Muni Update

March 19, 2018



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

 

Municipal Market Recap

Municipal bond funds reported investors put cash into funds for a second week, as weekly reporting funds experienced inflows of $339.142MM, after experiencing inflows of $406.753MM the week prior. The four-week moving average was a positive $125.589MM, after being in the red at $70.049MM 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 bonds 10 years and in weakened, while the long-end was steady. On Tuesday prices were unchanged across the curve. On Wednesday prices on bonds maturing 10 years and in were steady, while prices on bonds in the long-end strengthened. On Thursday prices on the front-end were steady, while prices on bonds 10 years and longer strengthened. On Friday prices on bonds 10 years and in were steady, while the long-end strengthened. Volume for the trading week is projected to be $2.9B, which is well below last week’s revised level of $5.0B in issuance. This week’s projected level of issuance is also below the average weekly issuance level so far this year, which has been $4.0B. In FY 2017, the average weekly issuance level was $6.0B.

This week’s economic calendar will be dominated by Wednesday’s FOMC Meeting. While there is fairly strong consensus about the results, as investors/analysts/economists expect the Fed to hike the overnight rate 25 bps and increase their forward rate projections, there is uncertainty about the degree to which the Fed will raise those forward projections. As for the remainder of the week, Wednesday will bring the February Existing Home Sales report and Friday will bring the February New Home Sales report.  After a run of weak housing reports, this data will be interesting, but unlikely to take the focus off the Fed decision.

Last week the yields on the two- and 10-year maturities on the MMD Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 1.58% and 2.50%, respectively. Meanwhile, the yield on the 30-year maturity on the MMD Triple-A Scale fell one basis point (bp) from Thursday to Friday and ended the week at 3.03%. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose two bps, while the yield on the 10-year GO bond rose one bp 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 steady from Thursday to Friday and ended the week at 1.61%. Meanwhile, the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity fell two bps on the MMA Triple-A Scale fell from Thursday to Friday and they ended the week at 2.45% and 3.07%, 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 was unchanged and the 30-year GO bond fell three bps.

On Monday, prices on U.S. Treasuries were mixed, as the front-end was steady, while bonds maturing 10 years and longer strengthened. On Tuesday prices on U.S. Treasuries strengthened across the curve. On Wednesday prices in the short-end were steady, while prices on bonds maturing 10 years and longer strengthened. On Thursday and Friday prices weakened across the curve. Overall, week-over-week the yield on the 10-year maturity fell five bps and closed the week at 2.84%. Meanwhile the yield on the two-year maturity rose four bps week-over-week and closed the week at 2.31%. This resulted in a week-over-week 2s/10s spread of 53 bps, nine bps tighter than last week’s 2s/10s spread of 62 bps. The yield on the 30-year maturity fell eight bps week-over-week, and finished the week at 3.08%.

 

Volume to be $2.9B for the Trading Week

Total volume for the coming week is estimated to be $2.9B, which is below the $5.0B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $1.7B in negotiated deals and approximately $1.2B in competitive sales. There are six sales scheduled of $100.0MM or larger, with four of those on the negotiated side.

The School District of Philadelphia will offer $251.0MM of GO bonds on Thursday. The deal is expected to mature serially from 2018 through 2038, with a term bond in 2043. The deal will be backed by the Pennsylvania state aid intercept program and is rated A2 by Moody’s Investors Service (Moody’s) and A+ by Fitch Ratings (Fitch). The Los Angeles Department of Airports will offer $230.465MM of senior refunding revenue bonds for LAX airport on Wednesday. The deal is rated Aa3 by Moody’s and AA by S&P Global Ratings (S&P) and Fitch.

In the competitive arena, Anne Arundel County, Maryland plans to sell $263.655MM of GO consolidated general improvement and water and sewer bonds on Tuesday. The deal is rated Aa1 by Moody’s and AAA by S&P. Also, the City and County of San Francisco will sell $251.345MM of GO clean and safe neighborhood park, transportation and road improvement bonds on Tuesday. The deal is rated Aaa by Moody’s and AA+ by S&P and Fitch.

