November 27, 2017
In this week’s Municipal Market Update, we highlight the following:
- Prices on municipals weakened daily through Wednesday and closed the week mixed on Friday, as reflected by weekly data for the Municipal Market Data (MMD) Triple-A Scale; also shown are the yields for the Municipal Market Advisors (MMA) Triple-A Scale and US Treasuries for the week;
- New issue volume for the week estimated to be $11.73B;
- Municipal bond funds posted inflows for a third week;
- Demand in the Bank Qualified (BQ) market remains strong;
- Day-by-day recap of activity in the General Market.
Municipal Market Recap
Municipal bond funds reported investors put cash into funds for a third week, as weekly reporting funds experienced inflows of $659.237MM in the latest reporting week, after experiencing inflows of $417.719MM the week prior. The four-week moving average was positive at $221.250MM, after being in the green at $121.942MM 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 bonds 10 years and in weakened, while the long-end was steady. They were mixed again on Tuesday, as the front-end weakened, while bonds maturing 10 years and longer strengthened. On Wednesday they strengthened across the curve. On Friday they weakened across the curve. Prices on municipals were weaker across the curve through Wednesday. On Friday they were mixed, as maturities 10 years and in weakened, while the long-end was steady. Volume for the trading week is projected to be $11.73B, which is well above last week’s revised level of $4.0B, which was 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.
This week’s economic calendar is packed with reports covering home sales (Mon. and Wed.), home prices (Tue.), trade (Tue.), inventories (Tue.), confidence (Wed.), income and spending (Thu.), manufacturing (Mon. and Fri.), construction (Fri.), and auto sales (Fri.). However, the two most insightful reports are likely to be Wednesday’s first revision of 3Q GDP and Thursday’s PCE inflation report for October. Originally estimated at 3.0% growth, subsequent data points to the tally being revised up to 3.2% or better. PCE inflation is expected to tick up from 1.3% YoY to 1.4% (core). While this remains well below the Fed’s target of 2.0%, an increase would be a positive sign after the index has dropped in 7 of the last 11 reports, from 1.91% last October to 1.33% this September.
Last week the yields on the two- and 10-year maturities on the MMD Triple-A Scale rose one basis point (bp) each from Wednesday to Friday and ended the week at 1.40% and 2.08%, respectively. Meanwhile, the yield on the 30-year maturity was steady on the MMD Triple-A Scale from Wednesday to Friday and they ended the week at 2.76%. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose 11 bps, while the yield on the 10-year GO bond rose eight bps and the yield on the 30-year GO bond rose seven bps.
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 1.22%, 2.14% and 2.91%, respectively. Overall, week-over-week the yield on the two-year maturity rose six bps, while the yield on the 10-maturity rose five bps and the yield on the 30-year maturity rose four bps.
Prices on U.S. Treasuries were mixed on Monday and Tuesday. On Wednesday they strengthened across the curve. On Friday they reversed course and weakened across the curve. Overall, week-over-week the yield on the 10-year maturity fell one bp and closed the week at 2.34%. Meanwhile the yield on the two-year maturity rose two bps week-over-week and closed the week at 1.75%. This resulted in a week-over-week 2s/10s spread of 59 bps, three bps tighter than last week’s 2s/10s spread of 62 bps. The yield on the 30-year maturity fell three bps week-over-week and finished the week at 2.76%.
New Issue Volume for the Thanksgiving Holiday Week Estimated to be $11.73B
Total volume for the coming holiday week is estimated to be $11.73B, which is well above last week’s $4.0B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $10.03B in negotiated deals and approximately $1.70B in competitive sales, according to data from Thomson Reuters. Topping the upcoming week’s list of deals is Houston’s $603.48MM public improvement and refunding bonds. The deal is set to price on Thursday, and is rated Aa3 by Moody’s Investors Service (Moody’s) and AA by Fitch Ratings (Fitch). Houston also plans to sell $135.0MM of airport system special facilities revenue bonds. The deal is set to price on Tuesday and is rated BB- by Standard and Poor’s Global Ratings (S&P).
Also on tap this week is an offering by the Florida Development Finance Corporation’s $600.0MM of Series 2017 surface facility revenue bonds for the South segment of the Brightline Passenger Rail Project on Thursday. The deal is unrated. Wisconsin is coming to market with an advance refunding deal. The state plans to price $369.48MM of Series 2017 2 transportation revenue refunding bonds on Tuesday. The deal is rated Aa2 by Moody’s and AA+ by S&P and Fitch and AAA by Kroll Bond Rating Agency (Kroll).
