Muni Update

May 15, 2017


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 $605.731MM in inflows in the latest reporting week, after experiencing inflows of $127.783MM the week prior. The four-week moving average remained positive at $292.065MM, after being a positive $547.560MM the week prior. All other funds posted inflows for the 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. While 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, retail participants are beginning to show growth.

U.S. Treasury prices weakened on Monday and Tuesday. On Wednesday prices strengthened across the curve, while on Thursday they were steady in the front end and weaker 10 years and longer. They finished the week stronger across the curve. Prices for municipals were once again steady in the front-end of the curve through Thursday. Meanwhile prices on municipals ten years and longer were steady on Monday and weaker on Tuesday. On Wednesday they were stronger and on Thursday they were mixed as the intermediate area of the curve strengthened and long end weakened. On Friday prices on municipals, like U.S. Treasuries, finished the week stronger across the curve. Volume for the trading week is projected to be $8.79B, which is relatively equal to last week’s revised level of $8.91B. This week’s level of new issuance volume, coupled with secondary market opportunities should be readily absorbed by a municipal market that has begun a stronger period of demand due to redemptions over the next few months.

This week’s calendar is very quiet following a week which saw weaker inflation and retail sales than expected, a continuation of strong confidence reports (business and consumer), and another hot labor report (continuing jobless claims matching lowest level since 1988).  The big reports this week will be homebuilder confidence, April’s housing starts and building permits, and April’s industrial production report.  In addition, U.S. markets will be watching for data out of the Eurozone.

Last week the yield on the two-year maturity on the MMD Triple-A Scale fell two basis points (bps) from Thursday to Friday and ended the week at 0.97%. Meanwhile the yield on the 10-year maturity fell five bps, while the yield on the 30-year maturity fell three bps on the MMD Triple-A Scale from last Thursday to Friday. They finished the week at 2.11% and 2.98%, 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 fell six bps and the yield on the 30-year GO bond fell five bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale fell two bps from Thursday to Friday and ended the week at 1.03%. Meanwhile the yield on the 10-year maturity fell three bps, while the yield on the 30-year maturity fell four bps on the MMA Triple-A Scale from last Thursday to Friday. They finished the week at 2.26% and 3.10%, respectively. Overall, week-over-week the yield on the two-year maturity fell two bps, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell four bps.

Prices on U.S. Treasuries started last week weaker and continued to weaken on Tuesday. On Wednesday prices strengthened across the curve, while on Thursday they were steady in the front end and weaker 10 years and longer. They finished the week stronger across the curve. Overall, week-over-week the yield on the 10-year maturity fell two bps and closed the week at 2.33%. Meanwhile the yield on the two-year maturity also fell two bps week-over-week and closed the week at 1.29%. This resulted in an unchanged week-over-week 2s/10s spread of 104 bps. The yield on the 30-year maturity was unchanged week-over-week and finished the week at 2.99%.


New Issue Volume Jumps to an Estimated $8.79B

Total volume for the trading week is estimated to be $8.79B, which is on par with the $8.91B in last week’s issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $7.17B in negotiated deals and approximately $1.62B in competitive sales, according to data from Thomson Reuters. The largest deal of the week will come from the Los Angeles Unified School District as it offers $1.08B of GO refunding and dedicated unlimited ad valorem property tax bonds on Tuesday. The deal is rated Aa2 by Moody’s Investors Service (Moody’s) and triple-A by Fitch Ratings (Fitch).

The Dormitory Authority of the State of New York plans to offer $665.0MM of revenue tax exempt bonds and taxable bonds for New York University on Tuesday following indications of interest on Monday. The Series A tax-exempt bonds are expected to mature serially from 2019 through 2038 and include a term bond in 2043. The Series B taxable bonds are expected to mature serially from 2019 through 2032 and include terms in 2039 and 2047. The deal is rated Aa2 by Moody’s and AA- by S&P Global Ratings (S&P). The District of Columbia will offer $576.415MM of GO refunding bonds on Wednesday. The deal is expected to mature serially from 2019 through 2037 and is rated Aa1 by Moody’s and AA by S&P and Fitch.

The largest competitive sale will come from the City of Phoenix Civic Improvement Corporation, when it prices $215.87MM of subordinate excise tax revenue and refunding bonds on Tuesday.


Municipal Bond Funds Post Inflows for a Fifth Week    

Municipal bond funds posted inflows for a fifth week, as market participants put cash into funds, according to the latest data from Lipper. Weekly reporting funds reported $605.731MM of inflows for the most recent week. These followed inflows of $127.783MM the week prior, according to Lipper. The four-week moving average was still in the green at a positive $292.065MM, after being in the green at a positive $547.560MM the week prior.

