Muni Update

October 2, 2017


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

 

Municipal Market Recap

Municipal bond funds posted inflows for the 12th week in a row, as weekly reporting funds experienced $378.211MM of inflows in the latest reporting week, after experiencing inflows of $573.978MM the week prior. The four-week moving average was positive at $360.985MM, after being in the green at $352.562MM 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 Tuesday and Wednesday they weakened across the curve. On Thursday prices were mixed, as the front-end strengthened while the long-end weakened. The ten-year spot was steady. On Friday prices were mixed again, as bonds maturing 10 years and in weakened, while the long-end strengthened. Prices on municipals started the trading week mixed, as bonds 10 years and longer were steady, while the front-end weakened. On Tuesday municipal prices were again mixed, as bonds 10 years and longer were steady, while the front-end weakened. On Wednesday and Thursday prices weakened across the curve. On Friday prices were mixed, as bonds maturing 10 years and in were steady, while the long-end strengthened. Volume for this trading week is projected to be $4.97B, which is below last week’s revised level of $8.68B. While supply has been down this year, we still expect this level of issuance coupled with secondary market opportunities to address the continued strong demand in the municipal sector.

This week’s economic calendar is lighter than last week’s, and it includes the ISM reports and the September labor data. We start the week with the ISM Manufacturing index and the August construction spending data. On Wednesday, the ISM Non-Manufacturing index is expected to tick up from 55.3 to 55.5, remaining at a reasonably strong level. Friday’s jobs data is, however, expected to be severely affected by the recent storms.  Economists expect nonfarm payroll growth to increase just 85k for the month with the unemployment rate holding at 4.4%.  Average hourly earnings are expected to stick at 2.5%.  However, with such a big impact coming from the recent storms, it will be hard to draw any definitive conclusions from this data.  Also on the calendar this week are several Fed speakers.

Last week the yield on the two-year maturity on the MMD Triple-A Scale rose one basis point (bp) from Thursday to Friday and they ended the week at 1.00%. Meanwhile, the yield on the 10-year maturity was steady and the yield on the 30-year maturity fell one bp on the MMD Triple-A Scale from Thursday to Friday and they ended the week at 2.00% and 2.84%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose 11 bps, while the yield on the 10-year GO bond rose eight 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 1.02%. 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 2.09% and 2.91%, respectively. Overall, week-over-week the yield on the two-year maturity rose seven bps, while the yields on the 10- and 30-year maturities each rose nine bps.

Prices on U.S. Treasuries started last week stronger across the curve. On Tuesday and Wednesday they weakened across the curve. On Thursday and Friday they were mixed. Overall, week-over-week the yield on the 10-year maturity rose six bps and closed the week at 2.32%. Meanwhile the yield on the two-year maturity rose four bps week-over-week and closed the week at 1.48%. This resulted in a week-over-week 2s/10s spread of 84 bps, two bps wider than last week’s 2s/10s spread of 82 bps. The yield on the 30-year maturity rose seven bps week-over-week and finished the week at 2.86%.

 

New Issue Volume is Expected to be $4.97B

Total volume for the trading week is estimated to be $4.97B, which is below last week’s $8.68B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $2.29B in negotiated deals and approximately $2.68B in competitive sales, according to data from Thomson Reuters. The coming week’s largest issue will come from the Dormitory Authority of the State of New York (DASNY), which will be offering buyers more than $2.0B of bonds in one negotiated deal and five competitive sales.

On Tuesday, DASNY will competitively sell $1.7B of general purpose state personal income tax revenue bonds consisting of $530.94MM of Series 2017B bidding group 2 bonds, $530.065MM of Series 2017B bidding group 3 bonds, $529.595MM of Series 2017B bidding group 1 bonds, $86.8MM of Series 2017D taxable bonds and $21.845MM of Series 2017C tax-exempt bonds. DASNY’s last deal in late June was rated Aa1 by Moody’s Investors Service (Moody’s) and AAA by S&P Global Ratings (S&P).

On Thursday DASNY will price $301.48MM of school districts and financing program revenue bonds in five series. The Series 2017 F, G, H, I and J carry various ratings ranging from Aa2 and Aa3 from Moody’s to A+ from S&P and AA- from Fitch Ratings.

In the short-term competitive arena, New York’s Triborough Bridge and Tunnel Authority (TBTA) will sell $400.0MM of Series 2017A general revenue bond anticipation notes on Monday. The BANs are rated MIG1 by Moody’s and F1+ by Fitch.

Also in the negotiated sector, two deals are coming out of San Diego. On Tuesday, the San Diego Unified School District plans to offer $220.0MM of Series 2017 GO bonds. The deal is rated Aa3 by Moody’s and AAA by Fitch. On Thursday the San Diego Association of Government’s Series 2017A South Bay Expressway first senior lien toll revenue bonds will be offered. The deal is rated A by S&P and A- by Fitch.

