October 19, 2020
In this week’s Municipal Market Update, we highlight the following:
- Municipal prices were steady on Tuesday and Wednesday, they were mixed on Thursday and steady again on Friday, as reflected by weekly data for the Municipal Market Data (MMD) Triple-A Scale; also shown are the yields for the Municipal Market Advisors (MMA) Triple-A Scale;
- New-issue offerings are forecasted to be $16.4B for the trading week;
- Municipal bond funds posted inflows for a second week;
- Demand in the Bank Qualified (BQ) market remains strong;
- Day-by-day recap of activity in the General Market.
Municipal Market Recap
Municipal prices were steady across the curve on Tuesday and Wednesday. On Thursday municipal prices were mixed, as prices on the front-end weakened, while prices on bonds maturing ten years and longer strengthened. On Friday municipal prices were steady again across the curve.
This trading week’s projected level of new-issue offerings is $16.4B and coupled with the recent rise in secondary market offerings should provide market participants with several opportunities to fill their needs. The expected continued strong demand, due in part to continued, although reduced redemption activity from this summer, coupled with strong inflows into funds has contributed to demand outpacing supply for most of the year.
The visible bond supply appears to be exploding as municipal issuers are racing to the bond market at the fastest pace since the record-setting borrowing spree three years ago. There are $31.0B of debt offerings so far scheduled over the next 30 days, a tally which captures only a fraction of what will likely be sold because many deals are done on shorter notice. It marks the busiest slate since February, 18th of 2005, when the figure was $31.49B. The volume of new bond sales has been building for weeks, with about $53.0B sold last month, according to Bloomberg. That’s not far from the all-time high of $59.0B in December of 2017. Per Bloomberg, the “surge reflects a push by governments to avoid volatility that could be set off by the November 3rd presidential election and borrow while rates are still holding not far from record lows.” The increased pace of borrowing has so far had little impact on tax-exempt yields, despite some investors’ concerns that it would weigh on prices. Many of the new bonds are taxable securities being sold for refinancings, which has eased the pressure on the tax-exempt market.
Investors in municipal bond funds put cash into funds for a second week in a row, as evidenced by the latest tax-exempt weekly reporting funds data showing that funds experienced inflows of $614.447MM in the latest week, after experiencing inflows of $1.729B the week prior. The four-week moving average was a positive $516.803MM, after being in the green at $516.182MM 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 yields on the two-, 10-, and 30-year maturities on the MMD Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 0.16%, 0.94%, and 1.72%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond rose one basis point (bp), while the yields on the 10- and 30-year GO bond each fell one bp.
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 0.29%. Meanwhile the yields on the 10- and 30-year maturities on the MMA Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 1.21% and 1.83%, respectively. Overall, week-over-week the yield on the two-year GO bond rose one bp, while the yields on the 10- and 30-year GO bonds were unchanged.
New-Issue Volume is Forecasted to be $16.4B for the Week
Total new-issue offerings for the trading week per IHS Markit Ipreo are estimated to be $16.4B. This week’s projected bond issuance is comprised of $10.4B in negotiated deals and $5.9B in competitive sales. The largest deal of the week will be the Sutter Health of California’s $1.99B taxable corporate CUSIP bonds offering that is set to price on Thursday. The deal is rated A1 by Moody’s Investors Service (Moody’s) and A+ by both Standard and Poor’s Global Ratings (S&P) and Fitch Ratings (Fitch).
Close behind is Illinois’s Common Spirit Health which is coming with a $1.5B offering of Series 2020 taxable corporate CUSIP bonds rated Baa1 by Moody’s and BBB+ By S&P and Fitch. Also, Banner Health of Arizona is coming to market with $607.655MM of Series 2020C taxable corporate CUSIP bonds on Tuesday. The deal is rated AA- by S&P and Fitch.
Other large deals of note include the Alabama Public School and College Authority’s $1.48B offering of capital improvement and refunding bonds consisting of Series 2020A tax-exempt bonds and a Series 2020B and 2020C taxable bond offerings on Thursday. The deals are rated Aa1 by Moody’s, AA by S&P and AA+ by Fitch. The state of Hawaii is offering $1.047B of GOs consisting of $900.0MM of taxable GOs and $147.15MM of tax-exempts on Wednesday.
Those searching for a little bit more yield can look no further than West Virginia’s Tobacco Settlement Finance Authority which is issuing $708.625MM of taxable Series 2020 senior current interest tobacco settlement asset-backed refunding bonds on Wednesday.
In the competitive arena, the State of California is selling $1.1B of various purpose GO bonds in three offerings on Thursday. The sales are made up of $590.265MM of tax-exempt Bid Group B GO and GO refunding bonds, $321.625MM of taxable Bid Group A GO construction bonds and $198.89MM of taxable Bid Group C GO refunding bonds. The State of Illinois is coming to market on Tuesday with $850.0MM of GOs in four offerings. The sales consist of $325MM of Series of October 2020B GOs, $300.0MM of Series of October 2020C GOs, $125.0MM of taxable Series of October 2020A GOs, and $100.0MM of Series of October 2020D GOs.
The Virginia Public School Authority is selling $473.64MM of school financing bonds on Tuesday in two offerings. The sales consist of $330.045MM of Series 2020C taxable refunding bonds and $143.595MM of Series 2020B tax-exempt school financing and refunding bonds. The deals are rated Aa1 by Moody’s and AA+ by S&P and Fitch.
