Muni Update

May 29, 2018



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

 

Municipal Market Recap

Prices on municipals were steady across the curve on Monday and Tuesday. They strengthened across the curve on Wednesday and Thursday. On Friday they were mixed, as the front-end was steady, while bonds maturing 10 years and longer strengthened. Volume for the holiday-shortened trading week is projected to be $3.41B, which is below last week’s revised level of $6.59B in issuance. This lower level of issuance is expected given the holiday-shortened trading week and should be easily digested given the high level of redemptions coming over the next few months. These forecasted high levels of redemptions, coupled with the expectation that weekly issuance should remain below average, should contribute to strong demand for municipals going forward. 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 for a third week in a row, as weekly reporting funds experienced inflows of $232.801MM, after experiencing inflows of $206.948MM the week prior. The four-week moving average turned positive at $65.590MM, after being a positive $64.760MM 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 yield on the two-year maturity on the MMD Triple-A Scale was unchanged from Thursday to Friday and ended the week at 1.82%. Meanwhile, the yield on the 10-year maturity fell two basis points (bps) and the yield on the 30-year maturity fell four bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 2.49% and 2.95%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond fell three bps, while the yield on the 10-year GO bond fell six bps and the yield on the 30-year GO bond fell 12 bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale fell four bps from Thursday to Friday and ended the week at 1.76%. Meanwhile the yield on the 10-year maturity fell six bps and the yield on the 30-year maturity fell 10 bps the MMA Triple-A Scale from Thursday to Friday and ended the week at 2.45% and 3.02%, respectively. Overall, week-over-week the yield on the two-year GO bond fell four bps, while the yield on the 10-year maturity fell six bps and the yield on the 30-year maturity fell nine bps.

On Monday prices on U.S. Treasuries were mixed, as the front and long-end maturities weakened, while the intermediate range was steady. On Tuesday prices were mixed again, as the front-end weakened, while bonds maturing 10 years and longer were steady. The rest of the week prices strengthened daily across the curve. Overall, week-over-week the yield on the 10-year maturity fell 14 bps and closed the week at 2.93%. Meanwhile the yield on the two-year maturity fell seven bps week-over-week and closed the week at 2.48%. This resulted in a 2s/10s spread of 45 bps, seven bps tighter than last week’s 2s/10s spread of 52 bps. The yield on the 30-year maturity fell 11 bps week-over-week and finished the week at 3.09%.

 

Volume to be $3.41B for the Trading Week

Total volume for the coming week is estimated to be $3.41B, which is below the $6.59B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $2.48B in negotiated deals and approximately $930.0MM in competitive sales. New issuance this holiday-shortened trading week will be dominated by Transportation bonds.

On Wednesday, the South Carolina State Ports Authority plans to offer $325.0MM of revenue Alternative Minimum Tax (AMT) bonds. The deal is rated A1 by Moody’s Investors Service (Moody’s) and A+ by Standard and Poor’s Global Ratings (S&P). On Thursday, the Metropolitan Washington Airports Authority plans to offer $578.0MM of airport system revenue and refunding AMT bonds. The deal is rated Aa3 by Moody’s and AA- by S&P and Fitch Ratings (Fitch).

The largest competitive deal will take place on Thursday, when the Virginia Transportation Board sells $149.605MM of capital project revenue bonds.

 

Municipal Bond Funds Post Inflows for a Third Week        

Municipal bond funds posted inflows last week, as market participants put cash into funds for a third week, according to the latest data from Lipper. The weekly reporting saw inflows of $232.801MM, after experiencing inflows of $206.948MM the week prior. The four-week moving average remained positive at $65.590MM, after being a positive $64.760MM the week prior.

Long-term municipal bond funds had inflows of $154.282MM in the latest week, after inflows of $264.239MM the week prior. Intermediate-term funds had inflows of $141.916MM, after experiencing inflows of $10.742MM the week prior. National funds had inflows of $301.718MM, after inflows of $240.367MM the week prior. High-yield municipal funds reported inflows of $166.008MM in the latest week, after inflows of $415.493MM the week prior. Exchange traded funds reported inflows of $ 105.053MM, after outflows of $110.620MM 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 market redemptions ($137.0B estimated) 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 widened across the curve, with the largest widening occurring in the five, 10- and 15-year maturities, 13 bps each.

 

Daily Overview of the General Market for the Week Ending May 25th

Last Monday prices on municipals were unchanged, as market participants were eyeing the $6.36B supply slate for the week. On the day, the yields on the two-, 10- and 30-year GO bonds were each steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as U.S. stocks jumped at the open on easing trade tensions between the U.S. and China and partially recovered from a mid-morning slump to finish the day solidly higher. The U.S. Dollar tracked longer yields up and back down, weakening for the first time in the last six sessions. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity was steady and the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio was unchanged on Monday from last Friday’s level of 83.1%, while the 30-year municipal-to-Treasury ratio slipped to 95.6% on Monday from last Friday’s level of 95.9%.

Last Tuesday prices on municipals were steady across the curve once again, as a number of new deals were priced, including the State of West Virginia’s $312.0MM Series 2018A GO road bonds. 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 the S&P 500 outlasted the Dow in positive territory on Tuesday, but afternoon selling pulled both lower for the day. The late-day slide for stocks also coincided with a move lower in oil prices. On the day, the yield on the two-year maturity rose one bp, while the yields on the 10- and 30-year maturities were unchanged. The 10-year municipal-to-Treasury ratio was unchanged on Tuesday from Monday’s level of 83.1%, while the 30-year municipal-to-Treasury ratio was unchanged on Tuesday from Monday’s level of 95.6%.

Last Wednesday prices on municipals were stronger, as West Virginia came to market with two big competitive sales and the Regents of the University of California priced two negotiated 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 three bps and the yield on the 30-year GO bond fell five bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were also stronger on the day. Major U.S. indexes dropped at the open following losses across both Asia and Europe, and the U.S. Dollar was firmer, as the Euro and Pound were hit by political uncertainty in Italy and weaker economic data. After the release of the Fed’s May Minutes, which were more dovish then expected, stocks turned around and the U.S. Dollar dipped. On the day, the yield on the two-year maturity fell six bps, while the yield on the 10-year maturity fell seven bps and the yield on the 30-year maturity fell four bps. The 10-year municipal-to-Treasury ratio rose to 84.0% on Wednesday from Tuesday’s level of 83.1%, while the 30-year municipal-to-Treasury ratio slipped to 95.3% on Wednesday from Tuesday’s level of 95.6%.

Last Thursday prices on municipals were mostly stronger, as market activity slowed ahead of Friday’s shortened trading session preceding the Memorial Day holiday weekend. On the day, the yields on the two- and 10-year GO bonds each fell one bp, while 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 day stronger, as U.S. stocks fell, but finished off early morning lows reached after President Trump said he was forced to cancel the upcoming meeting with North Korea “based on the tremendous anger and open hostility displayed” by the country’s government. On the day, the yield on the two-year maturity fell three bps, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell four bps. The 10-year municipal-to-Treasury ratio bumped up to 84.2% on Thursday from Wednesday’s level of 84.0%, while the 30-year municipal-to-Treasury ratio bumped up to 95.5% on Thursday from Wednesday’s level of 95.3%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to this week’s $3.41B new issue calendar. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond fell two bps and the yield on the 30-year GO bond fell four bps, 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 85.0% from Thursday’s level of 84.2%, while the 30-year municipal-to-Treasury ratio was unchanged on Friday from Thursday’s level of 95.5%.

 

 



 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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