Muni Update

May 8, 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 $127.783MM in inflows in the latest reporting week, after experiencing inflows of $144.519MM the week prior. The four-week moving average remained positive at $547.560MM, after being a positive $443.814MM the week prior. Most other funds posted inflows on the week. Investors still facing negative rates overseas continue to find higher-yielding 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. Still, 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.

U.S. Treasury prices weakened on Monday and strengthened on Tuesday.  Wednesday saw U.S. Treasury prices strengthen across the curve, while on Thursday they reversed curve and weakened cross the curve. On Friday they were mixed, as the front and intermediate maturities were unchanged, while the long-end strengthened. Prices for municipals were steady in the front-end of the curve for the week. Meanwhile prices on municipals ten years and longer were weaker on Monday and mixed on Tuesday. On Wednesday they were stronger Wednesday and on Thursday they were weaker. On Friday prices on municipals finished the day steady across the curve. Volume for the trading week is projected to be $9.36B, which is well above last week’s revised level of $4.89B. This week’s level of new issuance volume, coupled with secondary market opportunities should be readily absorbed by a municipal market that is starting to enter a stronger period of demand over the next few months, as portfolios will be seeing high levels of cash returned from maturing bonds and coupon interest.

This week’s economic calendar is lighter than the previous weeks with only a handful of significant economic reports.  The primary reports will come on Friday, when the April Retail Sales Report and April’s Consumer Price Index are released.  CPI is expected to hold steady, while retail sales are expected to rebound from a very weak first quarter.  Sales are expected to jump 0.6% at the headline level and 0.4% at the core level.  Fed officials are looking for a bounce-back in consumer spending in 2Q to validate their economic projections. Presuming we see such a rebound, a June rate hike is likely.  Also on the calendar this week are five Fedspeakers.

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 ended the week at 0.99%, 2.17% and 3.03%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose one basis point (bp), while the yield on the 10-year GO bond rose three bps and the yield on the 30-year GO bond rose one bp.

Last week the yields on the two- and 10-year maturities on the MMA Triple-A Scale were unchanged from Thursday to Friday and ended the week at 1.05% and 2.29%, respectively. Meanwhile the yield on the 30-year maturity on the MMA Triple-A Scale rose one bp from Thursday to Friday and ended the week at 3.14%. Overall, week-over-week the yield on the two- and 10-year maturities each fell one bp, while the yield on the 30-year maturity rose one bp.

Prices on U.S. Treasuries started last week weaker. On Tuesday they strengthened, while on Wednesday they weakened. On Thursday they weakened further across the curve. On Friday they closed the week mixed, as prices in the two- and 10-year maturities were steady, while prices on the long end strengthened. Overall, week-over-week the yield on the 10-year maturity rose seven bps and closed the week at 2.35%. Meanwhile the yield on the two-year maturity rose four bps week-over-week and closed the week at 1.31%. This resulted in a week-over-week 2s/10s spread of 104 bps, three bps wider than last week’s 2s/10s spread of 101 bps. The yield on the 30-year maturity rose three bps week-over-week and finished the week at 2.99%.


New Issue Volume Jumps to an Estimated $9.36B

Total volume for the trading week is estimated to be $9.36B, which is well above the $4.89B in last week’s issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $7.82B in negotiated deals and approximately $1.54B in competitive sales, according to data from Thomson Reuters. The last time estimated volume was higher was for the week ended March 10th, where it was estimated at $10.2B.

The largest deal of the week $915.0MM County of Cuyahoga, Ohio revenue bond offering that is being issued on behalf of Metrohealth System Hospital. The deal is scheduled to price on Wednesday after a one-day retail order period and is rated Baa3 by Moody’s Investors Service (Moody’s) and BBB- by S&P Global Ratings (S&P) and Fitch Ratings (Fitch). Moody’s recently downgraded Metrohealth citing “an unexpected and material increase in leverage relative to modest operating performance, while the system is executing new strategies and faces uncertainty regarding Medicaid funding. The rating is also constrained by significant competition in a consolidated market, high exposure to government payers, and construction risk associated with a large project.”

The State of Hawaii plans to offer $856.0MM of GO bonds, which will also be priced on Wednesday following a one-day retail order period. This deal is rated Aa1 by Moody’s, AA+ by S&P and AA by Fitch. The Houston Independent School District plans to offer $838.0MM of limited tax schoolhouse and refunding bonds. The deal is rated triple-A by Moody’s, S&P and Fitch.

Also this week, the market has a number of green bonds scheduled to be offered. The New York City Metropolitan Transportation Authority’s (NYC MTA) plans to offer $300.0MM of climate bonds that are certified green bonds. The City of Los Angeles, California will be offering $300.0MM plus of green bonds. A portion of the upcoming San Francisco Bay Area Rapid Transit’s $388.0MM offering will be green bonds. Finally, the City and County of Denver, Colorado are expected to come with $173.0MM of green bonds this week.

