Muni Update

November 6, 2017


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

 

Municipal Market Recap

Municipal bond funds reported investors pulled cash out, as weekly reporting funds experienced outflows of $654.999MM in the latest reporting week, after experiencing inflows of $262.006MM the week prior. The four-week moving average remained positive at $46.685MM, after being in the green at $175.351MM 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 recently proposed tax reform, 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 stronger across the curve. On Tuesday they were mixed, as the front-end weakened, while the intermediate maturities were steady and the long-end strengthened. They were mixed again on Wednesday, as the front-end weakened, the 10-year maturity was steady, and the long-end strengthened. On Thursday they were stronger across the curve. Friday they were mixed again, as the front-end weakened, while bonds maturing 10 years and longer strengthened. Prices on municipals were mixed daily for the week. On Monday the front-end was steady, while maturities 10 years and longer strengthened. On Tuesday the front-end weakened and maturities 10 years and longer were steady. On Wednesday bonds 10 years and in weakened, while the long-end strengthened. On Thursday the front-end was steady, while bonds 10 years and longer strengthened. Friday saw the front-end weaken, while bonds maturing 10 years and longer strengthened. Volume for this trading week is projected to be $8.99B, which is above last week’s revised level of $5.34B. This week’s supply level, together with secondary market opportunities, should address the continued strong demand for municipal bonds.

This week’s economic data is fairly light, and the biggest news is likely to include negotiations on the new tax bill proposal and a Tuesday speech from new Fed Board Governor Quarles. Quarles is the new Vice Chairman for bank supervision and we have limited public commentary from him on monetary policy.  As for the tax reform process, the House Ways and Means Committee will continue to fine tune the initial Bill, which they’ve indicated will take four days to complete.  As for the actual economic reports, the September JOLTs Job Openings report will be released on Tuesday showing labor force flows, the Bloomberg Survey of Economists is scheduled for Thursday along with September’s Wholesale Inventories report, and November’s University of Michigan Consumer Confidence index will be released on Friday.

Last week the yield on the two-year maturity on the MMD Triple-A Scale rose one basis point (bp) from Thursday to Friday and ended the week at 1.14%. Meanwhile, the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity fell five bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 1.99% and 2.75%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose eight bps, while the yield on the 10-year GO bond fell three bps and the yield on the 30-year GO bond fell nine 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 1.09%. Meanwhile, the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity fell two bps on the MMA Triple-A Scale from Thursday to Friday and they ended the week at 2.10% and 2.91%, respectively. Overall, week-over-week 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 five bps.

Prices on U.S. Treasuries started last week stronger.  They were mixed on Tuesday and Wednesday. On Thursday they strengthened across the curve and on Friday they were mixed. Overall, week-over-week the yield on the 10-year maturity fell 10 bps and closed the week at 2.33%. Meanwhile the yield on the two-year maturity rose two bps week-over-week and closed the week at 1.62%. This resulted in a week-over-week 2s/10s spread of 81 bps, two bps tighter than last week’s 2s/10s spread of 83 bps. The yield on the 30-year maturity fell 13 bps week-over-week and finished the week at 2.81%.

 

New Issue Volume is Expected to be $8.99B

Total volume for the trading week is estimated to be $8.99B, which is above last week’s $5.34B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $6.62B in negotiated deals and approximately $2.37B in competitive sales, according to data from Thomson Reuters. Helping to boost this week’s issuance is an uptick in refunding offerings that is highlighted by the Commonwealth of Pennsylvania’s plan to offer $973.99MM of GO refunding bonds on Wednesday. The deal is rated Aa3 by Moody’s Investors Service (Moody’s), A+ by S&P Global Ratings (S&P) and AA- by Fitch Ratings (Fitch).

The largest negotiated deal of the week is the $736.0MM offering from the Salt River Project, agricultural improvement and power district electric system revenue bonds, scheduled for Tuesday. The deal is rated Aa1 by Moody’s and AA by S&P. The Triborough Bridge and Tunnel Authority (TBTA) plans to offer $500.0MM of general revenue refunding bonds on Wednesday, after a one-day retail order period. The deal is rated Aa3 by Moody’s, AA- by S&P and Fitch and AA by Kroll Bond Rating Agency (Kroll).

The Commonwealth of Massachusetts plans to offer $499.0MM of transportation fund revenue bonds for the Rail Enhancement Program and refunding bonds on Wednesday, after a one-day retail order period. The deal is rated Aa1 by Moody’s and triple-A by S&P.

 

Municipal Bond Funds Posted Outflows for the Week       

Municipal bond funds posted outflows for the week, as market participants pulled cash out of funds, according to the latest data from Lipper. The weekly reporters saw $654.999MM of outflows, after experiencing inflows of $262.006MM the week prior. The four-week moving average remained positive at $46.685MM, after being in the green at $175.351MM the week prior.

