Muni Update

October 1, 2018


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

 

Municipal Market Recap

 

Prices on municipals weakened Monday and Tuesday. On Wednesday they were mixed, as the front-end weakened, while bonds maturing 10 years and longer were steady. On Thursday they were mixed, as the front-end was steady, while bonds maturing 10 years and longer strengthened. Friday was a repeat of Thursday’s price action for municipals. Issuance for the week is projected to be $7.5B, which is above last week’s $3.3B in issuance, according to revised data from Thomson Reuters. This increase in issuance together with secondary market bid lists should provide market participants numerous opportunities this coming week, especially if the new issue opportunities are priced right.

 

Municipal bond funds reported investors reversed course again and pulled cash out of funds for the week, as weekly reporting funds experienced outflows of $384.796MM, after experiencing inflows of $140.805MM the week prior. The four-week moving average turned negative at $140.470MM, after being a positive $8.742MM the week prior. Investors still facing low rates overseas continue to find higher-yielding U.S. assets attractive. These factors, plus the high level of municipal redemptions over the next few months, should have both traditional and non-traditional market participants continuing to look for opportunities, especially if yields rise.

Last week the yield on the two-year maturity on the MMD Triple-A Scale was unchanged from Thursday to Friday and it ended the week at 1.97%. Meanwhile, the yields on the 10- and 30-year maturities each fell two basis points (bps) on the MMD Triple-A Scale from Thursday to Friday, and they ended the week at 2.58% and 3.19%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond rose four bps, while the yield on the 10-year GO bond fell one bp and the yield on the 30-year GO bond fell four bps.

 

Last week the yield on the two-year maturity on the MMA Triple-A Scale fell one bp from Thursday to Friday and ended the week at 1.84%. Meanwhile, the yields on the 10- and 30-year maturities were unchanged on the MMA Triple-A Scale from Thursday to Friday, and they ended the week at 2.58% and 3.19%, respectively. Overall, week-over-week the yield on the two-year GO bond rose one bp, while the yield on the 10-year GO bond was unchanged and the yield on the 30-year GO bond fell one bp.

 

U.S. Treasuries prices weakened on Monday across the curve. On Tuesday prices were mixed, as the front-end was steady, while bonds maturing ten years and longer weakened. On Wednesday prices were mixed again, as the front-end was steady, while bonds maturing 10 years and longer strengthened. On Thursday they were steady across the curve. On Friday they strengthened across the curve. Overall, week-over-week the yield on the 10-year maturity fell two bps and closed the week at 3.05%. Meanwhile the yield on the two-year maturity was unchanged week-over-week and closed the week at 2.81%. This resulted in a week-over-week 2s/10s spread of 24 bps, two bps tighter then last week’s 2s/10s spread of 26 bps. The yield on the 30-year maturity fell one bp week-over-week and finished the week at 3.19%.

Weekly Bond Issuance is Forecasted to be $7.5B for the Trading Week

Total issuance for the coming week is estimated to be $7.5B, which is above last week’s $3.3B in issuance, according to revised data from Thomson Reuters. This increase should provide market participants with a variety of opportunities to fill needs. This week’s trading calendar is comprised of $5.0B in negotiated offerings and $2.5B in competitive offerings.

Topping the negotiated calendar this week is the $1.56B Series 2018A transportation system bonds offering from the New Jersey Transportation Trust Fund Authority. The offering is set to price on Wednesday. Proceeds of the sale will refund outstanding bonds. The deal is rated Baa1 by Moody’s Investors Service (Moody’s), BBB+ by S&P Global Ratings (S&P) and A- by Fitch Ratings (Fitch).

In the competitive arena, the Dormitory Authority of the State of New York (DASNY) plans to sell over $1.7B of tax-exempts and taxables bonds in six separate offerings. Proceeds will be used for various state programs. The offering is set to price on Tuesday. In the short-term competitive sector, the New York Metropolitan Transportation Authority (MTA) is coming to market with two competitive note sales totaling $900.0MM on Wednesday.

Municipal Bond Funds Reverse Course and Post Outflows for the Week        

Municipal bond funds reversed course and posted outflows for the week, as market participants pulled cash out of funds for the week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $384.796MM, after experiencing inflows of $140.850MM the week prior. The four-week moving average turned negative at $140.470MM, after being a positive $8.742MM the week prior.