One deal that won’t be coming, according to Bloomberg, is Fortress Investment Group’s $3.2B sale of municipal bonds to build a passenger railroad between southern California and Las Vegas. The deal had been planned for Wednesday but has now been postponed and is listed as day-to-day.
Municipal Bond Funds Posted Inflows for a Second Week in a Row
Investors in municipal bond put cash into funds for a second week, as tax-exempt weekly reporting funds experienced inflows of $614.447MM in the latest week, after experiencing inflows of $1.729BMM the week prior. The four-week moving average was a positive $516.803MM, after being in the green at $516.182MM the week prior.
Long-term municipal bond funds had inflows of $170.662MM in the latest week, after experiencing inflows of $839.739MM the week prior. Intermediate-term funds had inflows of $14.194MM after inflows of $61.026MM the week prior. National funds had inflows of $652.176B after experiencing inflows of $1.661B the week prior. High-yield municipal funds reported outflows of $85.651MM in the latest week, after outflows of $349.441MM the week prior. Exchange traded municipal funds reported inflows of $191.893MM, after inflows of $220.101MM the week prior.
Demand in the Bank Qualified (BQ) Market Remains Strong
BQ participants continue to be focused on the new-issue paper this week, especially general market paper, as buyers continue to outpace sellers. BQ participants continue to have significant demand for municipal paper due in large part to having to replace rolloffs due to redemptions over the last few months, which started on June 1st. 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 one-, two- three-, and 30-year maturities all tightened, with the largest tightening occurring in the three-year maturity, four bps. Meanwhile the spreads on the five-, 10-, and 15-year maturities all widened, with the largest widening occurring in the 15-year maturity, 10 bps.
Daily Overview of the General Market for the Week Ending October 16th
Last Tuesday municipals prices were steady, as the first of the holiday-shortened trading week’s $14.3B in new-issue long-term debt was offered. 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.
Prices on U.S. Treasurys were mixed, as U.S. Stock prices fell for the session. The Dow finished down 157 points, or 0.6%. The S&P was also down 0.6%, and the NASDAQ was down just 0.1%. On the day, the yield on the two-year maturity was changed, while the yield on the 10-year maturity fell five bps and the yield on the 30-year maturity fell six bps. The 10-year municipal-to-Treasury ratio rose to 128.4% on Tuesday from last Friday’s level of 120.3%, while the 30-year municipal-to-Treasury ratio rose to 113.8% on Tuesday from last Friday’s level of 109.5%.
Last Wednesday municipals prices were steady, as a number of diverse issuers came to market including a $510.0MM offering of taxable bonds for the Baptist Healthcare System Obligated Group, a $385.12MM of revenue bonds from the Louisiana Public Finance Authority for the Ochsner Clinic Foundation project, $148.95MM of taxable hospital facilities revenue improvement bonds for the Nationwide Children’s Hospital project offered by Franklin County, Ohio, and $244.605MM of second lien distributable state aid revenue and revenue refunding bonds for the Charter County of Wayne, Michigan by the Michigan Finance Authority to name a few. 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 were strengthened on Wednesday, as U.S. stocks finished down for the higher. The Dow finished down 166 points or 0.6%, while the S&P was down 0.7% and the NASDAQ was down 0.8%. On the day, the yields on the two- and 30-year maturities each fell two bps, while the yield on the 10-maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 130.1% on Wednesday from Tuesday’s level of 128.4%, while the 30-year municipal-to-Treasury ratio rose to 115.3% on Wednesday from Tuesday’s level of 113.8%.
Last Thursday municipals prices were mixed, as the last of holiday-shortened trading week’s new-issue offerings came to market, including negotiated deals from issuers in Denver, Georgia and Oklahoma. 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 each fell one bp, according to the final read of the MMD Triple-A Scale.
U.S. Treasury prices were mixed last Thursday, as U.S. Stocks fell on the open only to reverse course and made up the majority of losses for the session on the hopes for a resolution to the continuing stimulus talks. The Dow finished down 20 points or 0.1%, while the S&P was down 0.2% and the NASDAQ was down 0.5%. 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 rose two bps. The 10-year municipal-to-Treasury ratio fell to 127.0% on Thursday from Wednesday’s level of 130.1%, while the 30-year municipal-to-Treasury ratio fell to 113.2% on Thursday from Wednesday’s level of 115.3%.
Last Friday prices on municipals were steady, as market participants started looking ahead to the $16.4B in expected new-issue offerings next week. On the day, the yields on the two-, 10-, and 30-year GO bond were unchanged, according to the final read of the MMD Triple-A Scale.
U.S. Treasury prices were mixed on Friday, as was U.S. stocks price action for the session. The Dow finished up 112 points, or 0.4%, while the S&P barely moved on the day and the NASDAQ was down 0.4%. On the day, the yields on the two- and 30-year maturities were unchanged, while the yield on the 10-year maturity rose two bps. The 10-year municipal-to-Treasury ratio fell to 123.7% on Friday from Thursday’s level of 127.0%, while the 30-year municipal-to-Treasury was unchanged on Friday from Thursday’s level of 113.2%.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP