Muni Update

May 7, 2018



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

 

Municipal Market Recap

Prices on municipal bonds were mixed daily through Thursday. On Monday the front-end was steady, while bonds maturing 10 years and longer strengthened. On Tuesday prices on bonds maturing 10 years and in weakened, while the long-end was steady. On Wednesday the front-end was steady, while bonds maturing 10 years and longer strengthened. Thursday was a repeat of Wednesday’s price action. On Friday prices on bonds strengthened across the curve. Volume for the trading week is projected to be $4.86B, which is below last week’s revised level of $2.98B in issuance. Average weekly volume in 2018 has been about $4.5B, off sharply from 2017’s average of over $6.0B a week. Municipal new issue volume rose in April to the highest monthly level year-to-date. Driving this increase in issuance was a rise in new-money deals, which partly offsets the plunge in refunding transactions that the market has seen this year due to recent tax law changes. Though April was the busiest month of this year, April volume dipped to $29.5B from $30.7B a year earlier, according to Thomson Reuters data.

Municipal bond funds reported investors reversed course and pulled cash out of funds last week, as weekly reporting funds experienced outflows of $344.710MM, after experiencing inflows of $229.481MM the week prior. The four-week moving average was a negative $218.779MM, after being a negative $194.379MM 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.

This week’s economic calendar and announcements are light, with just the Consumer Credit report scheduled for release today at 2:00 p.m. CT. Credit is expected to rise $16.0B for the month of March. Also on the schedule this week are public comments from Fed officials Bostic, Barkin, Kaplan, and Evans. We do not anticipate that any of them will make any major comments that will meaningfully affect the markets. Finally, we will see another busy week for corporate earnings reports and on Thursday CPI inflation data will be released.

Last week the yield on the two-year maturity on the MMD Triple-A Scale fell one basis point (bp) from Thursday to Friday and ended the week at 1.87%. Meanwhile, the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell three bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 2.43% and 2.97%, 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 eight bps and the yield on the 30-year GO bond fell 14 bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale rose 12 bps from Thursday to Friday and ended the week at 1.77%. Meanwhile, the yield on the 10-year maturity rose three bps, while the yield on the 30-year maturity fell three bps on the MMA Triple-A Scale from Thursday to Friday and they ended the week at 2.47% and 3.03%, respectively. Overall, week-over-week the yield on the two-year GO bond fell one bp, while the yield on the 10-year maturity fell seven bps and the yield on the 30-year maturity fell 11 bps.

On Monday prices on U.S. Treasuries were mixed, as the front-end was steady, while bonds maturing 10 years and longer strengthened. On Tuesday prices weakened across the curve. On Wednesday prices were mixed, as the front-end strengthened, while bonds maturing 10 years and longer were steady. On Thursday prices were mixed again, as the front-end was steady and bonds maturing ten years and longer strengthened. On Friday prices were mixed once more, as the front-end weakened, while bonds maturing 10 years and longer strengthened. Overall, week-over-week the yield on the 10-year maturity fell two bps and closed the week at 2.94%. Meanwhile the yield on the two-year maturity rose two bps week-over-week and closed the week at 2.51%. This resulted in a 2s/10s spread of 43 bps, four bps tighter than last week’s 2s/10s spread of 47 bps. The yield on the 30-year maturity fell two bps week-over-week and finished the week at 3.11%.

 

Volume to be $4.86B for the Trading Week

Total volume for the coming week is estimated to be $4.86B, which is above the $2.98B in issuance last week, according to revised data from Thomson Reuters. This week’s calendar consists of $3.19B in negotiated deals and approximately $1.67B in competitive sales.

The largest deal of the week will be a $635.0MM tax-exempt and taxable deal from Energy Northwest. The Series 2018C tax-exempt and Series 2018D taxable electric revenue refunding bonds are set to price on Wednesday. The deal is rated Aa1 by Moody’s Investors Service (Moody’s), AA- by S&P Global Ratings (S&P) and AA by Fitch Ratings (Fitch).

The Dormitory Authority of New York (DASNY) is back in the market again this week as it plans to offer $591.0MM of Series 2018 A, B, C, D and E school districts financing program revenue bonds on Tuesday. The Series A and E bonds are rated Aa3 by Moody’s and AA- by Fitch; the Series B bonds are rated Aa2 by Moody’s and AA- by Fitch; the Series C bonds are rated AA by S&P and AA- by Fitch; and the Series D bonds are rated Aa1 by Moody’s and AA- by Fitch.

In the competitive arena, the City and County of San Francisco is selling $382.04MM of GO bonds in three sales on Tuesday. The deals consist of $189.735MM of Series 2018C, 2014 earthquake safety and emergency response GOs; $142.23MM of Series 2018D taxable, 2015 affordable housing GOs; and $50.075MM of Series 2018E, 2016 public health and safety GOs. The deals are rated Aaa by Moody’s and AA+ by S&P and Fitch.

