Muni Update

March 4, 2019



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

 

Municipal Market Recap

Municipal prices were steady on Monday across the curve. On Tuesday they strengthened across the curve. They were mixed the rest of the week. On Wednesday bonds maturing 10 years and in were steady, while bonds on the long-end weakened. On Thursday and Friday the front-end was steady, while bonds maturing 10 years and longer weakened. Issuance this week is forecasted to be $5.84B, which is above last week’s revised level of $4.71B in issuance. The new issue calendar coupled with bid lists should provide market participants with opportunities to fill their needs, as municipals remain in demand. Driving this strong demand is a combination of high redemption flows and the municipal bond mutual funds. We note, that municipal bond issuance increased 29.2% in February from a year earlier, when volume took a hit from changes in U.S. tax laws. Volume ended the month at $23.24B on 576 transactions, up from $17.98B on 563 deals in February 2018.

Investors in municipal bond funds put cash into funds for an eighth week, as weekly reporting funds experienced inflows of $1.705B after experiencing inflows of $1.469B the week prior. The four-week moving average was a positive $1.444B, after being a positive $1.283B the week prior. Investors still facing low rates overseas continue to find higher-yielding U.S. assets attractive. Also, according to Bloomberg, municipal bonds gained for a 4th straight month in February buoyed by strong mutual fund inflows and the relatively slow pace of new debt sales. This allowed tax-exempt securities to outperform U.S. Treasuries for the second month in a row, per Bloomberg’s benchmark indexes. Municipal debt has returned 1.3% this year, vs. the 0.2% for U.S. Treasuries. 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 rose three basis points (bps) and the yield on the 30-year maturity rose two bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 2.13% and 3.00%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond fell two bps, while the yield on the 10-year GO bond rose three bps and the yield on the 30-year GO bond rose one bp.

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 1.65%. Meanwhile, the yields on the 10- and 30-year maturities each rose two bps on the MMA Triple-A Scale from Thursday to Friday and they ended the week at 2.37% and 3.08%, respectively. Overall, week-over-week the yield on the two-year GO bond was unchanged, while the yield on the 10-year GO bond rose one bp and the yield on the 30-year GO bonds rose two bps.

 

New Issue Volume is Forecasted to be $5.84B for the Week

Total issuance for the trading week is estimated to be $5.84, which is above last week’s trading volume of $4.71B in issuance, according to revised data from Thomson Reuters. This level of issuance, like last week’s should be well-received by market participants due to continued strong demand driven in large part by high redemptions. This week’s trading calendar is comprised of $4.58B in negotiated offerings and $1.26B in competitive offerings.

Topping this week’s new issue slate is a $2.3B GO bond offering from the State of California. The deal will consist of $2.05B of various purpose refunding GOs and $250.0MM of various purpose new-money GOs. The deal is rated Aa3 by Moody’s Investors Service (Moody’s) and AA- by both Standard and Poor’s Global Ratings (S&P) and Fitch Ratings (Fitch).

Also on tap this week is a $914.245MM GO offering from New York City (NYC) set for Wednesday, after a two-day retail order period. Last Friday, Moody’s upgraded MYC’s GO debt rating to Aa1 from Aa2 in an action that affects about $38.0B of outstanding GO debt. S&P and Fitch rate NYC’s GO debt AA. Also on Wednesday, NYC will competitively sell $71.89MM of taxable Fiscal 2019 Series F, Subseries F-2 GOs. The City of Boston, Massachusetts plans to sell competitively $145.13MM of GOs bonds on Tuesday. Proceeds will be used to finance the city’s various capital projects. The deal is rated triple-A by both Moody’s and S&P.

 

Municipal Bond Funds Post Inflows for a Eighth Week

Investors in municipal bond funds put cash into funds for an eighth week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $1.705B, after experiencing inflows of $1.469B the week prior. The four-week moving average was a positive $1.444B, after being a positive $1.283B the week prior.

Long-term municipal bond funds had inflows of $1.110B in the latest week after experiencing inflows of $919.613MM the week prior. Intermediate-term funds had inflows of $469.295MM after inflows of $377.716MM the week prior. National funds had inflows of $1.515B after experiencing inflows of $1.291B the week prior. High-yield municipal funds reported inflows of $472.731MM in the latest week, after inflows of $397.226MM the week prior. Exchange traded funds reported inflows of $144.0MM, after inflows of $95.270MM 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. The continued low level of projected new issue BQ paper at this time, has some market participants looking to GM opportunities in both the primary and secondary markets to provide them 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 tightened 11 bps, with the largest tightening occurring in the 15- and 30-maturities.

 

Daily Overview of the General Market for the Week Ending March 1st

Last Monday prices on municipals were steady, as market participants were looking forward to the $5.7B 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 weaker, as U.S. equity markets closed up to start the week, but all ended well off the highs set early in the session. 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 was rose one bp. The 10-year municipal-to-Treasury ratio fell to 78.7% on Monday from last Friday’s level of 79.3%, while the 30-year municipal-to-Treasury ratio slipped to 98.7% on Monday from last Friday’s level of 99.0%.

Last Tuesday prices on municipals strengthened, as deals form issuers in Ohio and Nevada came to market. On the day, the yields on the two- and 10-year GO bonds each fell two bps, while the yield on the 30-year GO fell four bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also stronger on Tuesday, as U.S. stocks flipped between gains and losses for the session, barely budging from their opening levels once the final trades had posted. The Dow slipped 0.1% while the S&P 500 and NASDAQ ticked down by even smaller amounts. 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 was relatively unchanged on Tuesday from Monday’s level of 78.7%, while the 30-year municipal-to-Treasury ratio fell to 98.0% on Tuesday from Monday’s level of 98.7%.

Last Wednesday prices on municipals were mixed, as New York City and other issuers came to market. On the day, the yields on the two- and ten-year maturities were unchanged, while the yield on the 30-year GO bond rose 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 session slightly lower, due in part to mixed economic data and weak earnings results from a major retailer. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity rose five bps and the yield on the 30-year maturity rose six bps. The 10-year municipal-to-Treasury ratio fell to 77.3% on Wednesday from Tuesday’s levels of 78.7%, while the 30-year municipal-to-Treasury ratio fell to 96.4% on Wednesday from Tuesday’s level of 98.0%.

Last Thursday prices on municipals were mixed, 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 yields on the 10- and 30-year GO bonds each rose two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day weaker, as each of the three major U.S. indices retreated into Thursday’s close to end the session down 0.3%. On the day, the yields on the two- and 30-year maturities each rose two bps, while the yield on the 10-year maturity rose four bps. The 10-year municipal-to-Treasury ratio fell to 76.9% on Thursday from Wednesday’s levels of 77.3%, while the 30-year municipal-to-Treasury was unchanged on Thursday from Wednesday’s level of 96.4%.

Last Friday, prices on municipals were mixed again, as market participants were looking ahead to the coming trading week’s $5.84B 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 rose three bps and the yield on the 30-year GO bond rose two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day weaker, as each of the three major U.S. indices posted modest gains for the session, with the NASDAQ leading the way with 0.83% increase. On the day, the yields on the two- and 10-year maturities each rose three bps, while the yield on the 30-year maturity rose four bps. The 10-year municipal-to-Treasury bumped up to 77.2% on Friday from Thursday’s level of 76.9%, while the 30-year municipal-to-Treasury ratio fell to 95.9% on Friday from Thursday’s level of 96.4%.

 

Taxable Market







Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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