Long-term municipal bond funds had outflows of $635.982MM in the latest week after outflows of $416.137MM the week prior. Intermediate-term funds had outflows of $835.0MM after experiencing inflows of $527.272MM the week prior. National funds had outflows of $221.241MM after outflows of $41.524MM the week prior. High-yield municipal funds reported outflows of $81.357MM in the latest week, after inflows of $175.779MM the week prior. Exchange traded funds reported outflows of $149.284MM, after experiencing inflows of $151.373MM 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 (8 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-year maturities, with the largest tightening in the two-year maturity, two bps. Meanwhile the spreads on the five-, 10-, 15- and 30-year maturities widened week-over-week, with the largest widening occurring in the 30-year maturity, 11 bps.

 

Daily Overview of the General Market for the Week Ending November 3rd

Last Monday prices on municipals were mixed, as market participants awaited the week’s first issues from Montgomery County, Maryland and Phoenix to hit the market. 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 Monday’s news cycle was dominated by the indictments of several individuals previously involved in President Trump’s campaign or administration in one capacity or another and a buried headline on tax reform that appeared to create Monday’s pivot point for U.S. assets. The headline that hit the wires suggested that the 15% corporate tax rate cut (from 35% to 20%) could be phased in through 2022, as opposed to being fully effective upon enactment. That was also the exact time that U.S. stocks and Treasury yields made their sharpest move of the day. The S&P tumbled as much as 0.5% following the report before recovering to end down 0.3%. The NASDAQ was essentially unchanged. The U.S. Dollar, which was already weaker on a recovery in the Euro, extended its daily decline and finished near its daily lows. On the day, the yield on the two-year maturity fell two bps, while the yields on the 10- and 30-year maturities each fell six bps. The 10-year municipal-to-Treasury ratio rose to 84.8% on Monday from Friday’s level of 83.1%, while the 30-year municipal-to-Treasury rose to 98.3% on Monday from Friday’s level of 96.6%.

Last Tuesday prices on municipals were mixed, as the Phoenix Civic Improvement Corporation repriced a sale of airport revenue bonds to lower costs and the Massachusetts Development Finance Agency brought a sale to institutional buyers a day early, taking advantage of a steady municipal bond market. On the day the yield on the two-year GO bond rose three bps, while the yields on the  and 10- and 30-year GO bonds were each steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed, as stocks seemed unfazed by an action-packed calendar for the remainder of the week and rebounded Tuesday to close out their best month since February. The U.S. Dollar also had its best month since February, thanks in large part to a dovish decision by the ECB that dented the Euro. Oil prices wrapped up October on a positive note with U.S. WTI closing at its highest level in months, while Brent finished at its strongest level since 2015. On the day, the yield on the two-year maturity rose one bp, 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 was unchanged on Tuesday from Monday’s level of 84.8%, while the 30-year municipal-to-Treasury ratio rose to 98.6% on Tuesday from Monday’s level of 98.3%.

Last Wednesday prices on municipals were mixed, as Baltimore, Maryland and Guilford, North Carolina were among a handful of issuers who priced municipal bonds, as the market waited for the Federal Open Market Committee to announce it had kept its benchmark interest rate unchanged. On the day the yield on the two-year GO bond rose four bps, while the yield on the 10-year GO bond rose one bp and the yield on the 30-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale

U.S. Treasury prices were also mixed, as markets were fixated on the president’s pick to be the next Fed Chair. Also Fed Funds Futures contracts were active after the FOMC meeting, going from pricing in an 85% likelihood of a December rate hike to a 92% likelihood. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity was unchanged and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 85.2% on Wednesday from Tuesday’s level of 84.8%, while the 30-year municipal-to-Treasury ratio was unchanged on Wednesday from Tuesday’s level of 98.6%.

Last Thursday prices on municipals were mixed, as market participants reacted negatively to the proposal in the tax reform bill to eliminate advanced refundings and private activity bonds (PAB). Despite this negativity, the Virginia Small Business Financing Authority’s $737.0MM PAB offering in the primary market was met with strong demand. 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 finished the day stronger, as the House Ways and Means Committee’s tax plan was unveiled and President Trump officially announced the selection of FOMC Governor Jay Powell as his replacement for Chair Yellen upon the conclusion of her term in February. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-matutrity fell two bps and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio was relatively unchanged on Thursday from Wednesday’s level of 85.2%, while the 30-year municipal-to-Treasury ratio rose to 98.9% on Thursday from Wednesday’s level of 98.6%.

Last Friday prices on municipals finished the week mixed, as market participants prepped for the estimated $8.99B in new issue paper expected to come to market. On the day, the yield on the two-year GO bond rose one bp, while the yield on the 10-year GO bond fell one bp and yield on the 30-year GO bond fell five bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the week mixed. On the day, the yield on the two-year maturity rose one bp, while the yields on the 10- and 30-year maturities each fell two bps. The 10-year municipal-to-Treasury ratio rose to 85.4% on Friday from Thursday’s level of 85.1%, while the 30-year municipal-to-Treasury ratio fell to 97.9% on Friday from Thursday’s level of 98.9%.

 



 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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