Muni Update

May 22, 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 $426.721MM in inflows in the latest reporting week, after experiencing inflows of $605.731MM the week prior. The four-week moving average remained positive at $326.188MM, after being a positive $292.065MM the week prior. All other funds posted inflows for the week. Investors still facing negative rates overseas continue to find higher-yielding U.S. 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 were mixed on Monday and Tuesday. On Wednesday prices strengthened across the curve, while on Thursday and Friday they weakened across the curve, giving back some of Wednesday gains. Prices for municipals were also mixed on Monday and Tuesday and stronger across the curve on Wednesday. On Thursday prices were unchanged in the front-end and stronger 10 years and longer. On Friday they finished the week unchanged. Volume for the trading week is projected to be $7.02B, which is below last week’s revised level of $8.42B, but is expected given the shortened trading session this Friday ahead of the Memorial Day Holiday the following Monday. 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 economic calendar will bring a handful of important reports including New Home Sales data for April on Tuesday and on Wednesday Existing Home Sales data will be released. Both are expected to show monthly declines with some housing experts warning that existing sales may be off more than expected.  Also on Wednesday, the FOMC will release the Minutes from their May 3rd meeting, at which time a June rate hike was seen all but done. However, since that time, economic data have disappointed and new developments in Washington have thrown the markets for a bit of a loop. As such, the Fed’s collective mindset on May 3rd may not matter that much to the markets on Wednesday.  Instead, the markets are more likely to take their cue from current Fedspeak including Bullard’s comments last Friday that he thought the Fed’s own forward-rate-path projections were too aggressive (he voiced the same opinion prior to the recent drama).  Friday will bring the first revision to 1Q GDP, which is expected to show that the economy expanded at 1.0% versus the initial estimate of 0.7%.

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 0.92%, 2.01%, and 2.87%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell five basis points (bps), while the yield on the 10-year GO bond fell 10 bps and the yield on the 30-year GO bond fell 11 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 they ended the week at 0.98%, 2.17%, and 3.01%. Overall, week-over-week the yield on the two-year maturity fell five bps, while the yields on the 10- and 30-year maturities each fell nine bps.

Prices on U.S. Treasuries started last week mixed and were mixed again on Tuesday. On Wednesday prices strengthened across the curve, while on Thursday and Friday they weakened giving back some of Wednesday’s gains, but not all.  Overall, week-over-week the yield on the 10-year maturity fell nine bps and closed the week at 2.24%. Meanwhile the yield on the two-year maturity fell one bp week-over-week and closed the week at 1.28%. This resulted in a week-over-week 2s/10s spread of 96 bps, eight bps tighter than last week’s 2s/10s spread of 104 bps. The yield on the 30-year maturity fell eight bps week-over-week and finished the week at 2.91%.


New Issue Volume Expected to be an Estimated $7.02B

Total volume for the trading week is estimated to be $7.02B, which is below the $8.42B in last week’s issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $5.59B in negotiated deals and approximately $1.43B in competitive sales, according to data from Thomson Reuters. Over a quarter of the week’s issuance will come from the Hudson Yard’s Infrastructure Corporation’s $2.15B of second indenture revenue bonds. The deal is set to price on Tuesday for institutions, after a two-day retail order period that started last Friday. The deal is rated Aa3 by Moody’s Investors Service (Moody’s), A+ by S&P Global Ratings (S&P) and Fitch Ratings (Fitch). We note that S&P upgraded its rating on the HYIC’s outstanding Fiscal 2012 Series A first-indenture senior revenue bonds by two notches to AA- from A. S&P also assigned its A+ rating to the current offering.

After this deal, there are 13 deals scheduled to price larger than $100.0MM, with the majority of the action squeezed into a two-day period Tuesday and Wednesday because of the abbreviated trading session on Friday ahead of Memorial Day weekend. New York University Hospitals Center plans to offer $600.0MM of taxable bonds. The deal is rated A3 by Moody’s and A- by S&P and Fitch. The Mayor and City Council of Baltimore Convention Center Hotel, Maryland plans to price $285.37MM of revenue refunding bonds on Wednesday. The deal is rated BBB- by S&P.

There are only two scheduled competitive deals larger than $100.0MM, with the largest coming from the San Francisco Municipal Transportation Agency’s $173.095MM of revenue bonds on Wednesday. The deal is rated Aa2 by Moody’s and AA by S&P.


Municipal Bond Funds Post Inflows for a Sixth Week   

Municipal bond funds posted inflows for a sixth week, as market participants continue to put cash into funds, according to the latest data from Lipper. Weekly reporting funds reported $426.721MM of inflows for the most recent week. These followed inflows of $605.731MM the week prior, according to Lipper. The four-week moving average was still in the green at a positive $326.188MM, after being in the green at a positive $292.065MM the week prior.

