Muni Update

November 20, 2017


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

 

Municipal Market Recap

Municipal bond funds reported investors put cash into funds for a second week, as weekly reporting funds experienced inflows of $417.719MM in the latest reporting week, after experiencing inflows of $463.044MM the week prior. The four-week moving average was positive at $121.942MM, after being in the green at $151.552MM 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 Senate’s version of the tax reform, now that the House has approved their version, the 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 mixed, as the front-end weakened, while the intermediate area was steady and the long-end strengthened. They were mixed again on Tuesday, as the front-end was steady, while bonds maturing 10 years and longer strengthened. On Wednesday they strengthened across the curve. On Thursday they weakened across the curve. On Friday they were mixed, as the front-end weakened, while maturities 10 years and longer strengthened.  Prices on municipals were weaker across the curve on Monday and Tuesday. On Wednesday they were mixed, as the front-end was steady, while bonds ten years and longer strengthened. On Thursday they weakened across the curve. On Friday they were mixed, as the front-end weakened, while maturities 10 years and longer were steady. Volume for this holiday-shortened trading week is projected to be $4.18B, and while it is below last week’s revised level of $8.52B, it is expected due to the Thanksgiving Holiday. This week’s supply level, together with secondary market opportunities, should address the continued strong demand for municipal bonds. Economic data is light this week, especially with the markets closed on Thursday in observance of the Thanksgiving holiday. The key reports of the week will be the October Existing Home Sales, October Durable Goods Orders, November University of Michigan Consumer Confidence, and the FOMC’s October Meeting Minutes on Wednesday.

Last week the yield on the two-year maturity on the MMD Triple-A Scale rose two basis points (bps) from Thursday to Friday and ended the week at 1.29%. Meanwhile, the yields on the 10- and 30-year maturities were steady on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 2.00% and 2.69%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose nine bps, while the yield on the 10-year GO bond rose two bps and the yield on the 30-year GO bond rose one bp.

Last week the yields on two-, 10- and 30-year maturities on the MMA Triple-A Scale were all unchanged from Thursday to Friday and they ended the week at 1.16%, 2.09% and 2.87%. Overall, week-over-week the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year maturities each rose one bp.

Prices on U.S. Treasuries were mixed Monday and Tuesday. On Wednesday they strengthened across the curve. On Thursday they reversed course and weakened across the curve. On Friday they were mixed. Overall, week-over-week the yield on the 10-year maturity fell five bps and closed the week at 2.35%. Meanwhile the yield on the two-year maturity rose eight bps week-over-week and closed the week at 1.73%. This resulted in a week-over-week 2s/10s spread of 62 bps, 13 bps tighter than last week’s 2s/10s spread of 75 bps. The yield on the 30-year maturity fell nine bps week-over-week and finished the week at 2.79%.

 

New Issue Volume for the Thanksgiving Holiday Week Estimated to be $4.18B

Total volume for the coming holiday week is estimated to be $4.18B, which is below last week’s $8.52B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $3.96B in negotiated deals and approximately $217.1MM in competitive sales, according to data from Thomson Reuters. This week is headlined by the New York Metropolitan Transportation Authority’s offering of $2.0B revenue advance refunding green bonds in a two day pricing period starting on Monday. The deal is rated A1 by Moody’s Investors Service (Moody’s), AA- by S&P Global Ratings (S&P), Fitch Ratings (Fitch) and AA+ by Kroll Bond Rating Agency (Kroll).

Also this week the Commonwealth of Virginia Transportation Board will offer $479.41MM of Federal Transportation Grant Anticipation Revenue and Refunding Notes on Tuesday. The deal is rated Aa1 by Moody’s and AA+ by S&P and Fitch.  North Broward Hospital District will offer $318.0MM of revenue bonds on Monday. The deal is rated Baa2 by Moody’s and BBB+ by S&P.

 

Municipal Bond Funds Posted Inflows for Second Week       

Municipal bond funds posted inflows for the week, as market participants put cash into funds, according to the latest data from Lipper. The weekly reporters saw $417.719MM of inflows, after experiencing inflows of $463.044MM the week prior. The four-week moving average was positive at $121.942MM, after being in the green at $151.552MM the week prior.

