Muni Update

May 14, 2018


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

 

Municipal Market Recap

Prices on municipal bonds were steady on Monday across the curve and were mixed daily thereafter. On Tuesday the front-end strengthened, while bonds maturing 10 years and longer were steady. On Wednesday the front-end was steady again, while bonds maturing 10 years and longer weakened. On Thursday the front and long-end maturities strengthened, while the intermediate maturities were steady. On Friday prices 10 years and in were steady, while the long-end strengthened. Volume for the trading week is projected to jump to $9.89B, which is above last week’s revised level of $6.58B in issuance. Average weekly volume in 2018 has been about $4.5B, off sharply from 2017’s average of over $6.0B.

Municipal bond funds reported investors reversed course and put cash into funds last week, as weekly reporting funds experienced inflows of $167.323MM, after experiencing outflows of $344.481MM the week prior. The four-week moving average was a negative $115.765MM, after being a negative $218.779MM 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.

Last week the yields on the two- and 10-year maturities on the MMD Triple-A Scale were both unchanged from Thursday to Friday, and they ended the week at 1.85% and 2.44%, respectively. Meanwhile, the yield on the 30-year maturity fell two basis points (bps) on the MMD Triple-A Scale from Thursday to Friday and ended the week at 2.95%. Overall, week-over-week the yields on the two- and 30-year general obligation (GO) bonds each fell two bps, while the yield on the 10-year GO bond rose one bp.

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 1.76% and 3.03%, respectively. Meanwhile, the yield on the 10-year maturity fell one bp on the MMA Scale from Thursday to Friday and ended the week at 2.44%. Overall, week-over-week the yield on the two-year GO bond fell one bp, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity was unchanged.

On Monday prices on U.S. Treasuries were mixed, as the front-end strengthened, while bonds maturing 10 years and longer weakened. On Tuesday and Wednesday prices weakened across the curve. On Thursday prices were mixed, as the front-end was steady and bonds maturing 10 years and longer strengthened. On Friday prices on maturities 10 years in were steady, while the long-end strengthened. Overall, week-over-week the yield on the 10-year maturity rose three bps and closed the week at 2.97%. Meanwhile the yield on the two-year maturity also rose three bps week-over-week and closed the week at 2.54%. This resulted in an unchanged 2s/10s spread of 43 bps. The yield on the 30-year maturity fell one bp week-over-week and finished the week at 3.10%.

 

Volume to be $9.89B for the Trading Week

Total volume for the coming week is estimated to be $9.89B, which is above the $6.58B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $5.90B in negotiated deals and approximately $3.99B in competitive sales. There are 21 deals scheduled of $100.0MM or larger, seven of them coming via the competitive route. Three different issuers are each expected to bring over $1B as well.

The Commonwealth of Pennsylvania is set to sell $1.25B of GO bonds competitively on Wednesday. The deal is rated A+ by S&P Global Ratings (S&P) and AA- by Fitch Ratings (Fitch). Also in the competitive arena, the New York City Transitional Finance Authority (NYC TFA) is scheduled to sell a total of $1.1B of taxable and tax-exempt future tax secured subordinate bonds in five separate sales on Tuesday.

Over on the negotiated side, the largest single deal of the week will come from the Airport Commission of the City and County of San Francisco, which plans to offer $914.0MM of airport second series revenue and revenue refunding bonds on Wednesday. The mixture of taxable, alternative minimum tax (AMT) and non-AMT bonds are rated A1 by Moody’s Investors Service (Mood’s) and A+ by S&P and Fitch.

Also this week the Grand Parkway Transportation Corporation of Texas plans to offer two issues. The first will be a $911.305MM offering of subordinate tier toll revenue bonds. The second will be $610.615MM of bond anticipation notes (BANs). Both deals will price on Wednesday. The bond deal is rated AA+ by S&P and AA by Fitch, while the BANs are rated BBB by S&P and A- by Fitch.

 

Municipal Bond Funds Reverse Course and Post Inflows       

Municipal bond funds posted outflows last week, as market participants pulled cash out of funds, according to the latest data from Lipper. The weekly reporting saw inflows of $167.323MM, after experiencing outflows of $344.710MM the week prior. The four-week moving average was a negative $115.765MM, after being a negative $218.779MM the week prior.

