Muni Update

November 9, 2020


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


Municipal Market Recap

Municipal prices started the week mixed, as prices on bonds maturing ten years and in weakened, while prices on bonds on the long end were steady. On Tuesday, U.S election day, municipal prices were steady across the curve. On Wednesday municipal prices strengthened across the curve, as the Federal Open Markets Committee (FOMC) started its two-day meeting. On Thursday and Friday municipal prices were mixed, and for both days the front-end was steady, while prices on bonds maturing 10 years and longer strengthened. Also, on Thursday the FOMC ended it meeting and announced that they had held the overnight target rate steady at 0.00-0.25%.

This trading week’s projected level of new-issue offerings is $2.8B and coupled with secondary market offerings should provide market participants with some opportunities to fill their needs. We note that the supply of new-issue tax-exempt municipals is just barely keeping ahead of the pace of redemptions: the year-to-date (YTD) net supply of non-taxable bonds is less than $8.0B. We further note that not included in the municipal bond volume is the increased issuance of corporate bonds by not for profit issuers that could borrow in the municipal bond market; those financings now total $39.6B so far this year, with $9.2B of that in October. The YTD total is more than triple last year’s volume of $11.7B. Many of these corporate CUSIP bonds have been issued to refinance tax-exempt municipal bonds.

Investors in municipal bond funds pulled cash out of funds for the week, as evidenced by the latest tax-exempt weekly reporting funds data showing that funds experienced outflows of $954.015MM in the latest week, after experiencing inflows of $582.366MM the week prior. The four-week moving average remained positive at $212.47MM, after being in the green at $883.120MM the week prior. Investors still facing low or negative rates overseas continue to find positive yielding U.S. assets attractive despite the recent outflows.

Last week the yield on the two-year maturity on the MMD Triple-A Scale was unchanged from Thursday to Friday and ended the week at 0.19%. Meanwhile, the yields on the 10- and 30-year maturities on the MMD Triple-A Scale each fell one basis point (bp) from Thursday to Friday and they ended the week at 0.81% and 1.56%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond fell two bps, while the yield on the 10-year GO bond fell 12 bps and the yield on the 30-year GO bond fell 15 bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale rose one bp from Thursday to Friday and ended the week at 0.28%. Meanwhile the yield on the 10-year maturity on the MMA Triple-A Scale was unchanged from Thursday to Friday, while the yield on the 30-year maturity on the MMA Triple-A Scale fell bps from Thursday to Friday, they ended the week at 1.16% and 1.76%, respectively. Overall, week-over-week the yield on the two-year GO bond fell five bps, while the yield on the 10-year GO bond fell nine bps and the yield on the 30-year GO bond fell 11 bps.

New-Issue Volume is Forecasted to be Just $2.8B for the Week

Total new-issue offerings for the holiday shortened trading week per IHS Markit Ipreo are estimated to be just $2.8B. This week’s projected bond issuance is comprised of $2.07B in negotiated deals and $725MM in competitive sales. Topping the list of new offerings is the state of Louisiana’s remarketing of $424.0MM of gasoline and fuels tax second lien revenue refunding bonds set to price on Thursday. The bonds are rated Aa3 from Moody’s Investors Service (Moody’s) and AA- by Fitch Ratings (Fitch). Also, on Thursday the California Earthquake Authority plans to offer $300.0MM of Series 2020B taxable revenue bonds. The deal is rated A by Fitch and AA by Kroll Bond Rating Agency (KBRA).

On Tuesday several deals will be priced, including the Missouri State Environmental Improvement and Energy Resources Authority’s $100.0MM offering of Series 2020B taxable water pollution control and drinking water refunding revenue bonds. The deal is rated triple-A by Moody’s and Standard and Poor’s Global Ratings (S&P).  Contra Costa Community College District, California will price $110.0MM of Election of 2014 GO bonds. The deal is rated Aa1 by Moody’s and AA+ by S&P. Gardena, California will price $101.0MM of Series 2020 taxable pension obligation. The deal is rated AA- by S&P. Finally, the Bush Foundation of Minnesota is coming to market with a $100.0MM corporate CUSIP taxable social bond issue, the deal is rated Aaa by Moody’s. Proceeds will used to make grants “to counter systemic racial injustice experienced acutely by Native Americans and Black/African Americans,” according to the investor roadshow. Projects will be focused on home ownership, education, entrepreneurship and other economic development.

In the competitive arena, Portland, Oregon plans to sell $223.805MM of Series 2020A second lien sewer system revenue bonds on Tuesday. Proceeds will be used to finance capital assets of the sanitary sewer and stormwater drainage system and fund a reserve subaccount. The deal is rated Aa2 by Moody’s’ and AA by S&P.


Municipal Bond Funds Posted Outflows for the Week

Investors in municipal bond pulled cash out of funds for the week, as tax-exempt weekly reporting funds experienced outflows of $954.015MM in the latest week, after experiencing inflows of $582.366MM the week prior. The four-week moving average was still positive at $212.457MM, after being in the green at $833.120MM the week prior.

