Muni Update

March 18, 2019


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

 

Municipal Market Recap

Municipal prices were steady across the curve on Monday. On Tuesday they were mixed, as bonds in the front-end were steady, while bonds maturing 10 years and longer strengthened. On Wednesday and Thursday they were steady across the curve. Friday’s price action was a repeat of Tuesday’s, as they were mixed with the front-end steady and bonds maturing 10 years and longer stronger. Issuance for the week is forecasted to be $2.4B, which is well below last week’s revised level of $4.8B in issuance. This low level of new issue, which is due in large part to the Federal Open Markets Committee (FOMC) meeting this week, will have market participants looking to secondary market opportunities to fill their needs, as municipals remain in demand. Driving this strong demand is a combination of high redemption flows and inflows into municipal bond mutual funds.  We note, the recent tightening of the percentage of municipals-to-U.S. Treasuries should continue due to the current long-term impact of the supply-demand imbalance and the future forecast for lower rates.

Investors in municipal bond funds put cash into funds for an tenth week, as weekly reporting funds experienced inflows of $1.645B after experiencing inflows of $797.501MM the week prior. The four-week moving average was a positive $1.404B, after being a positive $1.335B 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 in the U.S. municipal market.

Last week the yield on the two-year maturity on the MMD Triple-A Scale was steady from Thursday to Friday and ended the week at 1.58%. Meanwhile the yield on the 10-year maturity fell one basis point (bp) and the yield on the 30-year maturity fell two bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 2.04% and 2.85%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond was unchanged, while the yield on the 10-year GO bond fell two bps and the yield on the 30-year GO bond fell four bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale was unchanged from Thursday to Friday and ended the week at 1.62%. Meanwhile, the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity fell two bps on the MMA Triple-A Scale from Thursday to Friday and they ended the week at 2.29% and 2.97%, respectively. Overall, week-over-week 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.

 

New Issue Volume is Forecasted to be $2.4B for the Week

Total new issuance for the trading week per IHS Markit Ipreo is estimated to be $2.4B, which is well below last week’s trading volume of $4.8B in issuance, according to revised data from Refinitiv. This low level of issuance is due in part to the FOMC meeting this week and a lack of state level GO issues. This week’s trading calendar is comprised of $1.8B in negotiated offerings and $624.0MM in competitive offerings.

There are only a handful of deals scheduled for $100.0MM or larger in size this week and they include the Indianapolis Local Public Improvement Bond Bank offering of $610.495MM of community justice campus bonds for a courthouse and jail project on Thursday. The deal is rated triple A by Fitch Ratings (Fitch). Also this week the California Educational Facilities Authority plans to offer $460.0MM of Stanford University revenue bonds.

The Prosper Independent School District, Texas, plans to offer $200.5MM of GO unlimited tax school building bonds on Tuesday. The deal is rated triple A by Fitch due to the guarantee of the Texas Permanent School Fund.

 

Municipal Bond Funds Post Inflows for a Tenth Week

Investors in municipal bond funds put cash into funds for a tenth week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $1.645B, after experiencing inflows of $797.501MM the week prior. The four-week moving average was a positive $1.404B, after being a positive $1.335B the week prior.

Long-term municipal bond funds had inflows of $1.009B in the latest week after experiencing inflows of $372.940MM the week prior. Intermediate-term funds had inflows of $435.856MM after inflows of $350.599MM the week prior. National funds had inflows of $1.483B after experiencing inflows of $670.193MM the week prior. High-yield municipal funds reported inflows of $387.164MM in the latest week, after inflows of $373.681MM the week prior. Exchange traded funds reported inflows of $415.919MM, after inflows of $84.664MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

Last week, the BQ market had good activity, due in part to opportunities in both BQ and general market (GM) new issue and secondary market bid lists. With rolloffs expected to continue at a brisk pace, BQ participants will continue to have significant demand for BQ paper. This week’s higher projected level of new issue BQ paper, together with GM opportunities in both the primary and secondary markets should provide BQ market participants with additional chances to address their needs, while picking up attractive structures (4.0% coupons), especially those in the long-end of the curve (15+ years). Participants should also continue to utilize extension swaps, as the bid side for municipals continues to remain strong. Week-over-week, bank qualified spreads were mixed, as the spreads on one, two, three, and five-year maturities all widened, with the largest widening occurring in the three-year maturity, five bps. Meanwhile, week-over-week the spreads on the 10 and 30-year maturities were unchanged, while the spread on the 15-yar maturity tightened four bps.

 

Daily Overview of the General Market for the Week Ending March 15th

Last Monday prices on municipals were steady, as market participants were looking forward to the $5.5B in new issue offerings scheduled for the week, as well as a handful of new deals that were offered to start the week. 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. Treasuries were weaker, as U.S. stocks strengthened throughout the session on Monday. On the day, the yields on the two- and 10-year maturities each rose two bps, while the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 78.0% on Monday from last Friday’s level of 78.6%, while the 30-year municipal-to-Treasury ratio fell to 95.4% on Monday from last Friday’s level of 96.3%.

Last Tuesday prices on municipals were mixed, as a number of new issue offerings were priced. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond fell one bp and the yield on the 30-year GO bond fell two bps,  according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger, as U.S. stocks finished the day mixed. The Dow posted losses, due largely to issues with Boeing’s new plane, the 737 MAX 8, while the S&P 500 and NASDAQ posted modest gains for the session. On the day, the yield on the two-year maturity fell two bps, while the yields on the 10-and 30-year maturities each fell three bps. The 10-year municipal-to-Treasury ratio rose to 78.5% on Tuesday from Monday’s level of 78.0%, while the 30-year municipal-to-Treasury ratio bumped up to 95.7% on Tuesday from Monday’s level of 95.4%.

Last Wednesday prices on municipals were steady, as a number of new offerings hit the market, including deals from issuers in Virginia, New York, and Texas. On the day, the yield 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 U.S. stocks finished the session higher. The S&P 500 and NASDAQ both rose 0.69% on Wednesday, while the Dow again lagged behind with a still-solid finish of a 0.58% gain. On the day, the yields on the two- and 10-year maturities were steady, while the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio was unchanged on Wednesday from Tuesday’s levels of 78.5%, while the 30-year municipal-to-Treasury ratio fell to 95.0% on Wednesday from Tuesday’s level of 95.7%.

Last Thursday prices on municipals were steady again, as the last of the week’s new issue offerings came to market. 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.

U.S. Treasury prices finished the day weaker, as U.S. stocks finished the session mixed, as the Dow was up 0.03%, while the S&P was down 0.09% and the NASDAQ fell 0.16%. On the day, the yield on the two-year maturity rose one bp, while the yields on the 10- and 30-year maturities each rose two bps. The 10-year municipal-to-Treasury ratio fell to 78.0% on Thursday from Wednesday’s levels of 78.5%, while the 30-year municipal-to-Treasury fell to 94.4% on Thursday from Wednesday’s level of 95.0%.

Last Friday, prices on municipals were mixed, as market participants were looking ahead to the coming trading week’s $2.4B in new issue offerings. On the day, the yield on the two-year GO bond was unchanged, while the yield on the 10-year GO bond fell one bp and the yield on the 30-year GO bond fell two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as each of the three major U.S. indices posted gains for the session, with the NASDAQ leading the way with 0.76% increase. On the day, the yield on the two-year maturity fell three bps, while the yield on the 10-year maturity fell four bps and the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury rose to 81.9% on Friday from Thursday’s level of 78.0%, while the 30-year municipal-to-Treasury ratio was relatively unchanged on Friday from Thursday’s level of 94.4%.

 

 

Taxable Market



 


 




Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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