Muni Update

March 26, 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 third week, as weekly reporting funds experienced inflows of $445.450MM, after experiencing inflows of $339.142MM the week prior. The four-week moving average was a positive $150.101MM, after being positive $125.589MM 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 steady across the curve ahead of the Federal Open Markets Committee (FOMC) meeting this week. On Tuesday prices weakened across the curve ahead of the FOMC meeting on Wednesday. On Wednesday prices again weakened across the curve. On Thursday prices on the front-end were steady, while prices on bonds 10 years and longer strengthened. On Friday prices on bonds were steady across the curve. Volume for the trading week is projected to be $3.7B, which is well above last week’s revised level of $2.11B in issuance. While this week’s projected level of issuance is below the average weekly issuance level so far this year, which has been $4.3B, the lower level of volume is expected due to the holiday-shortened trading week. In FY 2017, the average weekly issuance level was $7.3B. To date, total volume is down about 25.0% and secondary market activity remains tepid so far this year, resulting in a number of market participants believing there is a significant amount of cash on the sidelines waiting for a catalyst to jump into the market.

This week’s economic calendar is fairly light for this holiday-shortened week, but it does bring a few reports that will be watched. We start off with the March Conference Board Consumer Confidence report on Tuesday. It is expected to improve from its 18-year high that it posted last month. The University of Michigan’s confidence report is expected to show confidence unchanged from its second-highest level since 2000 in Thursday’s data. We will have a better gauge on two key 2Q GDP metrics in February’s advanced look at the trade balance report (expected to show a slight decrease in the goods trade deficit) and the February Wholesale Inventories report. The final revision of 4Q GDP is expected to show a 0.2% increase to 2.7% on Wednesday.  But the most important data will come on Thursday when the BEA releases its February personal income, spending, and PCE inflation data. Core PCE is expected to tick up from 1.5% YoY to 1.6%, and while income is expected to be another strong month, spending remains tepid.

Last week the yields on the two-, 10- and 30-year maturities on the MMD Triple-A Scale were all unchanged from Thursday to Friday and they ended the week at 1.64%, 2.47% and 3.00%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose six basis points (bps), while the yields on the 10- and 30-year GO bonds each fell three bps.

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale were all steady from Thursday to Friday and they ended the week at 1.64%, 2.45% and 3.08%, respectively. Overall, week-over-week the yield on the two-year GO bond rose three bps, while the yield on the 10-year GO bond was unchanged and the yield on the 30-year GO bond rose one bp.

On Monday, prices on U.S. Treasuries were steady across the curve. On Tuesday prices weakened across the curve. On Wednesday prices on the short-end strengthened, while prices on bonds maturing 10 years and longer weakened. On Thursday prices strengthened across the curve. On Friday prices were mixed, as the front-end strengthened, intermediate maturities were steady and the long-end weakened. Overall, week-over-week the yield on the 10-year maturity fell two bps and closed the week at 2.82%. Meanwhile the yield on the two-year maturity fell three bps week-over-week and closed the week at 2.28%. This resulted in a week-over-week 2s/10s spread of 54 bps, one bp wider than last week’s 2s/10s spread of 53 bps. The yield on the 30-year maturity fell one bp week-over-week and finished the week at 3.07%.

 

Volume to be $3.7B for the Holiday-Shortened Trading Week

Total volume for the coming week is estimated to be $3.7B, which is above the $2.11B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $2.95B in negotiated deals and approximately $750.0MM in competitive sales. There are eight deals scheduled of $100.0MM or larger, with the two biggest being taxable. This will mark the second week in a row and sixth time in the past eight weeks issuance will be below $4.0B.

George Washington University will offer $793.0MM of taxable, corporate CUSIPs on Tuesday. The deal is rated A1 by Moody’s Investors Service (Moody’s) and A+ by S&P Global Ratings (S&P). Sutter Health on Tuesday will price a total of $1.29B in two deals. They will be comprised of a $684.475MM taxable deal and $606.255MM tax-exempt deal.

The State of Connecticut plans to offer $617.0MM of GO and GO refunding bonds on Wednesday, following a one-day retail order period. The deal is rated A1 by Moody’s, A+ by S&P and Fitch Ratings (Fitch) and AA- by Kroll Bond Rating Agency (Kroll).

