Muni Update

October 10, 2017



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

 

Municipal Market Recap

Municipal bond funds posted outflows for the week, as weekly reporting funds experienced $140.336MM of cash withdrawals in the latest reporting week, after experiencing inflows of $378.211MM the week prior. The four-week moving average was positive at $263.309MM, after being in the green at $360.985MM the week prior. Investors still facing negative 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 continue to rise. The uncertainty surrounding tax reform, infrastructure, 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 weaker across the curve. On Tuesday they were mixed, as bonds 10 years and in strengthened, while the long-end was steady. On Wednesday they were mixed again, as the front- and long-ends weakened and the 10-year maturity was steady. On Thursday prices were weaker across the curve. On Friday ahead of the holiday weekend prices were mixed, as bonds maturing 10 years and in weakened, while the long-end was steady. Prices on municipals started the trading week mixed, as the front- and long-ends were stable, while the 10-year maturity weakened. On Tuesday municipal prices were mixed again, as bonds 10 years and in were steady, while the long-end strengthened. On Wednesday prices were steady across the curve. On Thursday prices were mixed, as bonds 10 years and in were steady while the long-end weakened. On Friday prices were mixed, as the front- and long-ends were stable, while the 10-year maturity weakened. Volume for this trading week is projected to be $7.2B, which is above last week’s revised level of $4.42B. While supply has been down this year, this uptick in issuance together with secondary market opportunities should be well received, especially as demand for municipal bonds remains strong.

This week’s holiday-shortened economic calendar includes some key economic reports, the release of the FOMC minutes and a number of Fed speakers. The focus of Wednesday’s FOMC Minutes is likely to be on the changes to the dot plot and what the general tone of the Committee is when it comes to the inflation mandate. As to the economic reports this week, the most important reports will be released on Friday: September’s CPI inflation and retail sales report. Headline inflation is projected to match its biggest monthly jump since 2009 (0.6%) and the YoY rate is expected to climb to 2.3%, the highest since March.

Last week the yields on the two- and 30-year maturities on the MMD Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 1.00% and 2.83%, respectively. Meanwhile, the yield on the 10-year maturity rose one basis point (bp) on the MMD Triple-A Scale from Thursday to Friday and ended the week at 2.02%. Overall, week-over-week the yield on the two-year general obligation (GO) bond was unchanged, while the yield on the 10-year GO bond rose two bps and the yield on the 30-year GO bond fell one bp.

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 1.03%. Meanwhile the   yields on the 10- and 30-year maturities on the MMA Triple-A Scale each rose one bp from Thursday to Friday and ended the week at 2.11% and 2.92%, respectively. Overall, week-over-week the yields on the two- and 30-year maturities each rose one bp, while the yield on the 10-year maturity rose two bps.

Prices on U.S. Treasuries started last week weaker across the curve. On Tuesday and Wednesday they were mixed. On Thursday they weakened across the curve. On Friday ahead of the holiday prices closed the week mixed. Overall, week-over-week the yield on the 10-year maturity rose five bps and closed the week at 2.37%. Meanwhile the yield on the two-year maturity rose four bps week-over-week and closed the week at 1.52%. This resulted in a week-over-week 2s/10s spread of 85 bps, one bp wider than last week’s 2s/10s spread of 84 bps. The yield on the 30-year maturity rose four bps week-over-week and finished the week at 2.90%.

 

New Issue Volume is Expected to be $7.2B

Total volume for the trading week is estimated to be $7.2B, which is above last week’s $4.42B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $5.1B in negotiated deals and approximately $2.1B in competitive sales, according to data from Thomson Reuters. The largest deal of the week will be the North Texas Tollway Authority’s $2.57B of system revenue and refunding bonds. The deal is slated to price on Thursday after holding a one-day retail order period. The issue is composed of Series 2017A first tier bonds and Series 2017B second tier bonds. The Series 2017A first tier bonds are rated A1 by Moody’s Investors Service (Moody’s) and A by S&P Global Ratings (S&P), while the Series 2017B second tier bonds are rated A2 by Moody’s and A- by S&P.

Also on tap is an $897.0MM offering from the Airport Commission of the City and County of San Francisco. The deal is expected to price on Wednesday. The issue is comprised of Series 2017A, Series 2017D and Series 2018A bonds subject to the alternative minimum tax (AMT), Series 2017 non-AMT bonds and Series 2017C taxables. The bonds are rated A1 by Moody’s and A+ by S&P and Fitch Ratings (Fitch).

In the competitive arena, the Los Angeles County Metropolitan Transportation Authority is selling $566.82MM of bonds in two separate offerings on Thursday. The sales consist of $479.71MM of Series 2017A Proposition A first tier senior sales tax revenue green bonds and $87.11MM of Series 2017B Proposition A first tier senior sales tax revenue refunding bonds. The deals are rated Aa1 by Moody’s and AAA by S&P. Texas A&M is also planning to offer $399.78MM of permanent university fund bonds in two competitive offerings. The first offering consisting of $309.83MM Series 2017B taxables and the second offering will be comprised of $89.95MM of Series 2017A tax-exempts. Both deals are rated triple-A by Moody’s, S&P and Fitch.

 

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 $140.336MM of outflows, after inflows of $378.211MM the week prior. The four-week moving average was positive at $263.309MM, after being in the green at $360.985MM the week prior.

