Muni Update

March 27, 2017



Municipal Market Update

 

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

 

Municipal Market Recap

Municipal bond funds recorded inflows, as weekly reporting funds experienced $173.473MM in inflows in the latest reporting week, after experiencing outflows of $118.061MM the week prior. The four-week moving average remained negative at $90.990MM, after being a negative $97.024MM the week prior. All other funds posted mixed results and we note the high yield funds reported inflows for a fourth week. Investors still facing negative rates overseas continue to find higher-yielding assets attractive. High demand is expected to continue to outpace supply, as reinvestment funds remain constant and traditional and non-traditional market participants continue to look for opportunities, especially if yields rise.

U.S. Treasury prices started the trading week stronger and strengthened daily through the end of trading on Wednesday. On Thursday they were steady in the front-end and weaker 10-years and longer. On Friday they were steady in the 10-year maturity and in, and stronger in the long-end. Prices for municipals also started the week stronger and strengthened daily through the close of business Wednesday. On Thursday they were steady in the front-end and stronger 10 -years and longer. On Friday they steady across the curve. Volume is projected to be $5.96B in issuance this week, which is above last week’s revised level of $4.41B. This week’s level of new issuance volume coupled with secondary market opportunities should contribute to providing market participants with opportunities as they replace rolloffs.

This week’s economic calendar is fairly heavy and a number of Fed speakers are scheduled to talk. Tuesday’s schedule is notably busy with reports on trade, wholesale inventories, January home prices, and consumer confidence. The first two reports will be important inputs into 1Q economic forecasts. Wednesday will bring pending home sales, which have been portending a downturn in housing sales. On Thursday 4Q GDP is expected to be revised up to 2.0%, although we see a revision lower to 1.8%. Friday will bring the ever-important personal income and spending data. Also on Friday, PCE inflation and another consumer confidence report will be released.

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 ended the week at 1.05%, 2.28% and 3.07%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell three basis points (bps), while the yield on the 10-year GO bond fell 12 bps and the yield on the 30-year GO bond fell 11 six bps.

Last week the yields on the two- and 30-year maturities on the MMA Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 1.11% and 3.21%, respectively. Meanwhile the yield on the 10-year maturity fell one bp on the MMA Triple-A Scale from last Thursday to Friday and they finished the week at 2.41%. Overall, week-over-week the yield on the two-year maturity fell four bps, while the yields on the 10- and 30-year maturities each fell seven bps.

Prices on U.S. Treasuries started last week stronger and strengthened daily through close of business Wednesday. On Thursday they were steady in the front-end and weaker 10 -years and longer. On Friday, U.S. Treasury prices were steady 10 -years and in and stronger on the long-end. Overall, week-over-week the yield on the 10-year maturity fell nine bps and closed the week at 2.41%. The yield on the two-year maturity fell seven bps week-over-week and ended the week at 1.25%. This resulted in a week-over-week 2s/10’s spread of 116 bps, two bps tighter than last week’s 2s/10’s spread of 118 bps. The yield on the 30-year maturity fell 10 bps and finished the week at 3.01%.

New Issue Volume Jumps to an Estimated $5.96B

Total volume for the trading week is estimated to be $5.96B, this is above the $4.41B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $4.53B in negotiated deals and approximately $1.43B in competitive sales. There are 12 scheduled sales larger than $100.0MM on the calendar this week.

The largest deal of the week is a State of Connecticut $750.0MM GO offering. The sale is comprised of $550.0MM Series A bonds and $200.0MM Series B refunding bonds. The deal is set to sell on Tuesday after a one day retail order period on Monday and is rated Aa3 by Moody’s Investors Service (Moody’s) and AA- by S&P Global Ratings (S&P), Fitch Ratings (Fitch) and Kroll Bond Rating Agency (Kroll). The State of Connecticut has continued to see its budget fray, as budget imbalances caused three bond rating downgrades last year alone. Moody’s and S&P have the state in negative outlook, while Fitch and KBRA have assigned stable outlooks.

The City of San Jose, California will offer $641.0MM of airport revenue refunding bonds on Tuesday following a one day retail order period. The deal is scheduled to include $486.5MM of bonds with interest subject to the alternative minimum tax (AMT), with a second series comprising the remainder of the bonds being non-AMT tax-exempt securities. The bond proceeds will refund all of the 2007 bonds issued for terminal improvements at the airport. The deal is rated A2 by Moody’s and A- by S&P and Fitch. Also out of California the Golden State Tobacco Securitization Corporation plans to offer $618.805MM on Thursday.

