Muni Update

October 16, 2017



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

 

Municipal Market Recap

Municipal bond funds reversed course and posted inflows for the week, as weekly reporting funds experienced $43.576MM of inflows of cash in the latest reporting week, after experiencing outflows of $140.336MM the week prior. The four-week moving average was positive at $2213.857MM, after being in the green at $263.309MM 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 stronger across the curve. On Wednesday they were mixed, as bonds 10 years and longer were steady, while the front-end weakened. On Thursday they were mixed again, as bonds 10 years and in strengthened, while the long-end weakened. On Friday they were mixed, as bonds maturing 10 years and in weakened, while the long-end was steady. Prices on municipals in the front-end were steady all week, while prices on maturities 10 years and longer strengthened daily. Volume for this trading week is projected to be $9.9B, which is above last week’s revised level of $4.2B. While supply has been down this year, this projected uptick in issuance together with secondary market opportunities should be well received, especially as demand for municipal bonds remains strong.

This week’s economic calendar is relatively quiet and includes a handful of housing reports and a few Fed speakers. Homebuilder confidence is scheduled for Tuesday and is expected to hold flat at 64 in October (a strong level historically). September’s housing starts and building permits data is scheduled for Wednesday with both expecting to show weak monthly results. As for the Fedspeak, Dudley’s comments on Wednesday and Yellen’s comments on Friday are likely to be the most impactful for the markets.

Last week the yield on the two-year maturities on the MMD Triple-A Scale was unchanged from Thursday to Friday and they ended the week at 1.00%.  Meanwhile, the yield on the 10-year maturity fell two basis points (bps) and the yield on the 30-year maturity fell four bps on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 1.96% and 2.74%, respectively. 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 fell six 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 fell one bp Thursday to Friday and ended the week at 1.00%. Meanwhile, the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell three bps on the MMA Triple-A Scale from Thursday to Friday and they ended the week at 2.06% and 2.86%, respectively. Overall, week-over-week the yield on the two-year maturity fell three bps, while the yield on the 10-year maturity fell five bps and the yield on the 30-year maturity fell six bps.

Prices on U.S. Treasuries started last week stronger across the curve. On Wednesday and Thursday they were mixed and on Friday they strengthened across the curve. Overall, week-over-week the yield on the 10-year maturity fell nine bps and closed the week at 2.28%. Meanwhile the yield on the two-year maturity fell two bps week-over-week and closed the week at 1.50%. This resulted in a week-over-week 2s/10s spread of 78 bps, seven bps tighter than last week’s 2s/10s spread of 85 bps. The yield on the 30-year maturity also fell nine   bps week-over-week and finished the week at 2.81%.

 

New Issue Volume is Expected to be $9.9B

Total volume for the trading week is estimated to be $9.9B, which is well above last week’s $4.2B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $4.3B in negotiated deals and approximately $5.6B in competitive sales, according to data from Thomson Reuters. We note that more than half the scheduled deals this week are to come competitively.

The New York City Transitional Finance Authority (NYC TFA) is scheduled to bring $1.0B to market on Wednesday, with an $850.0MM negotiated component and the remainder offered competitively. The future tax secured subordinate bonds are rated Aa1 by Moody’s Investors Service (Moody’s) and AAA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch).

California is on the docket to bring a total of $1.59B in three separate sales on Tuesday. They are anticipated to bring two issues of various purpose GO and refunding bonds. One will be for $557.215MM and the other $522.53MM. The remaining $508.57MM are projected to come as taxable various purpose GO bonds. All three deals are rated Aa3 by Moody’s and AA- by S&P and Fitch. Tuesday will also see the Berks County Industrial Development Authority price $575.0MM of health system revenue bonds for Tower Health. The deal is rated A3 by Moody’s and A by S&P and Fitch. Also on Tuesday, Illinois is slated to come with $1.5B of GO in three competitive sales. They are all rated Baa3 by Moody’s, BBB- by S&P and BBB by Fitch.

 

Municipal Bond Funds Posted Inflows for the Week       

Municipal bond funds posted inflows for the week, as market participants put cash into funds, according to the latest data from Lipper. The weekly reporters saw $43.576MM of inflows, after experiencing outflows of $140.336MM the week prior. The four-week moving average was positive at $213.857MM, after being in the green at $263.309MM the week prior.

Long-term municipal bond funds had outflows of $84.362MM in the latest reported week, after outflows of $136.354MM the week prior. Intermediate-term funds had inflows of $108.248MM after inflows of $117.108MM the week prior. National funds had inflows of $230.791MM after inflows of $58.823MM the week prior. High-yield municipal funds reported outflows of $93.973MM in the latest week, after experiencing outflows of $13.655MM the week prior. Exchange traded funds reported inflows of $104.014MM, after inflows of $72.007MM in the previous week.

 

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 widened in all maturities but the one-year, which tightened by six bps. The largest widening occurred in the 15- and 30-year maturities, nine bps each.

 

Daily Overview of the General Market for the Week Ending October 13th

Last Tuesday prices on municipals were mixed, as the first of the week’s new issues 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 on Tuesday, as the Dow led U.S. stocks to a daily gain Tuesday and its 47th record high of the year. The S&P recovered all of Monday’s losses after rising 0.23% and the NASDAQ lagged with a gain of 0.11%. The U.S. Dollar remained weak and closed near its session lows. On the day, the yield on the two-year maturity fell one bp, while the yields on the 10- and 30-year maturities each fell three bps. The 10-year municipal-to-Treasury ratio rose to 85.9% on Tuesday from Friday’s level of 85.2%, while the 30-year municipal-to-Treasury rose to 98.3% on Tuesday from Friday’s level of 97.6%.

Last Wednesday prices on municipals were mixed again, as new offerings from Texas and California issuers 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

U.S. Treasury prices finished the day mixed, as stocks closed at session highs and new records all around. The NASDAQ led with a 0.25% gain, while the Dow and S&P both added 0.18%. On the day, the yield on the two-year maturity rose one bp, while the yields on the 10- and 30-year maturities were steady. The 10-year municipal-to-Treasury ratio fell to 85.5% on Wednesday from Tuesday’s level of 85.9%, 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 were mixed again, as more than $3.0B of transportation deals were priced 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 three bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mixed, as the major U.S. equity indices faltered between 0.1% and 0.2% and the U.S. Dollar rose for the first time in the last five days. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio slipped to 85.3% on Thursday from Wednesday’s level of 85.5%, while the 30-year municipal-to-Treasury ratio fell to 96.5% 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 $9.9B in new issue paper expected to come to market. 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 finished the week stronger. On the day, the yield on the two-year maturity fell one bp, while the yield on the 10-year maturity fell four bps and the yield on the 30-year maturity fell seven bps. The 10-year municipal-to-Treasury ratio rose to 86.0% on Friday from Thursday’s level of 85.3%, while the 30-year municipal-to-Treasury ratio rose to 97.5% on Friday from Thursday’s level of 96.5%.

 

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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