Long-term municipal bond funds also had inflows, gaining $280.582MM in the latest week after rising $355.772MM the week prior. Intermediate-term funds had inflows of $5.202MM after experiencing inflows of $104.229MM the week prior. National funds had inflows of $443.455MM after inflows of $635.116MM the week prior. High-yield municipal funds reported inflows of $214.464MM in the latest reporting week, after experiencing inflows of $179.829MM the week prior. Exchange traded funds saw inflows of $98.138MM, after inflows of $30.237MM 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 utilize swaps to extend out the curve. Spreads were tighter across the BQ curve on bonds maturing five years and in, with the largest tightening occurring in the one-year maturity, 23 bps. For bonds maturing 10 years and longer spreads widened, with the largest widening occurring in the 15-year maturity, 3 bps.


Daily Overview of the General Market for the Week Ending May 19th

Last Monday prices on municipal bonds finished the day mixed, as the front-end weakened while bonds maturing ten years and longer were steady, as participants positioned themselves for the upcoming trading week’s $8.8B in new issue supply. On the day, the yield on the two-year GO bond fell one bp, while the yields on the 10- and 30-year year GO bonds were each unchanged, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were steady in the front-end and weaker ten years and longer, as stocks went on a run Monday due to gains in materials and the financial sector that helped push the S&P and NASDAQ to their 17th and 32nd record-high closes of the year, respectively. The U.S. Dollar fell for a third day and its momentum has the currency headed back towards its lowest levels since the U.S. presidential election. On the day, the yield on the two-year maturity was steady, while the yields on the 10- and 30- year maturities each rose one bp. The 10-year municipal-to-Treasury ratio fell to 90.2% on Monday from the prior Friday’s level of 90.6%, while the 30-year municipal-to-Treasury ratio slipped to 99.3% on Monday from the prior Friday’s level of 99.7%.

Last Tuesday prices on municipal bonds were steady in the front-end and stronger 10 years and longer, as the largest deal of the week 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 fell two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also steady in the front-end and stronger 10 years and longer, as U.S. stocks finished the day essential unchanged, while the S&P and NASDAQ posted gains on the day. The U.S. Dollar’s downshift never let up and the currency ended down 0.7% on the day; the greenback is down 1.4% since last Thursday and has now completely erased its post-presidential election gains. On the day, the yield on the two-year maturity was unchanged, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio fell to 89.7% on Tuesday from Monday’s level of 90.2%, while the 30-year municipal-to-Treasury ratio slipped to 99.0% on Tuesday from Monday’s level of 99.3%.

Last Wednesday prices on municipals finished stronger across the curve, as the municipal market rallied along with U.S. Treasuries, as stocks fell on growing political unrest in Washington, D.C. On the day, the yield on the two-year GO bond fell four bps, while the yield on the 10-year GO bond fell seven bps and the yield on the 30-year GO bond fell eight bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished stronger last Wednesday, as investors sold off riskier assets and moved into safer havens such as gold, the yen, and U.S. Treasuries. Financials bore the brunt of the equity selling, while defensive sectors buoyed the major indices. The Dow shed 373 points with the S&P off 44, both representing 1.8% declines. The U.S. Dollar closed at its lowest level since November 4th. On the day the yield on the two-year maturity fell five bps, while the yield on the 10-year maturity fell 12 bps and the yield on the 30-year maturity fell nine bps. The 10-year municipal-to-Treasury ratio rose to 91.4% on Wednesday from Tuesday’s level of 89.7%, while the 30-year municipal-to-Treasury ratio rose to 99.3% on Wednesday from Tuesday’s level of 99.0%.

Last Thursday prices on municipals finished steady in the front-end and stronger 10 years and longer, as the last of the week’s large deals were priced. On the day, the yield on the two-year GO bond was unchanged, while the yields on the 10- and 30-year year GO bonds each fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed, as bonds maturing 10 years and in weakened, while the long-end was steady. U.S. stocks clawed back some of Wednesday’s losses and the U.S. Dollar recovered. The Dow gained 0.3% as the S&P added 0.4% and the NASDAQ rallied 0.7%. The U.S. Dollar rebounded with the biggest move occurring after the British pound moved sharply lower in what some traders described as a technical flash crash. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity was unchanged. The 10-year municipal-to-Treasury ratio fell to 90.5% on Thursday, from Wednesday’s level of 91.4%, while the 30-year municipal-to-Treasury ratio fell to 99.0% on Thursday, from Wednesday’s level of 99.3%.

Last Friday saw prices on municipals finish the week unchanged across the curve, as participants prepped for the following holiday shortened trading week’s projected $7.02B in new issue offerings. On the day, 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 weaker on Friday, as the yields on the two- and 10-year maturities each rose two bps, while the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio fell to 89.7% on Friday from Thursday’s level of 90.5%, while the 30-year municipal-to-Treasury ratio fell 98.6% on Friday from Thursday’s level of 99.0%.





Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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