 

Municipal Bond Funds Posted Inflows for the Week       

Municipal bond funds posted inflows last week, as market participants put cash into funds for a second week, according to the latest data from Lipper. The weekly reporters saw $339.142MM of inflows, after experiencing inflows of $406.753MM the week prior. The four-week moving average was a positive $125.589MM, after being in the negative at $70.049MM the week prior.

Long-term municipal bond funds had inflows of $181.790MM in the latest week after inflows of $2158.275MM the week prior. Intermediate-term funds had inflows of $152.733MM after experiencing inflows of $201.010MM the week prior. National funds had inflows of $356.119MM after inflows of $383.340MM the week prior. High-yield municipal funds reported inflows of $110.948MM in the latest week, after inflows of $127.660MM the week prior. Exchange traded funds reported inflows of $76.237MM, after outflows of $97.946MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The BQ market continues to see good 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 due in part to having to replace rolloffs due to the high level of redemptions. This week’s new issue opportunities, while light, should provide market participants with some opportunities 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 10-20-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 tighter, with the largest tightening occurring in the two-year maturity, 16 bps.

 

Daily Overview of the General Market for the Week Ending March 16th

Last Monday prices on municipals were mixed, as retail buyers got first dibs on the New York City Transitional Finance Authority’s (NYC TFA) $1.0B offering of building aid revenue bonds. Retail pricing continued on Tuesday and was followed by institutional pricing on Wednesday. On the day the yields on the two- and 10-year GO bonds each rose two bps, while the yield on the 30-year GO bond was steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed on the day, as stocks also posted mixed results. The Dow dropped 0.62% to lag a little-changed S&P 500 and a 0.36% improvement in the tech-heavy NASDAQ. On the day, the yield on the two-year maturity was steady, while the yields on the 10- and 30-year maturities each fell two bps. The 10-year municipal-to-Treasury ratio rose 87.5% on Monday from last Friday’s level of 86.2%, while the 30-year municipal-to-Treasury ratio rose to 97.8% on Monday from last Friday’s level 97.2%, respectively.

Last Tuesday prices on municipals were steady, as two New York issuers dominated the municipal bond market, bringing over $2.0B in new supply. 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 stronger, as stocks fluctuated during Tuesday’s trading action and finished the session slightly down. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell five bps. The 10-year municipal-to-Treasury ratio rose to 88.4% on Tuesday from Monday’s level of 87.5%, while the 30-year municipal-to-Treasury ratio rose to 99.4% on Tuesday from Monday’s level of 97.8%.

Last Wednesday prices on municipals were mixed, as the NYC TFA was able to cut yields amid healthy demand for its $1.0B bond sale. Also noted by market participants was a reported drop in CUSIP requests, signaling that the supply drought may continue. On the day the yields on the two- and 10-year GO bonds were steady, while 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 were also mixed, as U.S. equities faded after an opening jump for a third consecutive session, resulting in another day of broad-based weakness. On the day, the yield on the two-year maturity was unchanged, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell four bps. The 10-year municipal-to-Treasury ratio rose to 89.3% on Wednesday from Tuesday’s level of 88.4%, while the 30-year municipal-to-Treasury ratio rose to 100.0% on Wednesday from Tuesday’s level of 99.4%.

Last Thursday prices on municipals were mixed, as the last of the week’s new issues came to market. 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 fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day weaker, as the S&P 500 was on a string of downticks to its daily low. By the close, the index had almost recovered to be unchanged for the day, splitting the Dow’s 0.47% gain and the NASDAQ’s 0.20% loss. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose two bps and the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio fell to 88.3% on Thursday from Wednesday’s level of 89.3%, while the 30-year municipal-to-Treasury ratio fell to 99.4% on Thursday from Wednesday’s level of 100.0%.

Prices on municipals last Friday finished the session mixed, as market participants were looking ahead to next week’s $2.9B new issue calendar. On the day, the yields on the two- and 10-year GO bonds were steady, while the yield on the 30-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the trading day weaker. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio slipped to 88.0% on Friday from Thursday’s level of 88.3%, while the 30-year municipal-to-Treasury ratio fell to 98.4% on Friday from Thursday’s level of 99.4%, respectively.

 

 



 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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