Muni Update

November 13, 2017


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

 

Municipal Market Recap

Municipal bond funds reported investors put cash into funds, as weekly reporting funds experienced inflows of $463.044MM in the latest reporting week, after experiencing outflows of $654.999MM the week prior. The four-week moving average was positive at $151.552MM, after being in the green at $46.685MM the week prior. Investors still facing very 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 if yields should rise as we head into year-end. The uncertainty surrounding the recently proposed tax reform, potential infrastructure spending, and the pace of Fed tightening is causing some market participants to be observers at this time.

U.S. Treasury prices started the trading week stronger across the curve. On Tuesday they were mixed, as the front-end weakened, while bonds 10 years and longer strengthened. They were mixed again on Wednesday, as the front-end was steady, while bonds 10 years and longer weakened. On Thursday they were mixed once again, as bonds maturing 10 years and in were steady, while the long-end weakened. On Friday they weakened across the curve. Prices on municipals were steady in the front-end, while maturities 10 years and longer strengthened daily through Wednesday. On Thursday and Friday they weakened across the curve. Volume for this trading week is projected to be $9.75B, which is just above last week’s revised level of $8.59B. This week’s supply level, together with secondary market opportunities, should address the continued strong demand for municipal bonds.

This week’s economic calendar will bring a few more reports than last week’s unusually quiet week. Of primary importance will be Wednesday’s Retail Sales and Consumer Price Index reports for the month of October.  Inflation is expected to hold at 1.7% YoY, while retail sales are expected to show a reasonably strong month of spending.  Heading into the final two months of the year, the retail sales data will be key as 1) the consumer is driving U.S. economic activity and 2) the leading indicators point to a strong year for holiday sales. Also this week the markets will get a healthy dose of Fedspeak with speeches from Evans, Yellen, Bostic, Mester, Kaplan, Brainard, and Williams. Finally, investors will continue to pay close attention to anything tax-reform related.

Last week the yield on the two-year maturity on the MMD Triple-A Scale rose four basis points (bps) from Thursday to Friday and ended the week at 1.20%. Meanwhile, the yield on the 10-year maturity rose five bps and the yield on the 30-year maturity rose six bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 1.98% and 2.68%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose six bps, while the yield on the 10-year GO bond fell one bp and the yield on the 30-year GO bond fell seven bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale rose three bps from Thursday to Friday and ended the week at 1.14%. Meanwhile, the yield on the 10-year maturity rose four bps and the yield on the 30-year maturity rose five bps on the MMA Triple-A Scale from Thursday to Friday and they ended the week at 2.08% and 2.86%, respectively. Overall, week-over-week the yield on the two-year maturity rose five bps, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell five bps.

Prices on U.S. Treasuries started last week stronger. They were mixed Tuesday through Thursday. On Friday they were weaker across the curve. Overall, week-over-week the yield on the 10-year maturity rose seven bps and closed the week at 2.40%. Meanwhile the yield on the two-year maturity rose three bps week-over-week and closed the week at 1.65%. This resulted in a week-over-week 2s/10s spread of 75 bps, six bps tighter than last week’s 2s/10s spread of 81 bps. The yield on the 30-year maturity rose seven bps week-over-week and finished the week at 2.88%.

 

New Issue Volume is Expected to be $9.75B

Total volume for the trading week is estimated to be $9.75B, which is above last week’s $8.59B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $6.57B in negotiated deals and approximately $3.18B in competitive sales, according to data from Thomson Reuters. For the week, the calendar has 14 negotiated deals that are scheduled for $100.0MM or larger in issuance, with three of the top four coming from State of Illinois issuers.

The Chicago’s Board of Education plans to offer $922.33MM of dedicated capital improvement tax (CIT) and unlimited tax GO dedicated revenue bonds. The CIT bonds are expected to price on Wednesday and are rated A by Fitch Ratings (Fitch). The GO bonds are expected to price on Thursday and are rated B by S&P Global Ratings (S&P) and BB- by Fitch. The Metropolitan Pier and Exposition Authority plans to offer $475.0MM of McCormick Place expansion project bonds and refunding bonds on Tuesday. The deal is rated BB+ by S&P and BBB- by Fitch. Staying in Illinois, the Illinois State Toll Highway Authority plans to offer $300.0MM of senior toll revenue bonds on Wednesday. The deal is rated Aa3 by Moody’s Investors Service (Moody’s) and AA- by S&P and Fitch. Moving east, the New York City Municipal Water Finance Authority plans to offer $400.0MM of water and sewer system second general resolution revenue bonds on Tuesday, after a one-day retail order period. The deal is rated Aa1 by Moody’s and AA+ by S&P and Fitch.

