Muni Update

March 5, 2018



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

 

Municipal Market Recap

Municipal bond funds reported investors pulled cash out of funds, as weekly reporting funds experienced outflows of $590.943MM, after experiencing inflows of $347.403MM the week prior. The four-week moving average was a negative $3.010MM, after being positive at $203.707MM the week prior. We note that the bulk of fund inflows in 2018 have been to date into national funds, not into funds of high tax states. 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 continue to rise.

On Monday municipal bond prices were steady across the curve. On Tuesday the front-end was steady, while bonds maturing 10 years and longer weakened. On Wednesday bond prices on the short and long ends of the curve were steady, while prices on bonds in the intermediate maturity ranges were stronger. On Thursday municipal prices were stronger across the curve. On Friday the front-end was steady, while bonds maturing 10 years and longer weakened. Volume for the trading week is projected to be $7.52B, which is just above twice the amount of last week’s revised level of $3.08B in issuance. This week’s projected level of issuance is a nice pick up in weekly issuance and should bring in some of the participants who have been sitting on the sidelines amid this year’s volatile financial markets.

This week’s economic calendar contains several key economic releases, which include today’s ISM Non-manufacturing PMI. Other key reports this week include: tomorrow’s revisions to last week’s capital goods data in January’s factory orders report, Wednesday’s ADP payroll projection, and the Fed’s latest Beige Book report. Friday’s nonfarm payroll report is expected to be the most impactful of the week.

Last week the yield on the two-year maturity on the MMD Triple-A Scale was unchanged from Thursday to Friday and ended the week at 1.51%.  Meanwhile, the yields on the 10- and 30-year maturities on the MMD Triple-A Scale each rose one basis point (bp) from Thursday to Friday and ended the week at 2.45% and 3.03%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell one bp, while the yields on the 10- and 30-year GO bonds were unchanged.

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale all rose one bp from Thursday to Friday and ended the week at 1.60%, 2.43% and 3.07%, respectively. Overall, week-over-week the yield on the two-year GO bond fell one bp, while the yields on the 10- and 30-year GO bonds were unchanged.

On Monday, prices on U.S. Treasuries were mixed, as bonds maturing 10 years and in strengthened, while the long-end was steady. On Tuesday prices weakened across the curve. On Wednesday and Thursday they strengthened across the curve. On Friday they weakened across the curve. Overall, week-over-week the yield on the 10-year maturity fell two bps and closed the week at 2.86%. Meanwhile the yield on the two-year maturity was unchanged week-over-week and closed the week at 2.25%. This resulted in a week-over-week 2s/10s spread of 61 bps, two bps tighter than last week’s 2s/10s spread of 63 bps. The yield on the 30-year maturity fell three bps week-over-week, and finished the week at 3.13%.

 

Volume to be $7.5B for the Trading Week

Total volume for the coming week is estimated to be $7.5B, which is above the $3.08B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $5.1B in negotiated deals and approximately $2.4B in competitive sales. The calendar has 13 deals scheduled of $100.0MM or larger and two offerings greater than $1.0B.

The State of California is set for its first sale of the year and plans to offer $2.1B in GO bonds for various purposes, including refunding bonds on Wednesday after a one-day retail order period. The deal is rated Aa3 by Moody’s Investors Service (Moody’s), AA by S&P Global Ratings (S&P) and AA- by Fitch Ratings (Fitch).

The Oklahoma Development Finance Authority plans to offer $1.2B of health system revenue and taxable bonds for the Oklahoma University Medicine Project on Tuesday. The deal is rated Baa3 by Moody’s and BB+ by S&P. Portions of the deal are expected to be insured by Assured Guaranty Municipal Corporation and will be rated AA by S&P at closing.

 

Municipal Bond Funds Posted Outflows for the Week       

Municipal bond funds posted outflows last week, as market participants reversed course and pulled cash out of funds, according to the latest data from Lipper. The weekly reporters saw $590.943MM of outflows, after experiencing inflows of $347.403MM the week prior. The four-week moving average was a negative $3.010MM, after being positive at $203.707MM the week prior.