In the competitive arena, Illinois is selling $750.0MM of GO bonds in two separate offerings on Wednesday. The deals consist of $655.0MM of Series of December 2017A GOs and $95.0MM of Series of December 2017B GOs. Both sales are rated Baa3 by Moody’s, BBB- by S&P and BBB by Fitch. On Thursday, the State of Washington plans to price $499.9MM of Series R-2018D various purpose GO refunding bonds.
Municipal Bond Funds Posted Inflows for the Third 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 $659.237MM of inflows, after experiencing inflows of $417.719MM the week prior. The four-week moving average was positive at $221.250MM, after being in the green at $121.942MM the week prior.
Long-term municipal bond funds had inflows of $434.368MM in the latest week after inflows of $373.985MM the week prior. Intermediate-term funds had inflows of $112.175MM after experiencing outflows of $2.017MM the week prior. National funds had inflows of $642.814MM after inflows of $453.793MM the week prior. High-yield municipal funds reported inflows of $177.142MM in the latest week, after inflows of $203.559MM the week prior. Exchange traded funds reported inflows of $83.606MM, after inflows of $23.098MM 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 (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 three-year maturity, three bps. Meanwhile the spreads on the 10- and 30-year maturities widened, week-over-week, with the largest widening occurring in the 30-year maturity, two bps. The 15-year maturity week-over-week was unchanged.
Daily Overview of the General Market for the Week Ending November 24th
Last Monday prices on municipals were weaker, as the New York Metropolitan Transportation Authority offered $2.2B to retail buyers. 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 stocks spent the better part of the day accumulating gains that provided sufficient cushion to keep the indices positive despite a bit of late-session selling. Fed funds futures nudged up the implied effective rate for the second half of 2018 and beyond, and Fed Chair Yellen said she would leave the Federal Reserve once Jay Powell is sworn in. 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 ratio fell to 84.8% on Monday from Friday’s level of 85.1%, while the 30-year municipal-to-Treasury ratio rose to 96.8% on Monday from Friday’s level of 96.4%.
Last Tuesday prices on municipals weakened, as the New York Metropolitan Transportation Authority’s $2.0B advance refunding deal for institutions was priced. On the day the yields on the two-, 10- and 30- year GO bonds each rose three bps, according to the final read of the MMD Triple-A Scale.
Prices on U.S. Treasuries were mixed, as stocks moved sharply higher in the first couple of hours of trading and held those gains for the remainder of the session. The risk-on tone that took stocks to record closes, however, wasn’t echoed by other asset classes. The U.S. Dollar was weaker in a day when most major currencies softened. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio rose to 86.4% on Tuesday from Monday’s level of 84.8%, while the 30-year municipal-to-Treasury ratio rose to 98.9% on Tuesday from Monday’s level of 96.8%.
Last Wednesday prices on municipals were weaker, as most market participants were already in the holiday mode ahead of the market’s Thursday’s close for Thanksgiving. On the day the yield on the two-year GO bond rose five bps, while the yields on the 10- and 30-year GO bonds each rose three bps, according to the final read of the MMD Triple-A Scale.
U.S. Treasury prices strengthened across the curve on Wednesday. On the day, the yields on the two- and 10-year maturities each fell three bps, while the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 88.4% on Wednesday from Tuesday’s level of 86.4%, while the 30-year municipal-to-Treasury ratio rose to 100.4% on Wednesday from Tuesday’s level of 98.9%.
Prices on municipals last Friday finished the day mixed, as participants were still in holiday mode and prepared for the upcoming week’s heavy new issue calendar. On the day, the yields on the two- and 10-year GO bonds each rose one bp, while the yield on the 30-year GO bond was steady, according to the final read of the MMD Triple-A Scale.
U.S. Treasury prices also finished the day weaker. On the day, the yields on the two-, 10- and 30-year maturities each rose one bp. The 10-year municipal-to-Treasury ratio rose to 88.9% on Friday from Wednesday’s level of 88.4%, while the 30-year municipal-to-Treasury ratio slipped to 100.04% on Friday from Wednesday’s level of 100.4%.
Senior Vice President
Vining Sparks IBG, LP