Muni Update

May 1, 2017


Municipal Market Update

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


Municipal Market Recap

Municipal bond funds recorded inflows for the week, as weekly reporting funds experienced $144.519MM in inflows in the latest reporting week, after experiencing outflows of $290.227MM the week prior. The four-week moving average remained positive at $443.814MM, after being a positive $476.945MM the week prior. All other funds posted mixed results and we note that after eight weeks of inflows the high-yield fund posted outflows. 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. Still, the uncertainty surrounding tax reform, infrastructure, and the pace of Fed tightening is causing some market participants to continue to be observers more than buyers at this time.

U.S. Treasury prices weakened on Monday and Tuesday. On Wednesday they were steady in the front-end and stronger 10 years and longer.  On Thursday U.S Treasury prices were stronger across the curve. On Friday they were mixed, as the front-end was weaker, the 10 year was stronger and the long-end was unchanged. Prices for municipals weakened on Monday and were mixed on Tuesday as the front-end was steady, while 10 years and longer prices weakened. On Wednesday prices on municipals 10 years and in were steady, while the long-end weakened. On Thursday municipal prices were steady across the curve. Friday saw municipals prices finish the day mixed, as the front-end was steady and the intermediate and long-ends saw prices weaken. Volume for the trading week is projected to be $7.02B, which is below last week’s revised level of $7.88B. This week’s level of new issuance volume coupled with secondary market opportunities should provide market participants with opportunities as they continue to replace rolloffs.

This week’s economic calendar is packed with data and events. Both ISM reports will be released (Manufacturing index on Monday and Non-Manufacturing index on Wednesday). The ADP Employment report on Wednesday is expected to show a big jump in private payrolls in April as a precursor to Friday’s BLS reports. Also on Wednesday, the FOMC will conclude its May meeting. The markets do not expect a hike, pricing in just a 14.0% chance. However, the markets are pricing in a 68.0% chance of a hike at the June meeting. On Friday, we will have the April job’s data. Also worth watching this week will be the polling data leading up to Sunday’s final round of the French election. Currently, pro-EU Macron is leading anti-EU Le Pen by a 20-point margin.

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 0.98%. 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 they ended the week at 2.14% and 3.02%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose nine bps, while the yield on the 10-year GO bond rose five bps and the yield on the 30-year GO bond rose seven bps.

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale were all unchanged from Thursday to Friday and ended the week at 1.06%, 2.30% and 3.13%, respectively. Overall, week-over-week the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose five bps and the yield on the 30-year maturity rose six bps.

Prices on U.S. Treasuries started last week weaker. On Tuesday they weakened again, while on Wednesday they were mixed. On Thursday they strengthened across the curve. On Friday they closed the week mixed, as prices in the front-end weakened, prices for the intermediate area were stronger and prices on the long-end were steady. Overall, week-over-week the yield on the 10-year maturity rose five bps and closed the week at 2.28%. Meanwhile the yield on the two-year maturity rose nine bps week-over-week and closed the week at 1.27%. This resulted in a week-over-week 2s/10’s spread of 101 bps, four bps tighter than last week’s 2s/10’s spread of 105 bps. The yield on the 30-year maturity rose seven bps week-over-week, and finished the week at 2.96%.

New Issue Volume Jumps to an Estimated $7.02B

Total volume for the trading week is estimated to be $7.02B, which is below the $7.88B in last week’s issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $5.96B in negotiated deals and approximately $1.06B in competitive sales, according to data from Thomson Reuters. For the third week in a row, a California issue will dominate the new issue market.

The University of California Regents’ plans to offer $1.13B of a variety of bonds on Thursday following a one-day retail order period and indications of interest. The sale is scheduled to be separated into $447.83MM of Series AV tax-exempt bonds, $186.225MM of Series AW taxable bonds and $500.0MM of Series AX taxable fixed rate notes. The deal is rated Aa2 by Moody’s Investors Service (Moody’s) and AA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch).