Long-term municipal bond funds had inflows of $252.252MM in the latest week, after outflows of $183.551MM the week prior. Intermediate-term funds had outflows of $68.529MM, after experiencing outflows of $43.953MM the week prior. National funds had inflows of $200.965MM, after outflows of $206.274MM the week prior. High-yield municipal funds reported inflows of $230.975MM in the latest week, after inflows of $26.680MM the week prior. Exchange traded funds reported inflows of $24.407MM, after inflows of $10.102MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The BQ market continues to see strong 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, as participants search for opportunities and prep for coming redemptions on June and July 1st. BQ participants (C-Corps) continue to find attractive opportunities, both size and structure in general market paper, due in part to the lower tax rates from tax reform and attractive spreads. Other market participants continue to find opportunities in both primary offerings and secondary market BQ opportunities to provide them additional chances 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 eight-years and in, and roll out to the 12-year maturity area of the curve or longer), as a way to pick up more yield with little to no drop-off in credit quality. Week-over-week, bank qualified spreads widened, with the largest widening occurring in the 10-year maturity, five bps.

 

Daily Overview of the General Market for the Week Ending May 11th

Last Monday prices on municipals were unchanged, as market participants were eyeing the $4.86B supply slate for the week. 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 mixed, as U.S. stocks rose Monday morning, only to have some late afternoon volatility result in the major indexes paring early morning gains. The U.S. Dollar finished at its highest level of the year. On the day, the yield on the two-year maturity fell two bps, while the yields on the 10- and 30-year maturities each rose one bp. The 10-year municipal-to-Treasury ratio slipped to 82.4% on Monday from last Friday’s level of 82.7%, while the 30-year municipal-to-Treasury ratio slipped to 95.2% on Monday from last Friday’s level of 95.5%.

Last Tuesday prices on municipals were mixed, as a number of new deals were priced, and the market was led by the $585.795MM Dormitory Authority of the State of New York’s series 2018 A, B, C, D and E school districts financing program revenue bonds for retail investors and the $382.04MM City and County of San Francisco GO bonds in three sales. On the day the yield on the two-year GO bond fell one bp, while the yields on the 10- and 30-year GO bonds were unchanged, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries weakened, as U.S. stocks didn’t move much end-to-end Tuesday. Overall, the Dow rose less than three points, the NASDAQ improved less than two, and the S&P 500 dropped less than one. The U.S. Dollar continued its climb since mid-April, closing up at a new year-to-date high. On the day, the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year maturities each rose one bp. The 10-year municipal-to-Treasury ratio fell to 82.1% on Tuesday from Monday’s level of 82.4%, while the 30-year municipal-to-Treasury ratio fell to 94.9% on Tuesday from Monday’s level of 95.2%.

Last Wednesday prices on municipals were mixed again, as a number of deals came to market, including the institutional pricing of the $585.795MM Dormitory Authority of the State of New York’s series 2018 A, B, C, D and E school districts financing program revenue bonds. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond rose one bp 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 weakened on the day, as both U.S. WTI and Brent crude rallied more than 3.0% and closed at their highest levels since late 2014. That boosted interest in energy companies and helped the sector move up more than 2.0% and lead the S&P 500. The broader index gained 1.0%, matching the NASDAQ’s improvement and outperforming the Dow’s 0.8% increase. 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 five bps. The 10-year municipal-to-Treasury ratio fell to 81.1% on Wednesday from Tuesday’s level of 82.1%, while the 30-year municipal-to-Treasury ratio slipped to 94.6% on Wednesday from Tuesday’s level of 94.9%.

Last Thursday prices on municipals were mixed, as the last of the week’s new issue 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 was steady and the yield on the 30-year GO bond fell two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mixed, as all 11 sectors of the S&P 500 gained to push the index up 0.94%, a slightly better result than the Dow and NASDAQ. U.S. WTI rose for the sixth time in the last seven sessions and reached a new high since November 2014. On the day, the yield on the two-year maturity was steady, 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 82.2% on Thursday from Wednesday’s level of 81.1%, while the 30-year municipal-to-Treasury ratio bumped up to 94.9% on Thursday from Wednesday’s level of 94.6%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to this week’s $9.89B new issue calendar. On the day, the yields on the two- and 10-year GO bonds were steady, while the yield on the 30-year GO bond fell two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mixed. On the day, the yields on the two- and 10-year maturities were each 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 82.2%, while the 30-year municipal-to-Treasury ratio bumped up to 95.2% on Friday from Thursday’s level of 94.9%.

 

 





Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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