Long-term municipal bond funds had outflows of $492.084MM in the latest week after outflows of $56.672MM the week prior. Intermediate-term funds had inflows of $29.617MM after experiencing inflows of $491.709MM the week prior. National funds had outflows of $373.190MM after inflows of $354.086MM the week prior. High-yield municipal funds reported outflows of $221.998MM in the latest week, after outflows of $5.074MM the week prior. Exchange traded funds reported inflows of $1.276MM, after outflows of $18.979MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The BQ market continues to see good activity, even with the lighter 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 do pick up, so market participants should find opportunities in both primary offerings and secondary market opportunities to provide them the 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 12-15-year maturity area of the curve), as a way to pick up more yield with little to no drop-off in credit quality. Week-over-week, bank qualified spreads were mixed, as spreads on the one-year maturity tightened by five bps and spreads on the two-year maturity were flat.  Meanwhile, spreads on maturities three years and longer all widened week-over-week. The largest widening occurred in the 30-year maturity, eight bps.

 

Daily Overview of the General Market for the Week Ending March 2nd

Last Monday prices on municipals were steady, as market participants prepped for the coming week’s light 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.

Prices on U.S. Treasuries were mixed on the day, as strong gains left the major indices higher for a third consecutive session and relieved some downward pressure on U.S. yields. On the day, the yield on the two-year maturity fell three bps, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity was unchanged. The 10-year municipal-to-Treasury ratio rose to 85.7% on Monday from last Friday’s level of 85.1%, while the 30-year municipal-to-Treasury ratio was unchanged on Monday from Friday’s level of 95.9%.

Last Tuesday prices on municipals were mixed, as new Federal Reserve Board Chair Jerome Powell’s testimony before Congress was perceived by market participants as increasing the possibility of tighter monetary policy. On the day the yield on the two-year GO bond was unchanged, while the yields on the 10- and 30-year GO bonds each rose three bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker across the curve, as the major focus on the day was the comments from new Federal Reserve Board Chair Powell’s first congressional testimony on monetary policy since taking the reigns as Fed Chair earlier this month. Powell got the market’s attention roughly 40 minutes in with his response to a question on what it would take for the Fed to hike four times this year. Yields moved quickly higher, as fed funds futures priced in for the first time a roughly 100.0% chance of a third hike in 2018. On the day, the yields on the two- and 10-year maturities each rose five bps, while the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio fell to 85.2% on Tuesday from Monday’s level of 85.7%, while the 30-year municipal-to-Treasury ratio bumped up to 96.2% on Tuesday from Monday’s level of 95.9%.

Last Wednesday prices on municipals were mixed, as several big deals hit the market and demand allowed some issuers to increase the size of their offerings. On the day the yields on the two- and 30-year GO bonds were steady while the yield on the 10-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were stronger. 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 five bps. The 10-year municipal-to-Treasury ratio rose to 86.1% on Wednesday from Tuesday’s level of 85.2%, while the 30-year municipal-to-Treasury ratio rose to 97.8% on Wednesday from Tuesday’s level of 96.2%.

Last Thursday prices on municipals were stronger, as the last of the week’s new offerings hit the market. On the day, the yield on the two-year GO bond fell one bp, while the yield on the 10-year GO bond fell three bps and the yield on the 30-year GO bond fell four bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as the broader market tumbled in response to fears of the potential ramping up of trade tensions and higher raw material costs for other industries. For the day, the Dow ended down 420 points, or 1.68%, and the S&P shed 36 points, or 1.33%. On the day, the yield on the two- year maturity fell three bps, while the yield on the 10-year maturity fell six bps and the yield on the 30-year maturity fell four bps. The 10-year municipal-to-Treasury ratio rose to 86.8% on Thursday from Wednesday’s level of 86.1%, while the 30-year municipal-to-Treasury ratio was unchanged on Thursday from Wednesday’s level of 97.8%.

Prices on municipals last Friday finished the trading day mixed, as market participants were looking ahead to next week’s $7.52B new issue calendar. 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 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 two bps, while the yield on the 10-year maturity rose five bps and the yield on the 30-year maturity rose four bps. The 10-year municipal-to-Treasury ratio fell to 85.7% on Friday from Thursday’s level of 86.8%, while the 30-year municipal-to-Treasury ratio fell to 96.8% on Friday from Thursday’s level of 97.7%.

 

Taxable Market

Sales of taxable municipal bonds jumped 21.0% year-over-year in the first two months of 2018. The $6.6B in volume from 680 deals was the most for any such period since 2013, when it was $6.7B.

 



 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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