Also this week the State of Wisconsin will be coming to market with a combined total of $688.3MM in two sales. The $403.105MM of general fund annual appropriation refunding taxable bonds will be priced on Tuesday and is expected to mature serially from 2018 through 2027. This deal is rated Aa3 by Moody’s and AA- by S&P and Fitch. The $285.205MM of transportation revenue bonds will also be priced Tuesday. This deal is rated Aa2 by Moody’s, AA+ by S&P and Fitch and triple-A by Kroll Bond Rating Agency (Kroll). The Kentucky Economic Development Finance Authority will offer $495.0MM of revenue refunding bonds for Owensboro Health, Incorporated Hospital on Tuesday. The deal is rated Baa3 by Moody’s and triple-B by Fitch.

The largest single competitive sale on the calendar for the coming week will come from Milwaukee, Wisconsin. The city plans to sell $132.225MM of GO promissory notes series and GO corporate purpose bonds on Thursday.

Municipal Bond Funds Post Inflows for a Third Week    

Municipal bond funds posted inflows for a third week, as market participants put cash into funds, according to the latest data from Lipper. Weekly reporting funds reported $144.519MM of inflows for the most recent week. These followed inflows of $290.227MM the week prior, according to Lipper. The four-week moving average was still in the green at a positive $443.814MM, after being in the green at a positive $473.945MM the week prior.

Long-term municipal bond funds also had inflows, gaining $291.183MM in the latest week after rising $382.696MM the week prior. Intermediate-term funds had outflows of $2.015MM after experiencing inflows of $129.744MM the week prior. National funds had inflows of $195.710MM after inflows of $317.247MM the week prior. High-yield municipal funds reported outflows of $129.979MM in the latest reporting week, after inflows of $227.034MM the week prior. Exchange traded funds saw outflows of $72.246MM, after experiencing inflows of $96.644MM the week prior.

Demand in the Bank Qualified (BQ) Market Remains Strong 

As has been the story so far this year, new issue BQ paper has been light, so participants continue to keep an eye on the secondary market to fill inquiries, especially those with the preferred structures. In addition, they are utilizing swaps to extend out the curve. Spreads were tighter across the BQ curve last week with the largest tightening occurring in the 30-year maturity, 21 bps.

Daily Overview of the General Market for the Week Ending April 28th

Last Monday prices on municipal bonds finished weaker, as participants positioned themselves for the upcoming trading week’s $8.26B in new issue supply. On the day, the yield on the two-year GO bond rose by three bps, while the yield on the 10-year GO bond rose by four bps and the yield on the 30-year GO bond rose five bps, 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 gained 1.1% after France’s CAC rallied 4.0% to lead sharp gains in Europe. On the day, the yield on the two-year maturity rose five bps, while the yield on the 10-year maturity rose four bps and the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio rose to 92.1% on Monday from the prior Friday’s level of 91.9%, while the 30-year municipal-to-Treasury ratio rose to 101.0% on Monday from the prior Friday’s level of 100.4%.

Last Tuesday prices on municipal bonds were steady in the front-end and weaker 10 years and longer, as a California healthcare issuer came to market with a multi-billion dollar offering. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond rose four bps and the yield on the 30-year GO bonds rose five bps,  according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker on the day, as the capital flight back into riskier assets remained in high gear and a continued stock surge helped pressure Treasury yields into their post-election ranges. On the day the yield on the two-year maturity rose four bps, while the yields on the 10- and 30-year maturities each rose six bps. The 10-year municipal-to-Treasury ratio fell to 91.4% on Tuesday from Monday’s level of 92.1%, while the 30-year municipal-to-Treasury ratio fell to 100.7% on Tuesday from Monday’s level of 101.0%.