Long-term municipal bond funds had outflows of $371.535MM in the latest week after experiencing inflows of $134.403MM the week prior. Intermediate-term funds had inflows of $131.732MM after outflows of $80.745MM the week prior. National funds had outflows of $346.384MM after experiencing inflows of $158.227MM the week prior. High-yield municipal funds reported outflows of $129.551MM in the latest week, after inflows of $156.236MM the week prior. Exchange traded funds reported outflows of $152.012MM, after inflows of $35.766MM 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 (12+ years). This trade has worked 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.

For this week, we expect to see a continuation of the extension swap. BQ participants will look to the longer-end of the curve to pick up yield in both the BQ and general market (GM) segments of the municipal market. The primary reason is that GM opportunities still present chances to pick up 4.0% and higher coupons. Week-over-week, bank qualified spreads were mixed, as the spreads on three, five and 10-year maturities were unchanged. Meanwhile the spreads on the two, 15 and 30-year maturities all tightened, with the largest tightening occurring in the two-year maturity, two bps. Finally, the spread on the one-year maturity widened week-over-week, one bp.

Daily Overview of the General Market for the Week Ending September 28th

Last Monday prices on municipals were weaker, as market participants were eyeing the $3.13B in long-term bond supply, ahead of the FOMC’s monetary policy meeting and quarter end wrap-up. 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 bond rose one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also weaker on Monday, as U.S. stocks posted losses 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 each rose one bp. The 10-year municipal-to-Treasury bumped up to 84.7% on Monday from last Friday’s level of 84.4%, while the 30-year municipal-to-Treasury was unchanged on Monday from last Friday’s level of 100.9%.

Last Tuesday prices on municipal bonds were weaker, as the largest deal of the week came to market, a $260.565MM State of Wisconsin Series 2018B GO offering. 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 rose two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as U.S. stocks traded mixed on the session. On the day, the yield on the two-year maturity was steady, while the yields on the 10- and 30-year maturities each rose two bps. The 10-year municipal-to-Treasury ratio slipped to 84.5% on Tuesday from Monday’s level of 84.7%, while the 30-year municipal-to-Treasury was unchanged on Tuesday from Monday’s level of 100.9%.

Last Wednesday prices on municipals were mixed, as market activity was kept to a minimum for the day, ahead of the FOMC’s announcement on rates. The FOMC meeting, as expected, concluded with a decision to raise the benchmark fed funds rate target to a range of 2.0% to 2.25%, the third increase this year and eighth since the FOMC started raising rates in 2015. The FOMC also cemented expectations for another hike this year as they reaffirmed that a strong U.S. economy will probably warrant further gradual increases well into 2019. The move reflected an upbeat assessment of the economy that was identical to the central bank’s last policy statement eight weeks ago. 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 were steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were also mixed, as U.S. stock prices and yields on U.S. treasuries mostly closed down for the session. On the day, the yield on the two-year maturity was steady, while the yields on the 10- and 30-year maturities each fell four bps. The 10-year municipal-to-Treasury ratio rose to 85.6% on Wednesday from Tuesday’s level of 84.5%, while the 30-year municipal-to-Treasury ratio rose to 102.2% on Wednesday from Tuesday’s level of 100.9%.

Last Thursday prices on municipals were mixed, as the last of week’s new issue deals came to market. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond fell two bps and the 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 also finished the day mixed, as U.S. stock prices rose during the session. On the day, the yields on the two-, 10- and 30-year maturities were each steady. The 10-year municipal-to-Treasury ratio fell to 85.0% on Thursday from Wednesday’s level of 85.6%, while the 30-year municipal-to-Treasury ratio fell to 100.6% on Thursday from Wednesday’s level of 102.2%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to the coming week’s $7.5B in new issue bond volume. 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 also finished the day mixed, as U.S. stocks prices mostly rose for the session. On the day, the yield on the two-year maturity fell two bps, while the yield on the 10-year GO bond fell one bp and the yield on the 30-year GO bond was steady. The 10-year municipal-to-Treasury fell to 84.6% on Friday from Thursday’s level of 85.0%, while the 30-year municipal-to-Treasury ratio fell to 100.0% on Friday from Thursday’s level of 100.6%.

Taxable Market







Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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