Muni Update

November 13, 2018



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

 

Municipal Market Recap

 

Prices on municipals started the week steady. On Tuesday through Thursday they were mixed. Tuesday saw the front and the long-ends weaken, while intermediate maturities were steady. On Wednesday the front-end was steady, while bonds maturing 10 years and longer strengthened. On Thursday the front-end strengthened, while bonds maturing 10 years and longer were steady. On Friday prices strengthened across the curve. Issuance for the week is projected to be $7.3B, which is well above last week’s $2.3B in issuance, according to revised data from Thomson Reuters. This increase, especially for a holiday-shortened trading week, together with bid lists, should provide market participants with opportunities to fill needs this week.

 

Municipal bond funds reported investors pulled cash out for a seventh week, as weekly reporting funds experienced outflows of $255.812MM, after experiencing outflows of $1.320B the week prior. The four-week moving average was a negative $678.357MM, after being a negative $826.368MM the week prior. Investors still facing low rates overseas continue to find higher-yielding U.S. assets attractive. These factors, plus the recent rise in yields and municipals being at their cheapest relative to U.S. Treasuries in six months, should have both traditional and non-traditional market participants continuing to look for opportunities in the U.S. municipal market.

Last week the yield on the two-year maturity on the MMD Triple-A Scale fell two basis points (bps) from Thursday to Friday and ended the week at 2.08%. Meanwhile, the yields on the 10- and 30-year maturities on the MMD Triple-A Scale each fell three bps from Thursday to Friday, and they ended the week at 2.72% and 3.41%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond fell two bps, while the yield on the 10-year GO bond fell five bps and the yield on the 30-year GO bond fell three bps.

 

Last week the yield on the two-year maturity on the MMA Triple-A Scale was unchanged from Thursday to Friday and ended the week at 2.01%. Meanwhile, the yields on the 10- and 30-year maturities on the MMA Triple-A Scale each fell one bp from Thursday to Friday, and they ended the week at 2.77% and 3.38%, respectively. Overall, week-over-week the yield on the two-year GO bond was unchanged, while the yields on the 10- and 30-year GO bonds each fell bp.

 

Weekly Bond Issuance is Forecasted to be $7.3B for the Trading Week

Total issuance for the holiday-shortened trading week is estimated to be $7.3B, which is well above last week’s $2.3B in issuance, according to revised data from Thomson Reuters. This week’s trading calendar is comprised of $5.8B in negotiated offerings and $1.5B in competitive offerings.

The Michigan Strategic Fund plans to offer $595.0MM of limited obligation revenue bonds for the I-75 improvement project on Wednesday. The deal is rated Baa2 by Moody’s Investors Service (Moody’s) and BBB by Kroll Bond Rating Agency (Kroll). Also on Wednesday, the South Carolina Jobs and Economic Development Authority plans to offer $587.0MM of hospital revenue bonds for the Prisma Health Obligated Group on Wednesday. The deal is rated A2 by Moody’s and A by S&P Global Ratings (S&P).

The Los Angeles Department of Water and Power plans to offer $426.0MM of water system revenue bonds on Thursday, after a one-day retail order period. The deal is rated Aa2 by Moody’s, AA+ by S&P and AA by Fitch Ratings (Fitch). Also on Thursday, the New Jersey Economic Development Authority plans to offer $401.0MM of school facilities construction and refunding bonds. The deal is rated Baa1 by Moody’s, BBB+ by S&P and A+ by Fitch.

In the competitive arena, the Wentzville R-IV School District, Missouri, is selling $159.82MM of Series 2018 GO refunding and improvement bonds under the Missouri Direct Deposit program. Proceeds will be used to finance various school improvements and to current refund some outstanding debt.

Municipal Bond Funds Post Outflows for a Seventh Week       

Municipal bond funds posted outflows for a seventh week, as market participants pulled cash out of funds for the week, according to the latest data from Lipper. The weekly reporting funds saw outflows of $255.812MM, after experiencing outflows of $1.320B the week prior. The four-week moving average was a negative $678.357MM, after being a negative $826.368MM the week prior.

Long-term municipal bond funds had outflows of $86.728MM in the latest week after experiencing outflows of $657.629MM the week prior. Intermediate-term funds had outflows of $39.001MM after outflows of $500.907MM the week prior. National funds had outflows of $87.939MM after experiencing outflows of $1.009B the week prior. High-yield municipal funds reported outflows of $161.205MM in the latest week, after outflows of $511.540MM the week prior. Exchange traded funds reported outflows of $89.409MM, after inflows of $105.897MM the week prior.

