Muni Update

May 30, 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 $326.188MM in inflows in the latest reporting week, after experiencing inflows of $426.721MM the week prior. The four-week moving average remained positive at $388.683MM, after being a positive $326.188MM 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 weaker on Tuesday. On Wednesday and Thursday prices strengthened across the curve. On Friday they were flat in the front-end and stronger 10 years and longer ahead of the long Memorial Day Holiday weekend. Prices for municipals were stronger on Monday and Tuesday. On Wednesday they were steady. On Thursday the 10-year maturity strengthened, while the two- and 30-year maturities were steady. On Friday municipals, like U.S. Treasuries, finished steady in the front-end and stronger 10 years and longer.  Volume for the trading week is projected to be $4.83B, which is below last week’s revised level of $7.17B, but is expected given the shortened trading week. This week’s level of new issuance volume, coupled with secondary market opportunities should be easily 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 is packed with data and kicks off the week with April’s Personal Income and Spending reports on Monday. Also on Monday the S&P CoreLogic Home Price index will be released. The data does not slow down as the week progresses. Thursday will bring the May ISM manufacturing report, April construction spending data, and May vehicle sales report, three big reports covering major categories of the economy.  Before those reports are released, the ADP Employment Report will give the market its first estimate of May payroll growth.  On Friday, the BLS’s payroll data will be released and is expected to show nonfarm payrolls up 185k, the unemployment rate holding at 4.4%, and average hourly earnings picking up from 2.5% to 2.6% YoY.  By the end of this week, the markets will have a good idea of just how strong several sectors of the economy are as we near the June 13-14 Federal Open Markets Committee meeting.

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 0.92%. Meanwhile, the yield on the 10-year maturity rose one basis point (bp) and the yield on the 30-year maturity rose two bps on the MMD Triple-A Scale from last Thursday to Friday, and they finished the week at 1.95% and 2.80%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond was unchanged, while the yield on the 10-year GO bond fell six bps and the yield on the 30-year GO bond fell seven 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 0.98% and 2.15%, respectively. Meanwhile, the yield on the 30-year maturity fell one bp on the MMA Triple-A Scale from Thursday to Friday and finished the week at 2.99%. Overall, week-over-week the yield on the two-year maturity was unchanged, while the yields on the 10- and 30-year maturities each fell two bps.

Prices on U.S. Treasuries started last week mixed. On Tuesday they weakened across the curve. On Wednesday and Thursday prices reversed course and strengthened across the curve. On Friday prices were mixed as they were steady in the front-end and stronger 10 years and longer. Overall, week-over-week the yield on the 10-year maturity was unchanged and closed the week at 2.24%. Meanwhile the yield on the two-year maturity rose one bp week-over-week and closed the week at 1.29%. This resulted in a week-over-week 2s/10s spread of 95 bps, one bp tighter than last week’s 2s/10s spread of 96 bps. The yield on the 30-year maturity was also unchanged week-over-week and finished the week at 2.91%.

 

New Issue Volume is Expected to be $4.83B

Total volume for the trading week is estimated to be $4.83B, which is below the $7.17B in last week’s issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $3.29B in negotiated deals and approximately $1.54B in competitive sales, according to data from Thomson Reuters. Only 12 of the scheduled deals are larger than $100.0MM this week and five of those deals are of the high-grade, triple-A rated variety.

The largest deal of the week is not a tax-exempt, but a taxable municipal offering of $600.0MM on Thursday for the Duke University Health System Inc. The deal is rated Aa2 by Moody’s Investors Service (Moody’s) and AA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch). Also on Thursday, after a one-day retail period the day before, will be a $370.0MM Connecticut State revolving fund general revenue bond offering. The deal will consist of a Series A green bond offering and a Series B bond offering. The deal is rated triple-A by Moody’s, S&P and Fitch.

The Louisiana Local Government Environmental Facilities and Community Development Authority will offer $250.885MM of Women’s Hospital Foundation Project refunding revenue bonds on Thursday after a one-day retail order period. The deal should feature both tax-exempts and taxable bonds and is rated A2 by Moody’s and A by S&P.  The State of Connecticut Health and Higher Educational Facilities Authority plans to offer $250.0MM of revenue bonds for Yale University on Wednesday. The deal is expected to have a mandatory put date of July 1, 2020 and is rated triple-A by Moody’s and S&P.

In the competitive arena, there are only two deals scheduled greater than $100.0MM this week and both are from Virginia and each is rated triple-A by Moody’s, S&P and Fitch. The first will be priced on Wednesday and is a $180.095MM sale of public improvement bonds from Arlington County, Virginia.  Then on Thursday, Loudoun County, Virginia will sell $108.125MM of GO public improvement bonds.

