Muni Update

October 29, 2018



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

 

Municipal Market Recap

Prices on municipals started the week mixed, as bonds maturing ten years and in were steady, while the long-end strengthened. On Tuesday they strengthened across the curve. On Wednesday prices were mixed again, as bonds maturing ten years and in were steady, while the long-end strengthened. On Thursday they were steady across the curve. On Friday they were mixed again, as the front-end was steady, while bonds maturing 10 years and longer strengthened. Issuance for the week is projected to be $6.5B, which is higher than last week’s $5.7B in issuance, according to revised data from Thomson Reuters. This level of issuance together with bid lists, should provide market participants with opportunities to fill needs this week.

 

Municipal bond funds reported investors pulled cash out for a fifth week, as weekly reporting funds experienced outflows of $494.914MM, after experiencing outflows of $632.032MM the week prior. The four-week moving average was a negative $505.107MM, after being a negative $479.578MM 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 and municipals being at their cheapest relative to U.S. Treasuries in six months, should have both traditional and non-traditional market participants continuing to look for opportunities in the U.S. municipal market.

Last week the yield on the two-year maturity on the MMD Triple-A Scale was unchanged from Thursday to Friday and they ended the week at 2.04%. Meanwhile, the yields on the 10- and 30-year maturities each fell two basis points (bps) on the MMD Triple-A Scale from Thursday to Friday, and they ended the week at 2.68% and 3.32%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond fell one bp, while the yield on the 10-year GO bond fell five bps and the yield on the 30-year GO bond fell eight bps.

 

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale were all unchanged from Thursday to Friday and they ended the week at 1.96%, 2.71% and 3.30%, respectively. Overall, week-over-week 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.

 

U.S. Treasury prices were steady across the curve on Monday. On Tuesday the strengthened across the curve. On Wednesday prices reversed course and weakened across the curve. On Thursday prices once again weakened across the curve. On Friday they reversed course and strengthened across the curve. Overall, week-over-week the yield on the 10-year maturity fell 12 bps and closed the week at 3.08%. Meanwhile the yield on the two-year maturity fell 11 bps week-over-week and closed the week at 2.81%. This resulted in a 2s/10s spread of 27 bps, one bp tighter then last week’s 2s/10s spread of 28 bps. The yield on the 30-year maturity fell six bps week-over-week and finished the week at 3.32%.

 

Weekly Bond Issuance is Forecasted to be $6.5B for the Trading Week

Total issuance for the coming trading week is estimated to be $6.5B, which is slightly above last week’s $5.7B in issuance, according to revised data from Thomson Reuters. This week’s trading calendar is comprised of $5.8B in negotiated offerings and $703.3MM in competitive offerings.

The Chicago’s Sales Tax Securitization Corporation’s $1.31B offering will headline the new issue calendar this week. The offering is comprised of $917.64MM of Series 2018C sales tax securitization bonds and $388.56MM of Series 2018D taxables sales tax securitization bonds. The deal is set to price on Wednesday.

Also this week there will also be a bevy of deals coming from California issuers to include the Los Angeles Department of Airports’ $714.0MM of subordinate revenue bonds. Also from Los Angeles will be $362.0MM of wastewater subordinate revenue bonds. The San Mateo Community College District plans to offer $318.0MM of GO bonds and the San Mateo County Joint Powers Financing Authority plans to offer $260.0MM of lease revenue bonds.

 

Municipal Bond Funds Post Outflows for a Fifth Week        

Municipal bond funds posted outflows for a fifth 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 $494.914MM, after experiencing outflows of $642.032MM the week prior. The four-week moving average was a negative $505.107MM, after being a negative $479.578MM the week prior.

Long-term municipal bond funds had outflows of $368.134MM in the latest week after experiencing outflows of $659.499MM the week prior. Intermediate-term funds had outflows of $143.005MM after outflows of $80.325MM the week prior. National funds had outflows of $370.522MM after experiencing outflows of $487.127MM the week prior. High-yield municipal funds reported outflows of $230.226MM in the latest week, after outflows of $604.919MM the week prior. Exchange traded funds reported outflows of $25.091MM, after inflows of $155.595MM 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 remains cheap. 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, 14 bps.

 

Daily Overview of the General Market for the Week Ending October 26th

Last Monday prices on municipals were mixed, as market participants were eyeing the $5.9B in long-term bond supply for the week, as Puerto Rico bonds rallied in the secondary market due to a revised fiscal plan which projects a bigger surplus. On the day, the yields on the two- and 10-year GO bond were steady, while the yield on the 30-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were steady on the day, as the Dow and S&P posted losses, while the NASDAQ was up for the session. On the day, the yields on the two-, 10- and 30-year maturities were steady. The 10-year municipal-to-Treasury was unchanged on Monday from last Friday’s level of 85.3%, while the 30-year municipal-to-Treasury slipped to 100.3% on Monday from last Friday’s level of 100.6%.

On Tuesday prices strengthened, as deals from Clark County, Nevada, and Ohio were among issuers pricing into a stronger municipal market, as volatility in equities spurred a flight to quality. On the day, the yield on the two-year GO bond fell one bp, while the yield on the 10-year GO bond fell three bps and the yield on the 30-year GO bond fell four bpd, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also stronger, as U.S. stock prices fell on the open and while they closed down for the day, they did claw back some of the losses during the afternoon part of the session. On the day, the yields on the two- and 10-year maturities each fell three bps, while the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury slipped to 85.2% on Tuesday from Monday’s level of 85.3%, while the 30-year municipal-to-Treasury slipped to 99.4% on Tuesday from Monday’s level of 100.3%.

Last Wednesday prices on municipals were mixed, as a number of new offerings came to market, including Montgomery County, Maryland’s triple-A-rated GO bond offering. 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 one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were stronger on the day across most of the curve, as U.S. stock prices plunged for the session, which ignited a flight into the safety of U.S. Treasuries. On the day, the yield on the two-year maturity fell five bps, while the yield on the 10-year maturity fell seven bps and the yield on the 30-year maturity fell four bps. The 10-year municipal-to-Treasury ratio rose to 87.1% on Wednesday from Tuesday’s level of 85.2%, while the 30-year municipal-to-Treasury rose 100.3% on Wednesday from Tuesday’s level of 99.4%.

Last Thursday prices on municipals were steady, as the last of the week’s municipal offerings came to market, including offerings from Phoenix Airport and a sale of notes from the Chicago Public School District. 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.

U.S. Treasury prices finished the day weaker, as U.S. stock prices rose for the session, as the NASDAQ led all gains and recovered 210 of Wednesday’s 329-point drop. On the day, the yields on the two- and 30-year maturities each rose two bps, while the yield on the 10-year maturity rose four bps. The 10-year municipal-to-Treasury ratio fell to 86.0% on Thursday from Wednesday’s level of 87.1%, while the 30-year municipal-to-Treasury ratio fell to 99.7% on Thursday from Wednesday’s level of 100.3%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to the coming week’s $6.5B in new issue bond volume. 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 two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as U.S. stocks prices were mixed on for the session. On the day, the yield on the two-year maturity fell five bps, while the yield on the 10-year maturity fell six bps and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury rose to 87.0% on Friday from Thursday’s level of 86.0%, while the 30-year municipal-to-Treasury bumped up  100.0% on Friday from Thursday’s level of 99.7%.

 

Taxable Market





 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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