Muni Update

May 21, 2018



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

 

Municipal Market Recap

Prices on municipals in the front-end were steady for the week, while bonds maturing 10 years and longer weakened daily through Thursday. On Friday prices across the curve were steady. Municipal-to-Treasury ratios contracted across the curve through Thursday last week. The 10-year municipal-to-Treasury ratio fell to 81.0% on Wednesday, its lowest since January 19th and well below the 52-week average of 85.6%. On Friday municipal-to-Treasury ratios rose. Volume for the trading week is projected to drop to $6.36B, which is below last week’s revised level of $9.02B in issuance, but is expected given the shortened trading session this Friday ahead of the Memorial Day Holiday the following Monday. 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 put cash into funds last week, as weekly reporting funds experienced inflows of $206.948MM, after experiencing inflows of $167.323MM the week prior. The four-week moving average turned positive at $64.760MM, after being a negative $115.765MM 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-, 10- and 30-year maturities on the MMD Triple-A Scale were all unchanged from Thursday to Friday, and they ended the week at 1.85%, 2.55% and 3.07%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond was steady, while the yield on the 10-year GO bond rose 11 basis points (bps) and the yield on the 30-year GO bond rose 12 bps.

Last week the yields on the two- and 10-year maturities on the MMA Triple-A Scale were unchanged from Thursday to Friday, and they ended the week at 1.80% and 2.51%, respectively. Meanwhile, the yield on the 30-year maturity fell one bp on the MMA Scale from Thursday to Friday and ended the week at 3.11%. Overall, week-over-week the yield on the two-year GO bond rose four bps, while the yield on the 10-year maturity rose seven bps and the yield on the 30-year maturity rose eight bps.

On Monday and Tuesday prices on U.S. Treasuries weakened across the curve. On Wednesday they were mixed, the front-end was stable, while intermediate maturities weakened and the long-end strengthened. On Thursday prices were mixed again, as the front-end was steady and bonds maturing 10 years and longer weakened. On Friday prices strengthened across the curve. Overall, week-over-week the yield on the 10-year maturity rose 10 bps and closed the week at 3.07%. Meanwhile the yield on the two-year maturity rose one bp week-over-week and closed the week at 2.55%. This resulted in a 2s/10s spread of 52 bps, nine bps wider than last week’s 2s/10s spread of 43 bps. The yield on the 30-year maturity rose 10 bps week-over-week and finished the week at 3.20%.

 

Volume to be $6.36B for the Trading Week

Total volume for the coming week is estimated to be $6.36B, which is below the $9.02B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $4.85B in negotiated deals and approximately $1.51B in competitive sales.

The largest sale of the week will come from the Regents of the University of California (Regents), which plans to offer three sales totaling $1.97B. The Regents plan to offer $946.0MM of the Series 2018AZ general revenue bonds on Tuesday, after a one-day retail order period. The second offering will consist of $739.0MM of Series 2018O limited project revenue bonds on Wednesday, after a one-day retail order period. The third piece will consist of $283.0MM of Series 2018BA taxable general revenue bonds on Wednesday. The Series AZ bonds and Series BA taxables are rated Aa2 by Moody’s Investors Service (Moody’s) and AA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch). The Series 2018O bonds are rated Aa3 by Moody’s and AA- by S&P and Fitch.

The State of West Virginia (State) is coming to market with $800.21MM in two deals, one negotiated and one competitive. The negotiated deal will consist of $312.0MM Series 2018A GO road bonds and is set to price on Monday. On Wednesday, the State will competitively sell $488.21MM of Series 2018B GO road bonds. The deals are rated Aa2 by Moody’s, AA- by S&P and AA by Fitch.

 

Municipal Bond Funds Post Inflows for a Second Week        

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 $206.948MM, after experiencing inflows of $167.323MM the week prior. The four-week moving average turned positive at $64.760MM, after being a negative $115.765MM the week prior.