 

Municipal Bond Funds Posted Inflows for the Week       

Municipal bond funds posted inflows for the 12th week in a row, as market participants continued to put cash into funds, according to the latest data from Lipper. The weekly reporters saw $378.211MM of inflows, after inflows of $573.978MM the week prior. The four-week moving average was positive at $360.985MM, after being in the green at $352.562MM the week prior.

Long-term municipal bond funds had inflows of $302.608MM in the latest week after experiencing inflows of $225.329MM the week prior. Intermediate-term funds had inflows of $107.568MM after inflows of $113.402MM the week prior. National funds had inflows of $381.156MM after inflows of $561.769MM the week prior. High-yield municipal funds reported inflows of $124.678MM in the latest week, after experiencing inflows of $133.982MM the week prior. Exchange traded funds reported inflows of $85.005MM, after positive inflows of $26.746MM the previous week.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The new issue calendar drops this week, so the backup in yields last week should have market participants looking to strong bid lists for a 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 the one-, two-, three- and 10-year maturities, with the largest widening in the one-year maturity, eight bps. Meanwhile the spreads on the five-, 15- and 30-year maturities, week-over-week, were unchanged.

 

Daily Overview of the General Market for the Week Ending September 29th

Last Monday prices on municipals were mixed, as municipal market participants geared up for the busiest week since June. On the day the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year GO bonds were each steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries last Monday were stronger across the curve, as saber rattling between North Korean and Washington reached a new level. Foreign Minister Ri Yong Ho said that President Trump had declared war by saying that the regime “won’t be around much longer.” He went on to say that Trump gave the country the right to shoot down U.S. planes flying near the North Korean border.  The White House responded by saying the U.S. has not declared war on North Korea. While traders presumed nothing will materialize from the latest words, the lack of détente in the rhetoric has raised concerns once again. Gold spiked to pre-FOMC levels after having dropped roughly 1% following the FOMC’s surprisingly confident near-term outlook. The S&P ended the day down 0.2%. On the day, the yield on the two-year maturity fell two bps, while the yield on the 10-year maturity fell five bps and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio rose on Monday to 86.9% from the prior Friday’s level of 85.0%, while the 30-year municipal-to-Treasury ratio rose to 100.7% on Monday from the prior Friday’s level of 99.6%.

Last Tuesday prices on municipals were again mixed, as new issue activity was brisk and highlighted by the Texas Water Development Board’s billion-dollar deal. On the day the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year GO bonds were each steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker across the curve on Tuesday. 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 fell to 86.1% on Tuesday from Monday’s level of 86.9%, while the 30-year municipal-to-Treasury slipped to 100.4% on Tuesday from Monday’s level of 100.7%.

Last Wednesday prices on municipals finished the day weaker, as yields rose across the curve, tax reform details were disclosed, and more new issuance came into the market. On the day, the yield on the two-year GO bond rose four bps, while the yields on the 10- and 30-year GO bonds each rose six bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day weaker, shortly after the GOP released the details of its plan for tax reforms. While the political response was mixed down partisan lines, the markets seemed to adopt a net favorable take on the tax talk. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose eighty bps and the yield on the 30-year maturity rose nine bps. The 10-year municipal-to-Treasury ratio fell to 85.7% on Wednesday from Tuesday’s level of 86.1%, while the 30-year municipal-to-Treasury ratio fell to 99.33% on Wednesday from Tuesday’s level of 100.4%.

Last Thursday prices on municipals finished weaker, as the market continued to digest the potential effects from the tax reform news announced the day prior and the last of the week’s new issuance came to market. 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.

U.S. Treasury prices finished the day mixed, as the three major U.S. equity indices all improved less than 0.2% but the S&P’s 0.12% gain was enough to push the index to its first record close in six days. The U.S. Dollar followed a path similar to most U.S. yields and ended the day down 0.23% from Wednesday’s five-week high. On the day, the yield on the two-year maturity fell two bps, while the yield on the 10-year maturity was steady and the yield on 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio rose to 86.6% on Thursday from Wednesday’s level of 85.7%, while the 30-year municipal-to-Treasury ratio was unchanged on Thursday from Wednesday’s level of 99.3%.

Last Friday prices on municipals finished the week mixed, as market participants prepped for the estimated $4.97B in new issue paper expected to come to market. On the day, the yield on the two-year GO bond rose one bp, while the yield on the 10-year GO bond was steady and the yield on the 30-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasuries prices finished the week mixed. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose one bp and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio fell to 86.2% on Friday from Thursday’s level of 86.6%, while the 30-year municipal-to-Treasury ratio was unchanged on Friday from Thursday’s level of 99.3%.

 

Taxable Market

Taxable municipal bonds had a strong week. The sell-off that started on Tuesday made them very attractive to market participants. This attractiveness drove strong demand, resulting in everyone scrambling to fill orders. 

 



 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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