The biggest competitive sale on the week hails from the Pacific Northwest, as Washington State plans to sell $505.81MM of various purpose GO refunding bonds on Tuesday. The deal is rated Aa1 by Moody’s and AA+ by S&P and Fitch. The State of Wisconsin is slated to sell $277.71MM of GO bonds. The deal is rated AA+ by Fitch.

 

Municipal Bond Funds Posted Inflows for the Week       

Municipal bond funds reversed course and posted inflows for the week, as market participants put cash into funds, according to the latest data from Lipper. The weekly reporters saw $463.044MM of inflows, after experiencing outflows of $654.999MM the week prior. The four-week moving average was positive at $151.552MM, after being in the green at $46.685MM the week prior.

Long-term municipal bond funds had inflows of $315.728MM in the latest week after reporting outflows of $635.982MM the week prior. Intermediate-term funds had inflows of $100.973MM after outflows of $835.000MM the week prior. National funds had inflows of $462.979MM after outflows of $221.241MM the week prior. High-yield municipal funds reported inflows of $206.612MM after experiencing outflows of $81.357MM the week prior. Exchange traded funds reported inflows of $35.922MM, after experiencing outflows of $149.284MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The new issue calendar this week picks up and, together with secondary opportunities, should provide market participants the chance to pick up attractive structures, especially those in the steepest part of the curve (15+ years). Participants continue to utilize extension swaps and perform some portfolio cleanup, as the bid side for municipals continues to remain strong. The short-end (8 years and in) continues to perform extremely well due to the demand driven by the retail sector, thus making extension swaps extremely attractive with the ability to increase yield in the portfolio. Week-over-week, bank qualified spreads tightened across the curve, with the largest tightening in the 15-year maturity, 15 bps.

 

Daily Overview of the General Market for the Week Ending November 10th

Last Monday prices on municipals were mixed, amid concern that the tax reform proposal being hammered out in Washington will crimp supply by eliminating private activity bonds and advance refunding offerings. 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 seven bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger, as most markets were quiet on the day. The Dow gained just nine points, or 0.04%, as the S&P added three points, or 0.13%, and the NASDAQ jumped 22 points, or 0.33%; all set new record high closes. On the day, the yields on the two- and 10-year maturities each fell one bp, while the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio fell to 84.5% on Monday from Friday’s level of 85.4%, while the 30-year municipal-to-Treasury ratio fell to 96.1% on Monday from Friday’s level of 97.9%.

Last Tuesday prices on municipals were mixed, as the first of the week’s new issues 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 eight bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed, as the major U.S. equity indices were essentially unchanged on the day. The U.S. Dollar remained stronger but pulled back off its highs and crude prices extended early morning losses. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio fell to 83.1% on Tuesday from Monday’s level of 84.5%, while the 30-year municipal-to-Treasury ratio fell to 93.9% on Tuesday from Monday’s level of 96.1%.

Last Wednesday prices on municipals were mixed, as new offerings came in waves in the busiest day of the week, as the market firmed and most issuers were able to lower yields. 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 two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were also mixed, as U.S. stocks moved to new record highs, despite a continued drag from the energy and financial sectors. 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 82.3% on Wednesday from Tuesday’s level of 83.1%, while the 30-year municipal-to-Treasury ratio fell to 92.8% on Wednesday from Tuesday’s level of 93.9%.

Last Thursday prices on municipals were weaker across the curve, as the last of the week’s municipal offerings came to market and municipals wavered in mid-session activity. On the day, the yields on the two- and 10-year GO bonds rose two bps each, while the yield on the 30-year GO bond rose four bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed, as equities opened weak with tech companies leading losses by the end of the day. The Dow closed down 101 points (-0.43%) but had more than halved its day’s worst 253 point (-1.1%) decline. The S&P dropped 10 points (-0.38%), after earlier losing as many as 28 points. On the day, the yields on the two-and 10-year maturities were each steady, while the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio rose to 83.2% on Thursday from Wednesday’s level of 82.3%, while the 30-year municipal-to-Treasury ratio rose to 93.2% on Thursday from Wednesday’s level of 92.8%.

Prices on municipals last Friday finished the day weaker, as market participants prepped for the estimated $9.75B in new issue paper expected to come to market. On the day, the yield on the two-year GO bond rose four bps, while the yield on the 10-year GO bond rose five bps and yield on the 30-year GO bond rose six bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day weaker across the curve. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity rose eight bps and the yield on the 30-year maturity rose seven bps. The 10-year municipal-to-Treasury ratio fell to 82.5% on Friday from Thursday’s level of 83.2%, while the 30-year municipal-to-Treasury ratio was relatively unchanged on Friday from Thursday’s level of 93.2%.




 

 

 

 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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