Muni Update

March 25, 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 prices were mixed, as bonds in the front-end weakened, while intermediate maturities were steady and the long-end strengthened. On Wednesday they were mixed again, as the front-end was steady, while bonds maturing 10 years and longer strengthened. On Thursday and Friday prices were stronger across the curve. Issuance for the week is forecasted to be $8.9B, which is well above last week’s revised level of $2.5B in issuance. This week’s projected level of issuance combined with secondary market offerings should provide market participants with a number of opportunities. Driving this strong demand in the municipal market is a combination of high redemption flows and inflows into municipal bond mutual funds.

Investors in municipal bond funds put cash into funds for an eleventh week, as weekly reporting funds experienced inflows of $1.425B after experiencing inflows of $1.645BMM the week prior. The four-week moving average was a positive $1.393B, after being a positive $1.404B 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. According to Bloomberg, state and local-government bonds are headed for their strongest start to a year since 2014, propelled by an influx of cash into municipal-debt mutual funds as investors seek out tax havens and the Federal Reserve holds off on interest-rate increases. The securities have returned 1.8% in 2019, putting them on track for the best first-quarter showing in five years. That’s roughly double the gain for Treasuries, according to Bloomberg Barclay’s indices.

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 1.53%. Meanwhile the yield on the 10-year maturity fell five bps and the yield on the 30-year maturity fell seven bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 1.92% and 2.67%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond fell five bps, while the yield on the 10-year GO bond fell 12 bps and the yield on the 30-year GO bond fell 18 bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale fell two bps from Thursday to Friday and ended the week at 1.56%. Meanwhile, the yield on the 10-year maturity fell five bps and the yield on the 30-year maturity fell seven bps on the MMA Triple-A Scale from Thursday to Friday and they ended the week at 2.18% and 2.82%, respectively. Overall, week-over-week the yield on the two-year GO bond fell six bps, while the yield on the 10-year GO bond fell 11 bps and the yield on the 30-year GO bond fell 15 bps.

 

New Issue Volume is Forecasted to be $8.9B for the Week

Total new issuance for the trading week per IHS Markit Ipreo is estimated to be $8.9B, which is well above last week’s trading volume of $2.5B in issuance, according to revised data from Refinitiv. This week’s trading calendar is comprised of $5.0B in negotiated offerings and $3.9B in competitive offerings.

On Tuesday, after a two day retail period, the New York City Transitional Finance Authority (NYC TFA) will be coming to market with almost $1.5B of bonds divided into negotiated and competitive offerings. The negotiated offering will consist of $850.0MM of tax-exempt Fiscal 2019 Series C future tax-secured subordinate revenue bonds for NYC’s Department of Administrative Services. The competitive offering from the NYC TFA will be comprised of $600.0MM of taxable offerings broken down into two sales. They will consisting of $300.0MM of Fiscal 2019 Series C Subseries C-2 future tax secured subordinate revenue bonds and $300.0MM of Fiscal 2019 Series C Subseries C-3 future tax-secured subordinate revenue bonds. All the offerings are rated Aa1 by Moody’s Investors Service (Moody’s) and triple A by S&P Global Ratings (S&P) and Fitch Ratings (Fitch).

On Wednesday, the City of Chicago’s plans to price its Series 2019 GOs offering. The deal is rated BBB+ by S&P and BBB- by Fitch. On Thursday, the State of Connecticut’s plans to offer $850.0MM of Series 2019A GOs on Thursday. The offering will consisting of $600.0MM of tax-exempts and $250.0MM of taxable bonds. The deal is rated A1 by Moody’s and A+ by S&P and AA- by Fitch.

In the competitive arena, the State of California is selling $842.0MM of taxable GOs on Tuesday in two sales consisting of $422.0MM of Bid Group B various purpose GOs and $420.79.0MM of Bid Group A various purpose GOs. Proceeds will be used to finance certain capital improvements and refund some outstanding GO commercial paper notes. The deals are rated Aa3 by Moody’s and AA- by S&P and Fitch. Also on Tuesday, the State of Illinois will sell $452.0MM of GOs in two sales consisting of $300.0MM of taxable Series of April 2019A bonds and $152.0MM of tax-exempt Series of April 2019B. Proceeds will be used to refund certain outstanding debt. The offerings are rated Baa3 by Moody’s, BBB- by S&P and BBB by Fitch.

Maryland is selling $489.6.0MM of state and local facilities loan of 2019 GOs in two sales on Tuesday. The sales will consist of $265.04MM of Bidding Group 1 GOs and $224.96.0MM of Bidding Group 2 GOs. Proceeds will be used for a variety of public purposes. The deals are rated Triple A by Moody’s, S&P, and Fitch.