Demand in the Bank Qualified (BQ) Market Remains Strong

The BQ market continues to see decent two – way flows with both buying and selling from market participants. For banks, the primary focus of activity over the past few months has been selling shorter (6 years and in) maturities with lower yields and reinvesting out on the curve (now 20+ years due to rising yields and widening spreads). This trade continues to working well for banks because of the higher tax rates of retail investors who have been buying the shorter paper with extremely low take-out yields. Banks who have invested in certain high tax states (CA, NY or NJ) have seen take-out yields less than 70% of U.S. Treasuries, in effect allowing them to purchase U.S. Treasuries and achieve similar tax-exempt yields to the municipal debt. Banks are looking at 12-15 year discount paper as an opportunity to pick up 4% coupons.

For this week, we expect to see a continuation of the extension swap, as well as BQ participants looking to discount paper in the 12-15 year range to pick up yield. In addition, they will be looking for both the BQ and general market (GM) segments of the municipal market, as the long-end remains cheap. The primary reason is that BQ and GM opportunities are presenting chances to pick up 4.0% and higher coupons. Week-over-week, the bank qualified spread for the one-year maturity tightened, five bps. All other maturities widened week-over-week, with the largest widening occurring in the 10-year maturing, nine bps.

Daily Overview of the General Market for the Week Ending November 9th

Last Monday prices on municipals were steady, as market participants were eyeing the $3.3B in long-term bond supply for the week, as King County, Washington, sold $124.455MM of Series 2018B sewer revenue bonds. 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.

Prices on U.S. Treasuries were mixed for the day, as the Dow and S&P posted gains, while the NASDAQ posted losses for the session. 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 three bps. The 10-year municipal-to-Treasury rose to 86.6% on Monday from last Friday’s level of 86.0%, while the 30-year municipal-to-Treasury rose to 100.3% on Monday from last Friday’s level of 99.4%.

On Tuesday prices were mixed, as a handful of deals were priced, including offerings from the Virginia College Building Authority, Tacoma, Washington and  the Stockton Public Financing Authority to name a few. On the day, the yield on the two-year GO bond rose one bp, while the yield on the 10-year GO bond was steady and the yield on the 30-year GO bond rose two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed, as U.S. stocks spent most of the low-volume day in positive territory as investors awaited the outcome of the U.S. midterm elections. On the day, the yields on the two- and 10-year maturities each rose two bps, while the yield on the 30-year maturity was steady. The 10-year municipal-to-Treasury fell to 86.0% on Tuesday from Monday’s level of 86.6%, while the 30-year municipal-to-Treasury rose to 100.9% on Tuesday from Monday’s level of 100.3.

Last Wednesday prices on municipals were mixed, as market participants digested the election results and optimism for potential infrastructure legislation how that the nation has a split Congress was being bantered about. 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.

U.S. Treasury prices were also mixed on the day, as U.S. stock rallied sharply after voters handed the House back to Democrats, but left control of the Senate with the Republicans. On the day, the yield on the two-year maturity rose three bps, while the yields on the 10- and 30-year maturities were steady. The 10-year municipal-to-Treasury fell to 85.4% on Wednesday from Tuesday’s level of 86.0%, while the 30-year municipal-to-Treasury slipped to 100.3% on Wednesday from Tuesday’s level of 100.9%.

Last Thursday prices on municipals were mixed, as market activity was muted due to the Federal Open Market Committee concluding its two-day meeting with no action taken on interest rates. On the day, the yield on the two-year GO bond fell one bp, while the yields on the 10- and 30-year GO bonds were each steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mixed, as U.S. stock prices finished the day mixed, as reflected by the Dow posting minimal gains, while the S&P and NASDAQ posted losses after the Fed’s latest decision did little to alter expectations for a rate increase in December. On the day, the yields on the two- and 10-year maturities each rose two bps, while the yield on the 30-year maturity was unchanged. The 10-year municipal-to-Treasury ratio fell to 84.9% on Thursday from Wednesday’s level of 85.4%, while the 30-year municipal-to-Treasury was unchanged on Thursday from Wednesday’s level of 100.3%.

Last Friday prices on municipals strengthened, as market participants were looking ahead to the coming holiday-shortened trading week’s $7.3B in new issue bond volume. On the day, the yield on the two-year GO bond fell two bps, while the yields on the 10- and 30-year GO bonds each fell three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mostly stronger, as U.S. stocks prices fell for the session. On the day, the yield on the two-year maturity fell four bps, while the yield on the 10-year maturity fell five bps and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury bumped up to 85.3% on Friday from Thursday’s level of 84.9%, while the 30-year municipal-to-Treasury was unchanged on Friday from Thursday’s level of 100.3%.







Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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