffs due to the high level of redemptions. This week’s new issue opportunities should provide market participants with opportunities in in the primary market, and together with secondary market opportunities should provide participants a chance to address their needs, especially those seeking attractive structures in the long-end of the curve. We continue to encourage participants to utilize extension swaps (sell short paper and roll out to the 12-15-year maturity area of the curve), as a way to pick up more yield with little to no drop-off in credit quality. Portfolio clean-up is also providing opportunities for participants. Week-over-week, bank qualified spreads were mixed, as spreads on the one-year maturity widened by two bps. Meanwhile, spreads on maturities two-years and longer all tightened week-over-week. The largest tightening occurred in the three-year maturity, four bps.  

 

Daily Overview of the General Market for the Week Ending March 9th

Last Monday prices on municipals were mixed, as market participants prepped for the coming week’s $7.5B new issue calendar. On the day the yield on the two-year GO bond was steady, while the yields on the 10- and 30-year GO bonds each rose two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed on the day, as stocks had a solid day. The Dow gained more than the S&P 500 and NASDAQ, but all three finished up by at least 1.0%. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity rose two bps and the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio was relatively unchanged on Monday from last Friday’s level of 85.7%, while the 30-year municipal-to-Treasury ratio slipped to 96.5% on Monday from last Friday’s level 96.8%, respectively.

Last Tuesday prices on municipals were steady, as California’s $2.2B GO deal was met with strong demand from participants. This prompted the underwriter to expedite retail pricing on Tuesday morning and move the institutional pricing to Tuesday afternoon from Wednesday. On the day the yields on the two-, 10- and 30-year GO bonds were steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as stocks fluctuated during Tuesday’s trading action and finished the session slightly up. 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 Tuesday from Monday’s level of 85.8%, while the 30-year municipal-to-Treasury ratio rose to 97.1% on Tuesday from Monday’s level of 96.5%.

Last Wednesday prices on municipals were mixed, as the market saw the State of Maryland sell $525.0MM of GO bonds. On the day the yield on the two-year GO bond rose one bp, 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 were mixed, as stocks fluctuated in negative territory during morning trading before mounting an afternoon comeback that would ultimately leave the S&P 500 little changed on the day. On the day, the yields on the two- and 10-year maturities were steady, while the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio was unchanged on Wednesday from Tuesday’s level of 85.8%, while the 30-year municipal-to-Treasury ratio slipped to 96.8% on Wednesday from Tuesday’s level of 97.1%.

Last Thursday prices on municipals were mixed, as New York issuers sold $890.0MM of bonds, to close out the biggest week of the year in terms of municipal volume. On the day, the yield on the two-year GO bond rose 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 also finished the day mixed, as stocks see-sawed in the morning before turning positive in the afternoon. The Dow closed up 0.38% and the S&P 500 finishing 0.44% stronger. 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 86.1% on Thursday from Wednesday’s level of 85.8%, while the 30-year municipal-to-Treasury ratio rose to 97.1% on Thursday from Wednesday’s level of 96.8%.

Prices on municipals last Friday finished the session weaker, as market participants were looking ahead to next week’s $6.05B new issue calendar. On the day, the yields on the two-, 10- and 30-year GO bonds each rose two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the trading day weaker. On the day, the yields on the two-, 10- and 30-year maturities each rose two bps. Both the 10- and 30-year municipal-to-Treasury ratios were relatively unchanged on Friday from Thursday’s levels of 86.1% and 97.1%, respectively.

 

 



 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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