 

Municipal Bond Funds Post Inflows for a Eleventh Week

Investors in municipal bond funds put cash into funds for an eleventh week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $1.425B, after experiencing inflows of $1.645BMM the week prior. The four-week moving average was a positive $1.393B, after being a positive $1.404B the week prior.

Long-term municipal bond funds had inflows of $1.102B in the latest week after experiencing inflows of $1.009B the week prior. Intermediate-term funds had inflows of $307.389MM after inflows of $435.856MM the week prior. National funds had inflows of $1.427B after experiencing inflows of $1.483B the week prior. High-yield municipal funds reported inflows of $480.331MM in the latest week, after inflows of $387.164MM the week prior. Exchange traded funds reported inflows of $168.827MM, after inflows of $415.919MM 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 (3.0% coupons and higher), 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 widened across the curve, with the largest widening occurring in the two-year maturity, six bps.

 

Daily Overview of the General Market for the Week Ending March 22nd

Last Monday prices on municipals were steady, as market participants were looking forward to the start of the FOMC meeting on Tuesday, as well as the $2.4B in new issue offerings scheduled for 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 mixed, as the three major U.S. equity averages opened higher Monday and gradually recovered from a sharp mid-morning drop to post a second day of gains. The Dow and NASDAQ both rose 0.3% while the S&P added a marginally better 0.4%; the S&P 500 and NASDAQ ended at their best levels since October. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity rose one bp and the yield on the 30 year maturity fell one bp. The 10-year municipal-to-Treasury ratio slipped to 78.5% on Monday from last Friday’s level of 78.8%, while the 30-year municipal-to-Treasury ratio bumped up to 94.7% on Monday from last Friday’s level of 94.4%.

Last Tuesday prices on municipals were mixed, as few new issue offerings, including issuers from Florida and Texas, were priced ahead of the conclusion of the FOMC’s meeting and its announcement on Wednesday. On the day, the yield on the two-year GO bond rose one bp, while the yield on the 10-year GO was steady and the yield on the 30-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker, as U.S. stocks finished the day mixed. The Dow and S&P posted minimal losses, while the NASDAQ posted minimal gains for the session. On the day, the yields on the two-, 10- and 30-year maturities each rose one bp. The 10-year municipal-to-Treasury ratio slipped to 78.2% on Tuesday from Monday’s level of 78.5%, while the 30-year municipal-to-Treasury ratio fell to 94.0% on Tuesday from Monday’s level of 94.7%.

Last Wednesday prices on municipals were mixed, as the FOMC voted to hold rates steady, and a number of California offerings hit the market. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond fell two bps and the yield on the 30-year GO bond fell four bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger, as U.S. equities ended mixed, with the Dow and the S&P falling, while the NASDAQ finished up for the session, as investors dealt with headlines from multiple fronts, including a more-dovish-than-expected decision from the Federal Reserve. The FOMC voted 10-0 to hold rates at a range of 2.25% to 2.5% and its Summary of Economic Projections suggested no further rate hikes this year and one in 2020. On the day, the yield on the two-year maturity fell six bps, while the yield on the 10-year maturity fell seven bps and the yield on the 30-year maturity fell four bps. The 10-year municipal-to-Treasury ratio rose to 79.5% on Wednesday from Tuesday’s levels of 78.2%, while the 30-year municipal-to-Treasury ratio was relatively unchanged on Wednesday from Tuesday’s level of 94.0%.

Last Thursday prices on municipals were stronger, as the last of the week’s new issue offerings came to market. On the day, the yield on the two-year GO bond fell four bps, while the yield on the 10-year GO bond fell five 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 finished the day mixed, as U.S. stocks finished the session up. The Dow posted gains of 0.84%, while the S&P was up 1.09% and the NASDAQ was up 1.42%. 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 fell to 77.6% on Thursday from Wednesday’s levels of 79.5%, while the 30-year municipal-to-Treasury fell to 92.6% on Thursday from Wednesday’s level of 94.0%.

Last Friday, prices on municipals were stronger, as market participants were looking ahead to the coming trading week’s $8.9B in new issue offerings. On the day, the yield on the two-year GO bond fell two bps, while the yield on the 10-year GO bond fell five bps and the yield on the 30-year GO bond fell seven bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day stronger, as each of the three major U.S. indices posted losses for the session. On the day, the yields on the two- and 10-year maturities each fell 10 bps, while the yield on the 30-year maturity fell eight bps. The 10-year municipal-to-Treasury rose to 78.7% on Friday from Thursday’s level of 77.6%, while the 30-year municipal-to-Treasury ratio was relatively unchanged on Friday from Thursday’s level of 92.6%.

 

 

Taxable Market



 


 




Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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