 

Municipal Bond Funds Reverse Course and Post Outflows       

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 outflows of $344.710MM, after experiencing inflows of $229.481MM the week prior. The four-week moving average was a negative $218.779MM, after being a negative $192.379MM the week prior.

Long-term municipal bond funds had outflows of $183.551MM in the latest week, after inflows of $88.923MM the week prior. Intermediate-term funds had outflows of $43.953MM, after experiencing inflows of $67.332MM the week prior. National funds had outflows of $206.274MM, after inflows of $257.056MM the week prior. High-yield municipal funds reported inflows of $26.680MM in the latest week, after inflows of $177.482MM the week prior. Exchange traded funds reported inflows of $10.102MM, after outflows of $12.637MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The BQ market continues to see good 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 due in part to having to replace rolloffs due to redemptions. 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 12-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 three-year maturity, four bps. Meanwhile spreads on 10-, 15- and 30-year maturities tightened week-over-week, with the largest tightening occurring in the 30-year maturity, 24 bps.

 

Daily Overview of the General Market for the Week Ending May 4th

Last Monday prices on municipals were mixed, as market participants were eyeing the $4.26B supply slate for the week, as well as anticipating the Federal Open Markets Committee meeting schedule 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 fell two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed, as an opening jump for U.S. equities disappeared mid-morning and, after drifting lower during afternoon trading, the major indexes sold off into the close. All 11 sectors of the S&P 500 were weaker and dragged the overall index down 0.82%, its first daily decline since last Tuesday. On the day, the yield on the two-year maturity was steady, 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 was relatively unchanged on Monday from last Friday’s level of 84.8%, while the 30-year municipal-to-Treasury ratio rose to 100.0% on Monday from last Friday’s level of 99.4%.

Last Tuesday prices on municipals were mixed, as a number of new deals priced, including the $326.04MM Dormitory Authority of the State of New York’s Series 2018 A&B revenue bonds for Columbia University, after holding a one-day retail order period. On the day the yields on the two- and 10-year GO bonds each rose one bp, while the yield on the 30-year GO bond was unchanged, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries weakened, as the S&P 500 came roaring back after lunch to erase a steep early decline and finish near the highs of the day. The index bottomed at down 0.9% just after lunch, but made a sharp reversal to finish up 0.3%. The U.S. Dollar continued to strengthen and held its overnight gains that pushed it through its 200-day moving average. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose four bps. The 10-year municipal-to-Treasury ratio fell to 84.2% on Tuesday from Monday’s level of 84.7%, while the 30-year municipal-to-Treasury ratio fell to 98.7% on Tuesday from Monday’s level of 100.0%.

Last Wednesday prices on municipals were mixed again, as action was subdued for much of the day ahead of the Federal Reserve’s monetary policy meeting. The Federal Open Market Committee held the fed funds rate target at a range of 1.5% to 1.75%, and tweaked its post-meeting statement language on inflation to say it “is expected to run near the Committee’s symmetric 2.0% objective over the medium term,” and removed the phrase that it is “monitoring inflation developments closely.” 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 were also mixed, as U.S. assets fluctuated ahead of the Fed’s decision but were little changed before the announcement. Immediately after the Fed’s Statement was released, the knee-jerk reaction reflected a dovish market interpretation. Stocks climbed, the yield curve moved lower, and the U.S. Dollar dropped. By the close, that assessment was less certain. Stocks had reversed course and tumbled into the close. On the day, the yield on the two-year maturity fell one bp, while the yields on the 10- and 30-year maturities were each steady. The 10-year municipal-to-Treasury ratio fell to 83.8% on Wednesday from Tuesday’s level of 84.2%, while the 30-year municipal-to-Treasury ratio fell to 97.8% on Wednesday from Tuesday’s level of 98.7%.

Last Thursday prices on municipals were mixed, as the last of the week’s new issue offerings hit 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 four bps and the yield on the 30-year GO bond fell six bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mixed, as the Dow ended the day essentially unchanged after dropping nearly 400 points or 1.6% in the morning. The S&P 500 also dropped in the morning before bouncing back to finish the day down just 0.3%, after being down almost 41 points or 1.6% in the morning. On the day, the yield on the two-year maturity was steady, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio fell to 83.1% on Thursday from Wednesday’s level of 83.8%, while the 30-year municipal-to-Treasury ratio fell to 96.2% on Thursday from Wednesday’s level of 97.8%.

Last Friday prices on municipals strengthened, as market participants were looking ahead to this week’s $4.86B new issue calendar. On the day, the yield on the two-year GO bond fell one bp, 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.

U.S. Treasury prices finished the day mixed. On the day, the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio fell to 82.7% on Friday from Thursday’s level of 83.1%, while the 30-year municipal-to-Treasury ratio fell to 95.5% on Friday from Thursday’s level of 96.2%.

 



 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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