Last Wednesday prices on municipals finished mixed, as the market absorbed a host of deals including large ones from the Port Authority of New York and New Jersey and the Los Angeles Department of Water and Power. On the day, the yields on the two- and 10-year GO bonds were each unchanged, while the yield on the 30-year GO bond rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished last Wednesday steady in the front-end and stronger 10 years and longer, as the major equity indices declined in the last 45 minutes of trading to completely erase early morning gains. On the day the yield on the two-year maturity was steady, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturities fell one bp. The 10-year municipal-to-Treasury ratio rose to 92.2% on Wednesday from Tuesday’s level of 91.4%, while the 30-year municipal-to-Treasury ratio rose to 101.4% on Wednesday from Tuesday’s level of 100.7%.

Last Thursday saw prices on municipals finish unchanged across curve, as the yields on the two-, 10- and 30-year GO bonds were all steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as the U.S. Dollar was capped by strength in the British Pound, crude prices fell and the Dow and S&P saw only marginal gains. On the day, the yields on the two- and 10-year maturities each fell two bps, while the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to  93.0% on Thursday, from Wednesday’s level of 92.2%, while the 30-year municipal-to-Treasury ratio rose to 101.7% on Thursday, from Wednesday’s level of 101.4%.

Last Friday saw prices on municipals finish the week steady in the front-end and weaker 10 years and longer, as participants prepped for the following week’s new issue offerings. 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 one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the week mixed, as the front-end weakened, while the 10-year maturity strengthened and the long-end was steady. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity was unchanged. The 10-year municipal-to-Treasury ratio rose to 93.9% on Friday, from Thursday’s level of 93.0%, while the 30-year municipal-to-Treasury ratio rose to 102.0% on Friday from Thursday’s level of 101.7%.


Taxable Market


April marks third straight month of low volume (the Bond Buyer)

Municipal bond volume dropped 20.2% in April and finished under $30.0B in total issuance for the third month in a row, as concerns about tax reform made issuers reluctant to hit the market. Monthly volume fell to $28.31B on 815 transactions from $35.51B on 1,195 deals in April of 2016, according to data from Thomson Reuters. This year’s performance marks the fourth time that April volume has been lower than $30.0B, dating back to 2007.

Refunding issuance in April sank to $6.9B on 213 deals from $13.88B on 529 deals a year earlier, a 50.3% decline from the same period of time last year. New money issuance increased 32.6% to $15.83B on 533 transactions from $11.94B on 550 deals in April 2016. Combined new-money and refunding issuance in April dipped to $5.59B from $9.69B a year earlier. Issuance of revenue bonds declined 22.7% to $16.63B, while general obligation bond sales fell 16.5% to $11.69B.

Negotiated deals dropped 15.3% to $22.01B, and competitive sales decreased by 20.7% to $6.12B. Taxable bond volume was 58.5% higher to $3.41B from $2.16B, while tax-exempt issuance decreased by 25.2% to $24.33B. Minimum tax bonds decreased to $568.0MM from $839.0MM. The volume of deals wrapped with bond insurance was slightly changed, with $2.08B on 146 deals compared with $2.07B on 163 deals a year earlier.

The only sector to post year-over-year increases was transportation, which improved by 50.2% to $3.03B on 33 transactions from $2.02B on 28 deals. Volume fell for the other nine sectors with the biggest decrease in par amount in the education sector, which dropped to $7.89B from $12.94B.

As for the different types of entities that issue bonds, only three were in the green. State governments increased sales 33.4% to $3.21B from $2.40B, state agencies improved to $9.39B from $9.35B and direct issuers increased their deal total to $588.0MM from $113.0MM. Volume decreased at least 13.7% for the other types of issuesr. The biggest decline came from colleges and universities for the second straight month when it dropped 86.2% to $497.0MM from $3.59B.

California retained the status of top state issuer, as it sold $25.15B so far this year. New York was number two, with $13.25B and Texas right behind in third with $11.28B. Pennsylvania is next with $5.78B and Maryland rounded out the top five with $3.98B in issuance.


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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