Long-term municipal bond funds had inflows of $264.239MM in the latest week, after inflows of $252.252MM the week prior. Intermediate-term funds had inflows of $10.742MM, after experiencing outflows of $68.529MM the week prior. National funds had inflows of $240.367MM, after inflows of $200.965MM the week prior. High-yield municipal funds reported inflows of $415.493MM in the latest week, after inflows of $220.975MM the week prior. Exchange traded funds reported outflows of $110.620MM, after inflows of $24.407MM 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 ($137.0B) 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 15-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 were mixed, as the spreads five years and in all widened, with the largest widening occurring in the two-year maturity, five bps. Meanwhile spreads on 10-, 15- and 30-year maturities tightened week-over-week, with the largest tightening occurring in the 30-year maturity, five bps.

 

Daily Overview of the General Market for the Week Ending May 18th

Last Monday prices on municipals were mixed, as market participants were eyeing the $9.89B supply slate for the week. 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.

Prices on U.S. Treasuries were weaker, as energy companies helped keep the S&P 500 (+0.09%) afloat on Monday, as higher rates hurt the real estate and utilities sectors without offering an offsetting boost to financial companies. On the day, the yield on the two-year maturity rose one bp, while the yields on the 10- and 30-year maturities each rose two bps. The 10-year municipal-to-Treasury ratio slipped to 81.9% on Monday from last Friday’s level of 82.2%, while the 30-year municipal-to-Treasury ratio fell to 94.9% on Monday from last Friday’s level of 95.2%.

Last Tuesday prices on municipals were mixed, as a number of new deals were priced, and the market was led by the $1.1B New York City Transitional Finance Authority’s sale of Fiscal 2018 Series C tax-exempt and taxable fixed-rate bonds in five sales. On the day the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond rose six bps and the yield on the 30-year GO bond rose seven bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries weakened, as higher yields and a firmer U.S. Dollar foiled equities attempt to add to Mondays’ modest gains. The S&P 500 lost 0.7% on widespread weakness with 10 of 11 sectors lower by the close. The Dow fell for the first time in nine sessions. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose nine bps and the yield on the 30-year maturity rose 10 bps. The 10-year municipal-to-Treasury ratio fell to 81.5% on Tuesday from Monday’s level of 81.9%, while the 30-year municipal-to-Treasury ratio fell to 94.1% on Tuesday from Monday’s level of 94.9%.

Last Wednesday prices on municipals were mixed again, as a number of deals came to market including Pennsylvania’s big competitive sale and the Grand Parkway negotiated offering. On the day, the yield on the two-year GO bond was steady, while the yields on the 10- and 30-year GO bonds rose, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were mixed, as stocks rose, on the heels of relatively solid US economic data, and the U.S. Dollar rallied to a five-month high. Oil prices also rose due to a report that U.S. crude stockpiles fell for a second week. On the day, the yield on the two-year maturity was steady, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio was unchanged on Wednesday from Tuesday’s level of 81.5%, while the 30-year municipal-to-Treasury ratio rose to 94.7% on Wednesday from Tuesday’s level of 94.1%.

Last Thursday prices on municipals were mixed, as the last of the week’s new issue offerings hit the market and the Chicago Board of Education more than doubled the size of its bond sale due to favorable market conditions. 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 three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mixed. Stocks gave up early gains as the Dow and NASDAQ slipped 0.2%, while the S&P 500 fell a more modest 0.1%. Oil prices finished marginally higher. On the day, the yield on the two-year maturity fell one bp, 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 rose to 82.0% on Thursday from Wednesday’s level of 81.5%, while the 30-year municipal-to-Treasury ratio was unchanged on Thursday from Wednesday’s level of 94.7%.

Last Friday prices on municipals were steady across the curve, as market participants were looking ahead to this week’s $6.36B new issue calendar. On the day, the yields on the two-, 10- and 30-year GO bonds were all unchanged, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger across the curve. On the day, the yield on the two-year maturity fell two bps, while the yields on the 10- and 30-year maturities each fell four bps. The 10-year municipal-to-Treasury ratio rose on Friday to 83.1% from Thursday’s level of 82.0%, while the 30-year municipal-to-Treasury ratio rose to 95.9% on Friday from Thursday’s level of 94.7%.

 

 



 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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