Long-term municipal bond funds also had inflows, gaining $355.772MM in the latest week after rising $21.355MM the week prior. Intermediate-term funds had inflows of $104.229MM after experiencing outflows of $20.4MM the week prior. National funds had inflows of $635.164MM after inflows of $205.904MM the week prior. High-yield municipal funds reported inflows of $179.829MM in the latest reporting week, after inflows of $36.671MM the week prior. Exchange traded funds saw inflows of $30.237MM, after experiencing outflows of $21.160MM the week prior.


Demand in the Bank Qualified (BQ) Market Remains Strong 

Rising new issue supply combined with increased activity in bid lists last week all contributed to meeting market participants rising demand for BQ paper, as participants search for opportunities and prep for coming redemptions on June and July 1st.  In addition, participants continue to utilizing swaps to extend out the curve. Spreads were tighter across the BQ curve last week with the largest tightening occurring in the 15-year maturity, eight bps.


Daily Overview of the General Market for the Week Ending May 12th

Last Monday prices on municipal bonds finished steady across the curve, as participants positioned themselves for the upcoming trading week’s $9.36B in new issue supply. On the day, the yields on the two-, 10- and 30-year year GO bonds were all unchanged, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker on the day, as the S&P eked out another record high close (+0.004%) thanks to a last minute rally that helped both the Dow and S&P turn positive for the day. The NASDAQ also notched another record-high close. Crude prices were volatile again but managed to add to Friday’s gains on hopes OPEC will extend their recent cuts past June. On the day, the yields on the two-, 10- and 30- year maturities each rose two bps. The 10-year municipal-to-Treasury ratio fell to 91.6% on Monday from the prior Friday’s level of 92.3%, while the 30-year municipal-to-Treasury ratio fell to 100.7% on Monday from the prior Friday’s level of 101.3%.

Last Tuesday prices on municipal bonds were steady in the front-end and weaker 10 years and longer, as a number of deals hit the market, including offerings from issuers in Cuyahoga County, Ohio, Wisconsin, Hawaii, the City of Los Angeles, San Francisco Bay Area Rapid Transit (BART) and the New York MTA hit the market. 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.

Prices on U.S. Treasuries weakened on Tuesday. 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 three bps. The 10-year municipal-to-Treasury ratio fell to 90.8% on  Tuesday from Monday’s level of 91.6%, while the 30-year municipal-to-Treasury ratio fell to 100.0% on Tuesday from Monday’s level of 100.7%.

Last Wednesday prices on municipals finished steady in the front end and stronger 10 years and longer, as new issuance offerings from Hawaii, Texas, New York, California and Pennsylvania swept into the market. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond fell one bp 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 finished last Wednesday stronger, as the S&P clawed its way to another daily gain and the NASDAQ rode its recent momentum to another all-time high close. The Dow was not as fortunate, falling 33 points and the U.S. Dollar was little changed. On the day the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio rose to 91.2% on Wednesday from Tuesday’s level of 90.8%, while the 30-year municipal-to-Treasury ratio was unchanged on Wednesday from Tuesday’s level of 100.0%.

Last Thursday prices on municipals finished steady in the front and long ends of the curve and stronger in the intermediate maturities, as the last of the week’s large deals were priced. On the day, the yield on the two- and 30-year year GO bonds were unchanged, 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 finished the day steady in the front end and weaker ten years and longer, as U.S. stocks fell and the U.S. Dollar was essentially unchanged after briefly spiking during the day. On the day, the yield on the two-year maturity was unchanged, while the yield on the 10-year maturity rose two bps and the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 90.0% on Thursday, from Wednesday’s level of 91.2%, while the 30-year municipal-to-Treasury ratio fell to 99.0% on Thursday, from Wednesday’s level of 100.0%.

Last Friday saw prices on municipals finish the week stronger across the curve, as participants prepped for the following week’s projected $8.79B in new issue offerings. On the day, the yield on the two-year GO bond fell two bps, 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.

U.S. Treasury prices also finished the week stronger across the curve. On the day, the yields on the two- and 30-year maturities each fell five bps, while the yield on the 10-year maturity fell seven bps. The 10-year municipal-to-Treasury ratio rose to 90.6% on Friday from Thursday’s level of 90.0%, while the 30-year municipal-to-Treasury ratio rose to 99.7% on Friday from Thursday’s level of 99.0%.


 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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