 

Municipal Bond Funds Post Inflows for a Seventh Week   

Municipal bond funds posted inflows for a seventh week, as market participants continue to put cash into funds, according to the latest data from Lipper. Weekly reporting funds reported $394.498MM of inflows for the most recent week. These followed inflows of $426.721MM the week prior, according to Lipper. The four-week moving average was still in the green at a positive $388.683MM, after being in the green at a positive $326.188MM the week prior.

Long-term municipal bond funds also had inflows, gaining $238.275MM in the latest week after rising $280.582MM the week prior. Intermediate-term funds had inflows of $8.640MM after experiencing inflows of $5.202MM the week prior. National funds had inflows of $447.135MM after inflows of $443.455MM the week prior. High-yield municipal funds reported inflows of $171.583MM in the latest reporting week, after experiencing inflows of $214.464MM the week prior. Exchange traded funds saw inflows of $50.978MM, after inflows of $98.138MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong 

With the new issue calendar for this week being slightly lighter than the past couple of weeks due to the holiday, market participants will be looking at bid lists to help meet rising demand for BQ paper as they search for opportunities and prep for coming redemptions on June 1st, 15th and 30th. In addition, the attractive slope of the BQ yield curve has participants continuing to utilize swaps to extend out the curve. Spreads were tighter across the BQ curve last week, with the largest tightening occurring in the 30-year maturity, 10 bps.

 

Daily Overview of the General Market for the Week Ending May 26th

Last Monday prices on municipal bonds finished the day steady in the front-end and stronger 10 years and longer, as participants positioned themselves for the upcoming trading week’s $7.02B in new issue supply. 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 mixed, as U.S. stocks started the week with healthy gains. The tech sector led the S&P 0.5% higher, a third consecutive gain, as the NASDAQ outperformed with a session-best 0.8% gain. The S&P ended just 6 points short of completely erasing last Wednesday’s loss that was the steepest for the index since last September. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity was steady. The 10-year municipal-to-Treasury ratio fell to 88.4% on Monday from the prior Friday’s level of 89.7%, while the 30-year municipal-to-Treasury ratio fell to 97.9% on Monday from the prior Friday’s level of 98.6%.

Last Tuesday prices on municipal bonds were steady in the front-end and stronger 10 years and longer, as the largest deal was priced for institutions.  On the day, the yield on the two-year GO bond was unchanged, while the yield on the 10-year GO bond fell two bps and the yield on the 30-year GO bond fell three bps, according to the final read of the MMD Triple-A Scale. Since the start of the year, the yield on the 10-year GO bond has fallen 35 bps while the yield on the 30-year GO bond has dropped 23 bps on the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker across the curve, as U.S. stocks climbed closer to their all-time highs. U.S. equities improved after strong economic data sent European exchanges higher for the day. On the day, the yield on the two-year maturity rose four bps, while the yields on the 10- and 30-year maturities each rose three bps. The 10-year municipal-to-Treasury ratio fell to 86.4% on Tuesday from Monday’s level of 88.4%, while the 30-year municipal-to-Treasury ratio fell to  95.9% on Tuesday from Monday’s level of 97.9%.

Last Wednesday prices on municipals finished flat across the curve, as the last of the week’s new issue offerings hit the market. 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.

U.S. Treasury prices finished stronger last Wednesday, as U.S. stocks gained on Wednesday after the release of the Fed Minutes. The Fed Minutes gave a strong hint for another rate increase in June and offered insight into how the Fed may implement a roll-off cap to phase out cash-flow reinvestments of its balance sheet holdings. On the day, the yields on the two- and 10-year maturity each fell one bp, while the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio rose to 87.2% on Wednesday from Tuesday’s level of 86.4%, while the 30-year municipal-to-Treasury ratio rose to 96.3% on Wednesday from Tuesday’s level of 95.9%.

With no major bond sales scheduled to price last Thursday, prices on municipals were steady ahead of Friday’s holiday-shortened trading day ahead of the Memorial Day Holiday weekend. On the day, the yields on the two-, 10- and 30-year GO bonds were unchanged, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger across the curve, as stocks set another record high despite oil crashing after the much anticipated OPEC decision. Both the S&P and NASDAQ set new all-time highs, while the Dow’s 71 point gain pushed it to within 33 points of a new record. On the day, the yields on the two-, 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio was unchanged on Thursday, from Wednesday’s level of 87.2%, while the 30-year municipal-to-Treasury ratio rose to 96.6% on Thursday, from Wednesday’s level of 96.3%.

Last Friday prices on municipals finished the week unchanged across the curve, ahead of the Memorial Day Holiday on Monday. 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 steady in the front-end and stronger 10 years and longer. On the day, the yield on the two-year maturity was steady, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio fell to 87.0% on Friday from Thursday’s level of 87.2%, while the 30-year municipal-to-Treasury ratio fell 96.2% on Friday from Thursday’s level of 96.6%.

 




 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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