Muni Update

November 5, 2018


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

 

Municipal Market Recap

 

Prices on municipals started the week steady and then weakened daily for the rest of the week. Issuance for the week is projected to be $3.3B, which is below last week’s $5.2B in issuance, according to revised data from Thomson Reuters. Despite this decrease in weekly issuance, we expect that new issue offerings 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 sixth week, as weekly reporting funds experienced outflows of $1.320B, after experiencing outflows of $494.914MM the week prior. The four-week moving average was a negative $826.368MM, after being a negative $505.107MM 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 yields on the two- and 10-year maturities on the MMD Triple-A Scale each rose two basis points (bps) from Thursday to Friday and they ended the week at 2.10% and 2.77%, respectively. Meanwhile, the yield on the 30-year maturity rose four bps on the MMD Triple-A Scale from Thursday to Friday, and ended the week at 3.44%. 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 rose nine bps and the yield on the 30-year GO bond rose 12 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 2.01%. Meanwhile, the yields on the 10- and 30-year maturities on the MMA Triple-A Scale each rose four bps from Thursday to Friday, and they ended the week at 2.78% and 3.39%, respectively. Overall, week-over-week the yield on the two-year GO bond rose five bps, while the yield on the 10-year GO bond rose seven bps and the yield on the 30-year GO bond rose nine bps.

U.S. Treasury prices were mixed on Monday, as bonds maturing 10 years and in were steady, while the long-end weakened. On Tuesday and Wednesday they weakened across the majority of the curve. On Thursday prices reversed course and strengthened across the curve. On Friday they reversed course again and weakened across the curve. Overall, week-over-week the yield on the 10-year maturity rose 14 bps and closed the week at 3.22%. Meanwhile the yield on the two-year maturity rose 10 bps week-over-week and closed the week at 2.91%. This resulted in a 2s/10s spread of 31 bps, four bps wider then last week’s 2s/10s spread of 27 bps. The yield on the 30-year maturity rose 14 bps week-over-week and finished the week at 3.46%.

 

Weekly Bond Issuance is Forecasted to be $3.3B for the Trading Week

 

Total issuance for the coming trading week is estimated to be $3.3B, which is well below last week’s $5.2B in issuance, according to revised data from Thomson Reuters. There are only seven deals schedule this week with a par amount of $100.0MM or larger, one of those being a taxable negotiated deal and two are competitive deals.

Central Plains Energy Project, Nebraska plans to offer $527.0MM of gas project revenue bonds, including fixed rate, LIBOR index rate and SIFMA index rate bonds on Tuesday. The deal is rated A3 by Moody’s Investors Service (Moody’s) and A by S&P Global Ratings (S&P). Also on Tuesday, Portland Community College plans to offer $171.87MM of full faith credit pension taxable bonds. The deal is rated Aa1 by Moody’s and AA+ by S&P.

The Virginia College Building Authority is scheduled to sell a total of $214.945MM of educational facility revenue bonds and taxable bonds in two separate sales also on Tuesday. The deals are rated Aa1 by Moody’s and AA+ by S&P and Fitch Ratings (Fitch).

 

Municipal Bond Funds Post Outflows for a Sixth Week        

 

Municipal bond funds posted outflows for a sixth 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 $1.320B, after experiencing outflows of $494.914MM the week prior. The four-week moving average was a negative $826.368MM, after being a negative $505.107MM the week prior.

Long-term municipal bond funds had outflows of $657.629MM in the latest week after experiencing outflows of $368.134MM the week prior. Intermediate-term funds had outflows of $500.907MM after outflows of $143.005MM the week prior. National funds had outflows of $1.008B after experiencing outflows of $370.522MM the week prior. High-yield municipal funds reported outflows of $511.540MM in the latest week, after outflows of $230.226MM the week prior. Exchange traded funds reported inflows of $105.897MM, after outflows of $25.091MM 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 is working extremely 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 30-year maturity widened, six bps. All other maturities were unchanged week-over-week.

 

Daily Overview of the General Market for the Week Ending November 2nd

 

Last Monday prices on municipals were steady, as market participants were eyeing the $6.5B in long-term bond supply for the week, and the City of Los Angeles priced $360.20MM of wastewater system subordinate revenue bonds for retail, ahead of Tuesday’s institutional pricing. On the day, the yields on the two-, 10- and 30-year GO bonds were steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed on the day, as the Dow, S&P and NASDAQ posted losses for the session. On the day, the yields on the two- and 10-year maturities were steady, while the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury was unchanged on Monday from last Friday’s level of 87.0%, while the 30-year municipal-to-Treasury slipped to 99.7% on Monday from last Friday’s level of 100.0%.

On Tuesday prices weakened, as a handful of deals priced ahead of the sizable market-testing transactions from Chicago and Los Angeles that are scheduled for Wednesday. On the day, the yield on the two-year GO bond rose one bp, while the yields on the 10- and 30-year GO bonds each rose two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also weaker, as U.S. stock prices rose for the session. On the day, the yields on the two- and 30-year maturities each rose three bps, while the yield on the 10-year maturity rose four bps. The 10-year municipal-to-Treasury slipped to 86.5% on Tuesday from Monday’s level of 87.0%, while the 30-year municipal-to-Treasury slipped to 99.4% on Tuesday from Monday’s level of 99.7%.

Last Wednesday prices on municipals were weaker, as a number of new offerings came to market. Meanwhile, the Chicago $1.3B Sales Tax Securitization Corporation deal that was tentatively scheduled to price on Wednesday, was moved to the day-to-day calendar due in part to market conditions and the recent downgrade of the bond last week and a downgrade of the state’s sales-tax backed Build Illinois bonds on Tuesday of this week. On the day, the yield on the two-year GO bond rose two bps, while the yield on the 10-year GO bond rose three bps and 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 also weakened on the day, as U.S. stock prices see-sawed during the session and finished the day basically unchanged. On the day, the yields on the two-, 10- and 30-year maturities each rose three bps. The 10-year municipal-to-Treasury bumped up to 86.7% on Wednesday from Tuesday’s level of 86.5%, while the 30-year municipal-to-Treasury bumped up to 99.7% on Wednesday from Tuesday’s level of 99.4%.

Last Thursday prices on municipals weakened further, as the last of the week’s municipal offerings came to market and the postponed Chicago $1.3B Sales Tax Securitization Corporation deal remained day-to-day. On the day, the yield on the two-year GO bond rose one bp, while the yields on the 10- and 30-year GO bonds each rose two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as U.S. stock prices were choppy early, briefly turning negative after October’s ISM Manufacturing PMI fell more than expected to a six-month low. However, as the day progressed U.S. stocks strengthened in late-afternoon trading and the major indices closed near their highs of the session. On the day, the yield on the two-year maturity fell three bps, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio rose to 87.6% on Thursday from Wednesday’s level of 86.7%, while the 30-year municipal-to-Treasury ratio rose to 100.6% on Thursday from Wednesday’s level of 99.7%.

Last Friday prices on municipals weakened again, as market participants were looking ahead to the coming week’s $3.3B in new issue bond volume. On the day, the yields on the two-and 10-year GO bonds each rose two bps, while the yield on the 30-year GO bonds rose four bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day weaker, as U.S. stocks prices fell for the session. On the day, the yield on the two-year maturity rose seven bps, while the yield on the 10-year maturity rose eight bps and the yield on the 30-year maturity rose six bps. The 10-year municipal-to-Treasury fell to 86.0% on Friday from Thursday’s level of 87.6%, while the 30-year municipal-to-Treasury fell to 99.4% on Friday from Thursday’s level of 100.6%.

 







Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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