Municipal Bond Funds Record Inflows   

Municipal bond funds reported inflows, according to the latest data from Lipper. Weekly reporting funds reported $173.473MM of inflows for the most recent week. These followed outflows of $118.061MM the week prior, according to Lipper. The four-week moving average remained in the red at negative $90.990MM, after being a negative $97.024MM the week prior.

Long-term municipal bond funds also reported inflows, gaining $251.521MM in the latest week after reporting outflows of $126.198MM the week prior. Intermediate-term funds had outflows of $18.088MM after experiencing inflows of $64.843MM the week prior. National funds had inflows of $196.828MM after outflows of $12.954MM the week prior. High-yield municipal funds reported inflows of $222.906MM in the latest reporting week, after inflows of $65.995MM the week prior. Exchange traded funds saw inflows of $118.730MM, after experiencing inflows of $31.051MM the week prior.

Demand in the Bank Qualified (BQ) Market Remains Strong 

The BQ market continues to see strong demand. Bid list activity last week was active, helping to offset the below average level of new issue offerings the market has been experiencing this month. For this week, portfolio managers should look to take advantage of month-end/quarter-end purchasing opportunities as the potential for continued secondary market bid list activity remains high, with numerous opportunities. BQ spreads were mixed last week as all maturities except the 30-year widened. Week-over-week the largest widening occurred in the three- and five-year maturities, 9 bps each, while the 30-year maturity tightened 4 bps.

Daily Overview of the General Market for the Week Ending March 24th

Last Monday prices on municipal bonds finished steady to mostly stronger in quiet activity, as primary action kicked off with the retail pricing of the week’s largest deal. On the day, the yield on the two-year GO bond was steady, while the 10-and 30-year GO bonds each 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 treaded water most of the day and the S&P fell 0.2%. On the day, the yields on the two- and 10-year maturities each fell three bps, while the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio rose to 96.4% on Monday from the prior Friday’s level of 96.0%, while the 30-year municipal-to-Treasury ratio was relatively unchanged on Monday from the prior Friday’s level of 102.2%.

Last Tuesday prices on municipal bonds were stronger, as the New York State Environmental Facilities Corporation priced its deals for institutional investors. On the day, the yield on the two-year GO bond fell one bp, while the yield on the 10-year GO bond fell five bps and the yield on the 30-year GO bond fell three bps,  according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger, as the Dow fell 1.1%, the S&P dropped 1.2% and the NASDAQ plunged 1.8%; the biggest daily declines since October 11. Financials were the biggest loser within the S&P, falling 2.9% to notch the worst single-day performance since the day after last summer’s Brexit vote. 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 five bps. The 10-year municipal-to-Treasury ratio rose fell to 95.9% on Tuesday from Monday’s level of 96.4%, while the 30-year municipal-to-Treasury ratio rose to 103.0% on Tuesday from Monday’s level of 102.3%.

Last Wednesday prices on municipals finished stronger, as more new issue volume hit the market. On the day, the yield on the two-year GO bond fell two bps, while the yields on the 10- and 30-year GO bonds each fell three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were stronger across the curve last Wednesday. U.S. stocks were mixed as the Dow ended lower but little changed while the S&P (+0.2%) and the NASDAQ (+0.5%) partially recovered from Tuesday’s turmoil. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity fell four bps and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio rose to 96.2% on Wednesday, from Tuesday’s level of 95.9%, while the 30-year municipal-to-Treasury ratio was unchanged on Wednesday, from Tuesday’s level of 103.0%.

Last Thursday prices on municipals finished mostly 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 was steady, while the yield on the 10-year GO bond fell two bps and the yield on the 30-year GO bond fell three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were mixed, as yields regained some ground Thursday, as stocks moved higher in the early part of trading and held onto those gains for the better part of the session. However, an announcement within the last hour of trading that Republicans were postponing the vote on the healthcare bill sent the three major indices sliding into negative territory. On the day, the yield on the two-year maturity was steady, 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 94.6% on Thursday, from Wednesday’s level of 96.2%, while the 30-year municipal-to-Treasury ratio fell to 101.7% on Thursday, from Wednesday’s level of 103.0%.

Last Friday prices on municipals were unchanged across the curve, as market participants began prepping for next week’s new issue supply calendar. 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 closed out the week mixed. On the day, the yields on the two- and 10-year maturities were steady, while the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio was unchanged on Friday, from Thursday’s level of 94.6%, while the 30-year municipal-to-Treasury ratio rose to 102.0% on Friday, from Thursday’s level of 101.7%.

Taxable Market

Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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