 

Municipal Bond Funds Posted Inflows for a Third Week       

Municipal bond funds posted inflows last week, as market participants put cash into funds for a third week, according to the latest data from Lipper. The weekly reporters saw $445.450MM of inflows, after experiencing inflows of $399.142MM the week prior. The four-week moving average was a positive $150.101MM, after being a positive $125.589MM the week prior.

Long-term municipal bond funds had inflows of $152.371MM in the latest week, after inflows of $181.790MM the week prior. Intermediate-term funds had inflows of $358.004MM, after experiencing inflows of $152.733MM the week prior. National funds had inflows of $502.293MM, after inflows of $356.119MM the week prior. High-yield municipal funds reported inflows of $65.3458MM in the latest week, after inflows of $110.948MM the week prior. Exchange traded funds reported inflows of $40.074MM, after inflows of $76.237MM 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 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. We continue to encourage participants to utilize extension swaps (sell short paper and roll out to the 10-15-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 wider, with the largest widening occurring in the five-year maturity, five bps.

 

Daily Overview of the General Market for the Week Ending March 23rd

Last Monday prices on municipals were steady, as market participants prepped for the week’s estimated $2.9B in issuance and the FOMC meeting. 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 also steady on the day, as trouble in the tech space led a sharp negativity towards global equities. The Dow and S&P 500 fell 1.4%, and both closed below their 50-day moving averages. Facebook was the S&P’s biggest detractor, down nearly 7.0% in its largest daily decline in almost four years and eighth biggest since going public in 2012. Stocks were also faced with a presumed Fed hike on Wednesday and speculation surrounding what the refreshed Dot Plot will look like. On the day, the yields on the two-, 10- and 30-year maturities were steady. The 10- and 30-year municipal-to-Treasury ratios were unchanged on Monday from last Friday’s levels of 88.0% and 98.4%, respectively.

Last Tuesday prices on municipals were steady, as a few competitive deals and one notable negotiated deal priced on Tuesday, while awaiting an expected interest rate increase at the FOMC meeting on Wednesday. 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 each rose one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also weaker on the day, as U.S. stocks rebounded from Monday to finish the day with modest gains. The U.S. Dollar held its overnight gains that unfolded on weaker data points in the Eurozone (economic confidence) and the U.K. (inflation). On the day, the yields on the two- and 30-year maturities each rose three bps, while the yield on the 10-year maturity rose four bps. The 10-year municipal-to-Treasury ratio fell to 87.2% on Tuesday from Monday’s level of 88.0%, while the 30-year municipal-to-Treasury ratio fell to 97.8% on Tuesday from Monday’s level of 98.4%.

Last Wednesday prices on municipals were weaker and, as expected, the Fed’s rate decision was Wednesday’s major focus. The U.S. Treasury curve was little changed but slightly steeper heading into the announcement. As is customary, markets flipped back and forth after the Fed announcement, as investors digested changes to the Statement wording and the updated rate path and economic forecasts. By the close, asset classes reflected differing takeaways. On the day, the yield on the two-year maturity rose three bps, while the yields on the 10- and 30-year GO bonds each rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were 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 fell three bps, while the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio fell to 86.6% on Wednesday from Tuesday’s level of 87.2%, while the 30-year municipal-to-Treasury ratio slipped to 97.4% on Wednesday from Tuesday’s level of 97.8%.

Last Thursday prices on municipals were mixed, as the two largest deals of the week priced. 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 five bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as U.S. equities faded on the open and almost doubled already-steep losses after the President signed the expected tariffs proposal aimed at China around noon. In addition to the tariffs on goods, the White House alluded to restrictions to Chinese investments in U.S. companies and technology. The Dow finished down 2.9% (724 points) and the S&P 500 closed off 2.5%. On the day, the yield on the two-year maturity fell two bps, while the yield on the 10-year maturity fell nine bps and the yield on the 30-year maturity fell seven bps. The 10-year municipal-to-Treasury ratio rose to 87.6% on Thursday from Wednesday’s level of 86.6%, while the 30-year municipal-to-Treasury ratio rose to 98.0% on Thursday from Wednesday’s level of 97.4%.

Prices on municipals last Friday finished the session steady, as market participants were looking ahead to this week’s $3.7B new issue calendar. 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 finished the trading day mixed. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity was steady and the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio was unchanged on Friday from Thursday’s level of 87.6%, while the 30-year municipal-to-Treasury ratio slipped to 97.7% on Friday from Thursday’s level of 98.0%.

 

 



 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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