Muni Update

October 15, 2018


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

 

Municipal Market Recap

 

Prices on municipals were weaker across the curve to start the week on Tuesday. On Wednesday municipal prices were mixed, as the front-end was steady, while prices on bonds maturing 10 years and longer weakened. On Thursday they were mixed again, as the front-end was steady, while bonds maturing 10 years and longer reversed course and strengthened. On Friday they were steady across the curve. Issuance for the week is projected to be $10.8B, which is well above last week’s $3.0B in issuance, according to revised data from Thomson Reuters. The increase in weekly issuance, together with bid lists, should provide market participants with plenty of opportunities to fill needs this week.  We note that municipal CUSIP requests slowed in September, following a record surge in August, according to CUSIP Global Services. This is suggestive of a possible near-term slowdown in new issuance. CUSIP requests fell by 9.6% in September 2018, from August.

 

Municipal bond funds reported investors pulled cash out for a third  week, as weekly reporting funds experienced outflows of $847.858MM, after experiencing outflows of $43.626MM the week prior. The four-week moving average was a negative $283.857MM, after being a negative $106.017MM 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 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-, 10- and 30-year maturities on the MMD Triple-A Scale were all unchanged from Thursday to Friday and they ended the week at 2.05%, 2.73% and 3.41%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond rose two basis points (bps), while the yield on the 10-year GO bond rose five bps and the yield on the 30-year GO bond rose six 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 1.96%. Meanwhile, the yields on the 10- and 30-year maturities each fell one bp on the MMA Triple-A Scale from Thursday to Friday, and they ended the week at 2.73% and 3.33%, respectively. Overall, week-over-week the yields on the two- and 30-year GO bonds each rose three bps, while the yield on the 10-year GO bond rose four bps.

 

U.S. Treasury prices were mixed on Tuesday and Wednesday, as the front-end was steady both days, while bonds maturing 10 years and longer strengthened on Tuesday and weakened on Wednesday. On Thursday prices strengthened across the curve. On Friday they were mixed, as the front- and long-ends were steady, while prices on intermediate maturities weakened. Overall, week-over-week the yield on the 10-year maturity fell eight bps and closed the week at 3.15%. Meanwhile the yield on the two-year maturity fell three bps week-over-week and closed the week at 2.85%. This resulted in a 2s/10s spread of 30 bps, five bps tighter then last week’s 2s/10s spread of 35 bps. The yield on the 30-year maturity fell eight bps week-over-week and finished the week at 3.32%.

Weekly Bond Issuance is Forecasted to be $10.8B for the Trading Week

Total issuance for the coming trading week is estimated to be $10.8B, which is well above last week’s $3.0B in issuance, according to revised data from Thomson Reuters. This increase in issuance should provide market participants with a variety of opportunities to fill needs. This week’s trading calendar is comprised of $7.3B in negotiated offerings and $3.5B in competitive offerings.

Ohio’s Toledo Hospital plans to offer $1.2B of taxable corporate CUSIP Series 2018B bonds on Thursday. The deal is rated Baa1 by Moody’s Investors Service (Moody’s), BBB by S&P Global Ratings (S&P) and AAA by Fitch Ratings (Fitch). The New York City Transitional Finance Authority (NYC TFA) plans to offer $1.2B of Fiscal 2019 Series S3 Subseries S3A building aid revenue bonds on Wednesday after a two-day retail order period. The building aid revenue bonds (BARBs) are expected to be rated Aa2 by Moody’s and AA by S&P and Fitch. In addition, the NYC TFA plans to also offer competitively $199.57MM of taxable Fiscal 2019 Series S3, Subseries S3B BARBs on Wednesday.

Connecticut plans to price $850.0MM of Series 2018B&C special tax obligation bonds for infrastructure purposes. The deal is rated AA by S&P and A+ by Fitch.  Salt Lake City, Utah plans to offer $845.0MM of airport revenue bonds for the Salt Lake City International Airport consisting of Series 2018 bonds subject to the alternative minimum tax (AMT) and a Series 2018 non-AMT bonds. The deal is rated A2 by Moody’s and A+ by S&P.

Essentia Health Obligated Group plans to offer $707.0MM of healthcare facilities revenue bonds consisting of $667.0MM from the Duluth Economic Development Authority, Minnesota, and $40.0MM Cass County, North Dakota. The deal is rated A- by S&P and Fitch.