Long-term municipal bond funds had outflows of $887.545MM in the latest week, after experiencing outflows of $205.727MM the week prior. Intermediate-term funds had outflows of $120.110MM after inflows of $87.597MM the week prior. National funds had outflows of $805.232MM after experiencing inflows of $593.114MM the week prior. High-yield municipal funds reported outflows of $260.247MM in the latest week, after inflows of $100.092MM the week prior. Exchange traded municipal funds reported inflows of $24.840MM, after inflows of $40.771MM the week prior.


Demand in the Bank Qualified (BQ) Market Remains Strong

This week’s low level of issuance will have both BQ and General Market participants looking to the secondary market for opportunities to fill their needs, as buyers will certainly outpace new-issue opportunities. BQ participants continue to have significant demand for municipal paper due in large part to having to replace rolloffs due to redemptions over the course of the year. Larger BQ participants (in particular C-Corps), continue to find attractive opportunities, both in size and structure in general market paper, due in part to the lower tax rates from tax reform, attractive spreads and lower costs of funds currently.

We encourage participants to continue to utilize extension swaps, to pick up more yield with little to no drop-off in credit quality, as well as to review their portfolio’s and look to replace weaker credits at this time. Week-over-week, BQ spreads were mixed, as the spreads on the one-, two-, three-, five-, and 10-year maturities all widened, with the largest widening occurring in the two-year maturity, seven bps. Meanwhile the spreads on the 15- and 30-year maturities all tightened, with the largest tightening occurring in the 30-year maturity, seven bps.


Daily Overview of the General Market for the Week Ending November 6th

Last Monday municipals prices were mixed, as market activity was muted ahead of the national election on Tuesday, the Federal Reserve monetary policy meeting on Wednesday and Thursday, and the October employment report on Friday. 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 bind was unchanged, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasurys were also mixed last Monday, as U.S. Stock prices rose for the session. The Dow finished up 423 points, or 1.6%, while the S&P was up 1.2%, and the NASDAQ was up 0.4%. On the day, the yield on 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 two bps. The 10-year municipal-to-Treasury ratio rose to 108.1% on Monday from last Friday’s level of 105.7%, while the 30-year municipal-to-Treasury ratio rose to 104.9% on Monday from Last Friday’s level of 103.6%.

Last Tuesday municipals prices were steady, as the largest deal of the week, the $130.0MM offering of Series 2020 turnpike revenue bonds from the Maine Turnpike Authority were priced. 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. Treasurys weakened last Tuesday, as U.S. Stock prices rose throughout the session. The Dow finished up 555 points, or 2.1%, while the S&P was up 1.8% and the NASDAQ was up 1.9%. On the day, the yield on the two-year maturity rose one bp, while the yields on the 10- and 30-year maturities each rose three bps. The 10-year municipal-to-Treasury ratio fell to 104.4% on Tuesday from Monday’s level of 108.1%, while the 30-year municipal-to-Treasury ratio fell to 103.0% on Tuesday from Monday’s level of 104.9%.

Last Wednesday municipals prices strengthened, following the U.S. Treasury rally of as much as 14 bps on the day, and the FOMC started its two-day meeting, as the country awaited the results of the national elections. On the day, the yield on the two-year GO bond fell three bps, while the yields on the 10- and 30-year GO bonds each fell 10 bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasurys also strengthened on Wednesday, as U.S. stocks finished up for the session. The Dow finished up 367 points or 1.3%, while the S&P was up 2.2% and the NASDAQ was up 3.9%. On the day, the yield on the two-year maturity fell three bps, while the yield on the 10-year maturity fell 12 bps and the yield on the 30-year maturity fell 11 bp. The 10-year municipal-to-Treasury ratio rose to 107.7% on Wednesday from Tuesday’s level of 104.4%, while the 30-year municipal-to-Treasury rose to 103.9% on Wednesday from Tuesday’s level of 103.0%.

Last Thursday municipals prices were mixed, as the FOMC voted unanimously to keep monetary policy unchanged as it concluded its two-day meeting, making only perfunctory alterations to its official communications as they stay beneath the radar. The overnight target rate range was unchanged at 0.00-0.25% while the interest on excess reserves rate was held at 0.10%. On the day, the yield on the two-year GO bond was unchanged, while the yield on the 10-year GO bond fell two bps and the yield on the 30-year GO bond fell four bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were also mixed on Thursday, as U.S. Stocks rose for the fourth session in a row. The Dow finished up 542 points or 2.0%, while the S&P was also up 2.0% and the NASDAQ was up 2.6%. On the day, the yield on the two-year maturity was unchanged, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio fell to 103.8% on Thursday from Wednesday’s level of 107.7%, while the 30-year municipal-to-Treasury ratio fell to 102.0% on Thursday from Wednesday’s level of 103.9%.

Last Friday prices on municipals were mixed, as market participants started looking ahead to the $2.8B in expected new-issue offerings, as well as the mid-week Veterans Day Holiday on Wednesday. On the day, the yield on the two-year GO bond was unchanged, 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.

U.S. Treasury prices were also mixed on Friday, as were U.S. stocks prices for session. The Dow finished down 66 points, or 0.2%, while the S&P and the NASDAQ were essential unchanged. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity rose four bps and the yield on the 30-year maturity rose six bps. The 10-year municipal-to-Treasury ratio fell to 97.6% on Friday from Thursday’s level of 103.8%, while the 30-year municipal-to-Treasury fell to 97.5% on Friday from Thursday’s level of 102.0%.





Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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