Long-term municipal bond funds had outflows of $136.354MM in the latest week after inflows of $302.608MM the week prior. Intermediate-term funds had inflows of $117.108MM after inflows of $107.568MM the week prior. National funds had inflows of $58.823MM after inflows of $381.156MM the week prior. High-yield municipal funds reported outflows of $13.655MM in the latest week, after experiencing inflows of $124.678MM the week prior. Exchange traded funds reported inflows of $72.007MM, after inflows of $85.005MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The new issue calendar for 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- and two-year maturities and were unchanged in the three-year maturity. The largest tightening occurred in the two-year maturity, two bps. Meanwhile the spreads on the five, 10-, 15- and 30-year maturities, week-over-week, all widened, with the largest widening occurring in the five and 10-year maturities, six bps.

  

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

Last Monday prices on municipals were mixed, as the first of the week’s new issues hit the market. On the day the yields on the two- and 30-year maturities were stable, while the yield on the 10-year GO bond rose one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries last Monday were weaker across the curve, as a rally in the markets sent U.S. stocks to another round of record highs. The Dow added over 150 points, or 0.68%, to lead the big three indices. The S&P gained 0.39% and the NASDAQ trailed with a 0.32% daily improvement. U.S. crude prices fell the most since September 8, after OPEC production data showed an unexpected increase in September. On the day, the yields on the two- and 10-year maturities each rose two bps, while the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio slipped on Monday to 85.9% from the prior Friday’s level of 86.2%, while the 30-year municipal-to-Treasury ratio slipped to 99.0% on Monday from the prior Friday’s level of 99.3%.

Last Tuesday prices on municipals were again mixed, as the Dormitory Authority of the State of New York (DASNY) competitively sold almost $1.7B of bonds in a handful of offerings. On the day the yields on the two- and 10-year GO bonds were steady, while the yield on the 30-year GO bond fell two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as U.S. stocks saw another record high.  The Dow led the way with a 0.37% gain, while the S&P and NASDAQ added roughly 0.2%. Telecommunications improved the most within the S&P to lead the index to its sixth consecutive daily gain. Among the biggest movers on the day were the major airline and auto companies. The airlines rallied more than 5.5% after Delta reported better-than-expected revenue per seat mile flown for 3Q. Auto companies rose 2.5% after auto sales for the month of September boomed. September’s sales rose 15.2% to a total annualized pace of 18.47MM units. This represented the biggest monthly gain since August 2009 and the strongest monthly sales pace since July 2005. It was expected that consumers replacing cars destroyed by the hurricanes would boost the monthly result. On the day, the yield on the two-year maturity fell three bps, while the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity was steady. The 10-year municipal-to-Treasury ratio rose to 86.3% on Tuesday from Monday’s level of 85.9%, while the 30-year municipal-to-Treasury fell to 98.3% on Tuesday from Monday’s level of 99.0%.

Last Wednesday prices on municipals finished the day steady, as more new issuance came into the market and prices on Puerto Rican bonds plunged after President Donald Trump suggested the commonwealth’s debt needed to be “wiped out” to help the island recover from the devastation caused by Hurricane Maria. On the day, the yields on the two-, 10- and 30-year GO bonds were unchanged, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed, as the S&P gained for a seventh session with its modest 0.12% daily gain enough to outperform the Dow and NASDAQ and notch the index another record close. The Dow gained a marginal 0.09% and the NASDAQ improved by an even smaller 0.04%; both managed record closes of their own. U.S. crude prices fell 1.0% and matched their lowest level since September 13. As expected, government data showed a draw-down of U.S. crude stocks and a build for gasoline. On the day, the yields on the two- and 30-year maturities each rose one bp, while the yield on the 10-year maturity was steady. The 10-year municipal-to-Treasury ratio was unchanged on Wednesday from Tuesday’s level of 86.3%, while the 30-year municipal-to-Treasury ratio fell to 97.9% on Wednesday from Tuesday’s level of 98.3%.

Last Thursday prices on municipals finished mixed, as many market participants watched Puerto Rico’s debt, which was recovering from sharp losses suffered the previous day. On the day, the yields on the two- and 10-year GO bonds were steady, while the yield on the 30-year GO bond rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day weaker, as stocks rallied sharply. The S&P and NASDAQ rose for an eighth consecutive session and the Dow gained in a seventh straight day of trading. The three major indices have now reached a record close every day of October. The U.S. Dollar joined in the rally, climbing 0.48% to its strongest level since July 25. On the day, the yields on the two-, 10- and 30-year maturities each rose two bps. The 10-year municipal-to-Treasury ratio fell to 85.5% on Thursday from Wednesday’s level of 86.3%, while the 30-year municipal-to-Treasury ratio slipped to 97.6% on Thursday from Wednesday’s level of 97.9%.

Last Friday prices on municipals finished the week mixed, as market participants prepped for the estimated $7.2B in new issue paper expected to come to market. On the day, the yields on the two- and 30-year GO bonds were steady, while the yield on the 10-year GO bond rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the week mixed. On the day, the yields on the two- and 10-year maturities rose two bps, while the yield on the 30-year maturity was steady. The 10-year municipal-to-Treasury ratio slipped to 85.2% on Friday from Thursday’s level of 85.5%, while the 30-year municipal-to-Treasury ratio was unchanged on Friday from Thursday’s level of 97.6%.

 

Taxable Market

Taxable municipal bonds had another strong week, as the continued sell-off made them very attractive, driving strong demand.

 





Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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