The largest competitive sale is set to take place Wednesday, as the Southern California Metropolitan Water Department will sell $245.16MM of subordinate water revenue refunding bonds.


Municipal Bond Funds Post Inflows for a Fourth Week    

Municipal bond funds posted inflows for a fourth week, as market participants put cash into funds, according to the latest data from Lipper. Weekly reporting funds reported $127.783MM of inflows for the most recent week. These followed inflows of $144.519MM the week prior, according to Lipper. The four-week moving average was still in the green at a positive $547.560MM, after being in the green at a positive $443.814MM the week prior.

Long-term municipal bond funds also had inflows, gaining $21.355MM in the latest week after rising $291.183MM the week prior. Intermediate-term funds had outflows of $20.400MM after experiencing outflows of $2.015MM the week prior. National funds had inflows of $205.904MM after inflows of $195.710MM the week prior. High-yield municipal funds reported inflows of $36.671MM in the latest reporting week, after experiencing outflows of $129.979MM the week prior. Exchange traded funds saw outflows of $21.160MM, after outflows of $72.246MM the week prior.


Demand in the Bank Qualified (BQ) Market Remains Strong 

As has been the story so far this year, new issue BQ paper volume has been light, so participants continue to keep an eye on the secondary market to fill inquiries, especially those with the preferred structures. In addition, they are utilizing swaps to extend out the curve. Spreads were tighter across the BQ curve last week with the largest tightening occurring in the 15-year maturity, eight bps.


Daily Overview of the General Market for the Week Ending May 5th

Last Monday prices on municipal bonds finished weaker, as participants positioned themselves for the upcoming trading week’s $7.026B in new issue supply. On the day, the yield on the two-year GO bond rose by one bp, while the yield on the 10-year GO bond rose by four bps and the yield on the 30-year GO bond rose three bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also weaker on the day, as the major U.S. stock indices finished mixed in Monday trading as the Dow dropped 0.1% and the S&P gained 0.2%. The tech-heavy NASDAQ index outperformed with a daily gain of 0.8%. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity rose four bps and the yield on the 30-year maturity rose five bps. The 10-year municipal-to-Treasury ratio was unchanged on Monday from the prior Friday’s level of 93.9%, while the 30-year municipal-to-Treasury ratio fell to 101.3% on Monday from the prior Friday’s level of 102.0%.

Last Tuesday prices on municipal bonds were steady in the front and intermediate maturities, while the long end weakened, as several large deals hit the market, with offerings from issuers in Wisconsin, Kentucky and Texas leading the way. On the day, the yields on the two- and 10-year GO bonds were unchanged, while the yield on the 30-year GO bond rose one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger on the day, as weaker than expected economic news brought back the bid for safer assets. 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 three bps. The 10-year municipal-to-Treasury ratio rose to 95.2% on Tuesday from Monday’s level of 93.9%, while the 30-year municipal-to-Treasury ratio rose to 102.7% on Tuesday from Monday’s level of 101.3%.

Last Wednesday prices on municipals finished steady in the front end and stronger 10 years and longer, as new issuance offerings swept into the market and federal policy makers took no action on interest rates. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond fell three 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 last Wednesday mixed, as prices weakened ten  years and in, while strengthening in the long end. U.S. stocks traded lower at Wednesday’s open as Apple and other tech companies slipped to crown the NASDAQ as the day’s worst performing major index. However, after the Fed’s Statement kept June teed up by rationalizing away the recent weakness in economic activity, stocks bounced to pare their daily loses. On the day the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose two bps and the yield on the 30-year maturities fell three bps. The 10-year municipal-to-Treasury ratio fell to 93.1% on Wednesday from Tuesday’s level of 95.2%, while the 30-year municipal-to-Treasury ratio slipped to 102.4% on Wednesday from Tuesday’s level of 102.7%.

Last Thursday prices on municipals finished steady in the front end and weaker 10 years and longer, as the last of the week’s large deals were priced, led by issuers from California and Massachusetts. On the day, the yield on the two-year GO bond was unchanged, while the yield on the 10-year GO bond rose two bps and the yield on the 30-year GO bond rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day weaker, as U.S. stocks ended little changed in the final session before Friday’s payroll report. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity rose four bps and the yield on the 30-year maturity rose five bps. The 10-year municipal-to-Treasury ratio fell to  92.3% on Thursday, from Wednesday’s level of 93.1%, while the 30-year municipal-to-Treasury ratio fell to 101.0% on Thursday, from Wednesday’s level of 102.4%.

Last Friday saw prices on municipals finish the week steady across the curve, as participants prepped for the following week’s hefty new issue offerings. 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 week mixed, as the front and intermediate maturities saw their prices remain steady, while the long end saw prices strengthen. On the day, the yields on the two- and 10-year maturities were unchanged, while the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio was unchanged from Thursday’s level of 92.3%, while the 30-year municipal-to-Treasury ratio rose to 101.3% on Friday from Thursday’s level of 101.0%.


Taxable Market

 



 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, L.P.

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