Muni Update

November 26, 2018



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

 

Municipal Market Recap

Monday saw prices on municipals start the week mixed, as the front-end was steady, while bonds maturing 10 years and longer strengthened. On Tuesday prices strengthened across the curve. On Wednesday prices were steady across the curve. On Friday’s shortened trading session prices strengthened across the curve. Issuance for the week trading week is projected to be $6.0B, which is well above last week’s holiday-shorted trading week of $863.4MM in issuance, according to revised data from Thomson Reuters. This increase in new issue volume coupled with bid lists should provide market participants with opportunities to fill their needs.

 

Municipal bond funds reported investors pulled cash out for an eighth week, as weekly reporting funds experienced outflows of $131.118MM, after experiencing outflows of $255.812MM the week prior. The four-week moving average was a negative $550.628MM, after being a negative $678.357MM 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 in the U.S. municipal market.

Last week the yield on the two-, 10- and 30-year maturities on the MMD Triple-A Scale each fell one basis point (bp) from Wednesday to Friday and ended the week at 2.01%, 2.61% and 3.27%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond fell one bp, while the yield on the 10-year GO bond fell four bps and the yield on the 30-year GO bond fell five bps.

 

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale were all unchanged from Wednesday to Friday and they ended the week at 1.96%, 2.69% and 3.32%, respectively. Overall, week-over-week the yield on the two-year GO bond fell one bp, while the yields on the 10- and 30-year GO bonds each fell three bps.

 

Weekly Bond Issuance is Forecasted to be $6.0B for the Trading Week

Total issuance for the trading week is estimated to be $6.0B, which is well above last week’s holiday-shortened trading week of $863.8MM in issuance, according to revised data from Thomson Reuters. This week’s trading calendar is comprised of $4.9B in negotiated offerings and $1.1B in competitive offerings. Topping the calendar are $1.2B in GO bonds coming out of New York City (NYC). NYC plans to price $856.0MM of tax-exempt fixed-rate bonds, consisting of Fiscal 2019 Series D Subseries D-1 and Fiscal 2008 Series J Subseries J-1 and J-11, as a reoffering. The deal is expected to have a two day retail order period starting on Tuesday and be priced for institutions on Thursday, November 29th.

Also on Thursday, the city is competitively selling $350.0MM of taxable fixed-rate GOs in two sales consisting of $223.79MM of Fiscal 2019 Series D Subseries D-2 GOs and $126.21MM of Fiscal 2019 Series D Subseries D-3 GOs. Proceeds will be used for capital projects, with the exception of some of the tax-exempt fixed-rate bond proceeds, which will be used to convert $175.0MM of outstanding floating-rate bonds into fixed-rates, the city said. The deals are rated Aa2 by Moody’s Investors Service (Moody’s) and AA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch).

Also on tap this week, the Chicago Board of Education (CBOE) will be coming to market with a $763.0MM deal. The deal is comprised of two offerings; a dedicated revenues Series 2018C unlimited tax GO refunding bonds and Series 2018D unlimited tax GOs, both are set to price on Wednesday. The deal is rated B+ by S&P, BB- by Fitch and BBB by Kroll Bond Rating Agency (Kroll).

 

Municipal Bond Funds Post Outflows for an Eighth Week        

Municipal bond funds posted outflows for an eighth 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 $131.118MM, after experiencing outflows of $255.812MM the week prior. The four-week moving average was a negative $550.628MM, after being a negative $678.357MM the week prior.

Long-term municipal bond funds had outflows of $361.143MM in the latest week after experiencing outflows of $286.728MM the week prior. Intermediate-term funds had inflows of $375,000 after outflows of $39.001MM the week prior. National funds had outflows of $23.857MM after experiencing outflows of $87.939MM the week prior. High-yield municipal funds reported outflows of $129.541MM in the latest week, after outflows of $161.205MM the week prior. Exchange traded funds reported inflows of $90.396MM, after outflows of $89.409MM 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 are looking at 12-15 year discount paper as an opportunity to pick up 4.0% coupons.

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, bank qualified spreads were mixed, as the three-year maturity widened by one bp, while all other maturities tightened, with the largest tightening occurring in the 15-year maturity, 11 bps.

 

Daily Overview of the General Market for the Week Ending November 23rd

Last Monday prices on municipals were mixed, and with activity for this holiday- shortened trading week bunched into today and Tuesday, a number of new issue offerings were successful priced. 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 one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger, as the Dow, S&P and NASDAQ all posted losses for the session. On the day, the yields on the two- and 10-year maturities each fell two bps, while the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury bumped up to 86.3% on Monday from last Friday’s level of 86.0%, while the 30-year municipal-to-Treasury was unchanged on Monday from last Monday’s level of 99.7%.

Last Tuesday prices on municipals were stronger, as the last of the weeks new issue offerings were priced and stock market volatility left investors hungry for a safe haven before the Thanksgiving Holiday. 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.

Prices on U.S. Treasuries were mixed, as the major stock indices sold off for a second day in a row. On the day, the yields on the two- and 10-year maturities were each unchanged, while the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury fell to 85.6% on Tuesday from Monday’s level of 86.3%, while the 30-year municipal-to-Treasury fell to 99.1% on Tuesday from Monday’s level of 99.7%.

Last Wednesday prices on municipals were steady ahead of the Thanksgiving Holiday. 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 were mixed on the day, as U.S. stock prices rose for the session. On the day, the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year maturities were steady. Both the 10- and 30-year municipal-to-Treasury ratios were unchanged on Wednesday from Tuesday’s levels of 85.6% and 99.1%, respectively.

Last Friday prices on municipals strengthened, as market participants were looking ahead to the coming trading week’s $6.0B in new issue bond volume. On the day, the yields on the two-, 10- and 30-year GO bonds each fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed, as U.S. stock prices fell for the session. On the day, the yields on the two- and 30-year maturities were stead, while the yield on the 10-year maturity fell one bp. The 10-year municipal-to-Treasury bumped up to 85.9% on Friday from Wednesday’s level of 85.6%, while the 30-year municipal-to-Treasury was unchanged on Friday from Wednesday’s level of 99.1%.

 

Taxable Market







Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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