In the competitive sector, the Metropolitan Government of Nashville and Davidson County, Tennessee plans to sell $724.3MM of GO bonds on Tuesday. The deal is rated Aa2 by Moody’s and AA by S&P. Also on Tuesday, Illinois will sell $250.0MM of Build Illinois sales tax revenue bonds in three sales consisting of $125.0MM of Junior Obligation Tax-Exempt Series B of October 2018, $115.0MM of Junior Obligation Tax-Exempt Series A of October 2018, and $10.0MM of Junior Obligation Taxable Series C of October 2018. The deals are rated AA- by S&P and A- by Fitch. On Wednesday, California is selling $866.0MM of GOs consisting of $445.0MM of Bid Group A various purpose GO bonds and $421.02MM of Bid Group B various purpose GO bonds.

Municipal Bond Funds Post Outflows for a Third Week        

Municipal bond funds posted outflows for a third 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 $847.858MM, after experiencing outflows of $43.626MM the week prior. The four-week moving average was a negative $283.857MM, after being a negative $106.017MM the week prior.

Long-term municipal bond funds had outflows of $933.968MM in the latest week after experiencing inflows of $91.187MM the week prior. Intermediate-term funds had outflows of $72.567MM after outflows of $140.647MM the week prior. National funds had outflows of $704.697MM after experiencing inflows of $28.651MM the week prior. High-yield municipal funds reported outflows of $500.423MM in the latest week, after outflows of $113.789MM the week prior. Exchange traded funds reported outflows of $211.389MM, after inflows of $116.152MM 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 10+ years due to rising yields). 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.

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, especially as the long-end has cheapened in the past week.  The primary reason is that GM opportunities still present chances to pick up 4.0% and higher coupons. Week-over-week, bank qualified spreads widened across the curve, with the largest widening occurring in the five-year maturity, 25 bps.

Daily Overview of the General Market for the Week Ending October 12th

Last week started with prices weakening across the curve, as market participants were eyeing the $4.4B in long-term bond supply for the holiday-shortened trading week. On the day, the yields on the two-year GO bond rose two bps, while the yield on the 10-year GO bond rose by four bps and the yield on the 30-year GO bond rose by five bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed last Tuesday, as U.S. stocks had a mixed session. On the day, the yield on the two-year maturity was steady, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury rose to 84.7% on Tuesday from last Friday’s level of 83.0%, while the 30-year municipal-to-Treasury rose to 100.9% on Tuesday from last Friday’s level of 98.5%.

Last Wednesday prices on municipals were mixed, as market activity picked up and a number of new issue offerings 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 rose three bps and the yield on the 30-year GO bond rose five bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were also mixed on the day, as U.S. stock prices fell for the session. On the day, the yield on the two-year maturity was steady, while the yields on the 10-year maturity rose one bp and the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio rose to 85.4% on Wednesday from Tuesday’s level of 84.7%, while the 30-year municipal-to-Treasury ratio rose to 101.8% on Wednesday from Tuesday’s level of 100.9%.

Last Thursday prices on municipals were mixed, as the rest of the week’s new issue offerings were well received in the 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 four 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 fell for the session. On the day, the yield on the two-year maturity fell three bps, while the yield on the 10-year maturity fell eight bps and the yield on the 30-year maturity fell seven bps. The 10-year municipal-to-Treasury ratio rose to 86.9% on Thursday from Wednesday’s level of 85.4%, while the 30-year municipal-to-Treasury ratio rose to 102.7% on Thursday from Wednesday’s level of 101.8%.

Last Friday prices on municipals were unchanged, as market participants were looking ahead to the coming week’s $10.8B in new issue bond volume. On the day, the yields on the two-, 10- and 30-year GO bonds were all steady, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day mixed, as U.S. stocks prices rose for the session. On the day, the yields on the two- and 30-year maturities were steady, while the yield on 10-year maturity rose one bp. The 10-year municipal-to-Treasury slipped to 86.7% on Friday from Thursday’s level of 86.9%, while the 30-year municipal-to-Treasury was unchanged on Friday from Thursday’s level of 102.7%.

Taxable Market







Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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