Long-term municipal bond funds had inflows of $373.985MM in the latest week after reporting inflows of $315.728MM the week prior. Intermediate-term funds had outflows of $1.017MM after experiencing inflows of $100.973MM the week prior. National funds had inflows of $453.793MM after inflows of $462.979MM the week prior. High-yield municipal funds reported inflows of $203.559MM after experiencing inflows of $206.612MM the week prior. Exchange traded funds reported inflows of $23.098MM, after experiencing inflows of $35.922MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The new issue calendar for this holiday-shortened trading week is lighter compared to last week. Still, we expect that the new issue calendar together with secondary market opportunities will provide market participants the chance to pick up attractive structures 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 (5 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 were mixed, as they tightened in the one-, two-, three- and five-year maturities, with the largest tightening in the two-year maturity, seven bps. Meanwhile the spreads on the 10-, 15- and 30-year maturities widened, week-over-week, with the largest widening occurring in the 30-year maturity, 10 bps.

 

Daily Overview of the General Market for the Week Ending November 17th

Last Monday prices on municipals were weaker, as participants saw the first of the week’s new supply hit the screens and watched to see how Congress was tackling tax reform. On the day the yield on the two-year GO bond rose three bps, while the yields on the 10- and 30-year GO bonds each rose one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as U.S. equities dropped at the open but turned positive after just thirty minutes of trading and stayed positive for the day. On the day, the yield on the two-year maturity rose four bps, while the yield on the 10-year maturity was steady and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 82.9% on Monday from Friday’s level of 82.5%, while the 30-year municipal-to-Treasury ratio rose to 93.7% on Monday from Friday’s level of 93.1%.

Last Tuesday prices on municipals weakened, as competitive sales from the states of Washington and Wisconsin, along with negotiated deals from New York and Illinois issuers, dominated Tuesday’s new issue offerings. On the day the yield on the two-year GO bond rose two bps, while the yields on the 10- and 30-year GO bonds each rose one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as markets succumbed to separate forces, with the Euro outperforming all major currencies following a strong German GDP report and sovereign yields falling as crude prices tumbled. 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 ratio rose to 84.0% on Tuesday from Monday’s level of 82.9%, while the 30-year municipal-to-Treasury ratio rose to 95.1% on Tuesday from Monday’s level of 93.7%.

Last Wednesday prices on municipals were mixed as the Illinois Tollway priced its   $300.0MM deal and the first part of the Chicago Board of Education’s $922.0MM bond offering came to market. 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 stronger, as stocks sold off early after another bout of global trepidation had again pushed futures lower ahead of the U.S. session. On the day, the S&P fell 0.55% in its biggest single-day drop since September 5 (the day after North Korea successfully tested a hydrogen bomb). According to the WSJ, that ended a 50-day streak without a decline of 0.5% or more, which was the longest since 1965. The Dow fell a steeper 0.59% and the NASDAQ dropped 0.47%. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity fell five bps and the yield on the 30-year maturity fell six bps. The 10-year municipal-to-Treasury ratio rose to 85.4% on Wednesday from Tuesday’s level of 84.0%, while the 30-year municipal-to-Treasury ratio rose to 96.4% on Wednesday from Tuesday’s level of 95.1%.

Last Thursday prices on municipals were weaker across the curve, as the Chicago Board of Education lowered borrowing costs, as it returned to the market on Thursday selling $1.03B of GO bonds. On the day, the yield on the two-year GO bond rose two bps, while the yields on the 10- and 30-year GO bonds each rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day weaker, as all three major indices rallied sharply to their highest levels of the week with the Dow and S&P both gaining 0.8% in their best day since September 11th. The NASDAQ outperformed them with a 1.3% gain, representing its biggest daily gain since October 27th and its seventh best daily result of 2017. Those gains materialized despite shares of energy companies continuing to drag on the broader indices. Crude prices fell for a third day in their longest losing streak since early October. On the day, the yields on the two-and 10-year maturities each rose three bps, while the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio fell to 84.8% on Thursday from Wednesday’s level of 85.4%, while the 30-year municipal-to-Treasury ratio slipped to 96.1% on Thursday from Wednesday’s level of 96.4%.

Prices on municipals last Friday finished the day mixed, as market participants prepped for the estimated $4.18B in new issue paper expected to come to market. On the day, the yield on the two-year GO bond rose two bps, 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. 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 rose to 85.1% on Friday from Thursday’s level of 84.8%, while the 30-year municipal-to-Treasury ratio rose to 96.4% on Friday from Thursday’s level of 96.1%.

 



 

 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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