Muni Update

October 30, 2017


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

 

Municipal Market Recap

Municipal bond funds posted inflows for the week, as weekly reporting funds experienced $262.006MM of inflows in the latest reporting week, after experiencing inflows of $536.158MM the week prior. The four-week moving average was positive at $175.351MM, after being in the green at $204.402MM 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 mixed, as the front-end strengthened, while maturities 10 years and longer were steady. They weakened daily across the curve through Thursday. On Friday they reversed course and strengthened across the curve. The rising U.S. Treasury rates last week put pressure on municipal spreads and resulted in a steeper yield curve. It also did not help that last week was one of the heaviest supply weeks of the year and that the MMD-Treasury ratios reached their multi-year lows earlier in the week.  Prices on municipals started the week steady. They also weakened daily through close of business Thursday. On Friday they were steady across the curve. Volume for this trading week is projected to be $6.7B, which is down from last week’s revised level of $10.19B. This week’s supply level, while down from the past few weeks, does represent a more manageable calendar and, together with secondary market opportunities, should address the continued strong demand for municipal bonds.

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 1.06%, 2.02% and 2.84%, respectively. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose four basis points (bps), while the yield on the 10-year GO bond rose seven bps and the yield on the 30-year GO bond rose 10 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 1.07%, 2.11% and 2.96%, respectively. Overall, week-over-week the yield on the two-year maturity rose five bps, while the yield on the 10-year maturity rose six bps and the yield on the 30-year maturity rose eight bps.

Prices on U.S. Treasuries started last week mixed. They weakened across the curve daily through Thursday. On Friday they reversed course and finished the week stronger across the curve. Overall, week-over-week the yield on the 10-year maturity rose five bps and closed the week at 2.43%. Meanwhile the yield on the two-year maturity rose two bps week-over-week and closed the week at 1.60%. This resulted in a week-over-week 2s/10s spread of 83 bps, three bps wider than last week’s 2s/10s spread of 80 bps. The yield on the 30-year maturity rose five bps week-over-week and finished the week at 2.94%.

 

New Issue Volume is Expected to be $6.7B

Total volume for the trading week is estimated to be $6.7B, which is below last week’s $10.19B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $4.6B in negotiated deals and approximately $2.1B in competitive sales, according to data from Thomson Reuters. This week’s more manageable new issue calendar will be led by issuers on different ends of the credit spectrum: AAA-rated Montgomery County, Maryland, and the BBB-rated Virginia Small Business Financing Authority.

The Virginia Small Business Financing Authority will offer $737.0MM of Series 2017 senior lien private activity revenue bonds on Thursday. Proceeds from the Transform 66 P3 Project bond sale will be loaned to I-66 Express Mobility Partners LLC to finance costs related to the planning, development, design, and construction of express lanes and related facilities along 22 miles of the I-66 corridor from I-495 to U.S. 29. Under the Virginia Public-Private Transportation Action, the Department of Transportation (DOT) has the authority to allow private firms to develop and operate transportation facilities. The tax-exempt bonds, as mentioned above, are rated Baa3 by Moody’s Investors Service (Moody’s) and BBB by Fitch Ratings (Fitch).

Montgomery County, Maryland plans to sell $684.0MM of bonds in four separate competitive offerings on Tuesday. The deals consist of $291.54MM of Series C consolidated public improvement refunding bonds of 2017, $170.0MM of Series A consolidated public improvement bonds of 2017, $144.06MM of Series D 2019 crossover consolidated public improvement refunding bonds of 2017, and $78.72MM of Series B consolidated public improvement refunding bonds of 2017. All four sales are rated triple-A by Moody’s, S&P Global Ratings (S&P) and Fitch.

Also on Tuesday, the Phoenix Civic Improvement Corporation plans to offer $401.0MM of senior lien airport revenue and revenue refunding bonds. The offering is composed of Series 2017A bonds subject to the alternative minimum tax (AMT), Series 2017B non-AMT bonds, and Series 2017C taxables. The offerings are rated Aa3 by Moody’s and AA- by S&P. In the competitive arena on Thursday, Santa Clara County, California will offer $350.0MM of Election of 2008 refunding Series 2017C GO bonds.

 

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 $262.006MM of inflows, after experiencing inflows of $536.158MM the week prior. The four-week moving average was positive at $175.351MM, after being in the green at $204.402MM the week prior.

Long-term municipal bond funds had inflows of $416.137MM in the latest week after inflows of $424.977MM the week prior. Intermediate-term funds had inflows of $527.272MM after experiencing inflows of $164.276MM the week prior. National funds had outflows of $41.524MM after inflows of $547.592MM the week prior. High-yield municipal funds reported inflows of $175.779MM in the latest week, after experiencing inflows of $222.947MM the week prior. Exchange traded funds reported inflows of $151.3473MM, after inflows of $184.768MM in the previous week.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The new issue calendar this week in more manageable, 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 for all maturities, except the one-year maturity, tightened. The week-over-week spread on the one-year maturity widened by one bp. The largest widening occurred in the 10-, 15- and 30-year maturities, three bps each.

 

Daily Overview of the General Market for the Week Ending October 27th

Last Monday prices on municipals were steady, as the first of the week’s new issues hit the market. 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. Treasuries were mixed on Monday, as U.S. stocks ended their most recent six-day record-run. Shares of technology and industrial companies weighed heavily on the broader indices on the first day of the busiest week for quarterly corporate earnings results. The drag from tech companies led the NASDAQ to a 0.64% drop, while the S&P dropped 0.40% and the Dow lost a more modest 0.23%. The U.S. Dollar strengthened against the Euro but was weaker against the Yen and British Pound. On the day, the yield on the two-year maturity fell one bp, while the yields on the 10- and 30-year maturities were each steady. The 10- and 30-year municipal-to-Treasury ratios were both unchanged on Monday from Friday’s levels of 81.9% and 94.8%, respectively.

Last Tuesday prices on municipals were weaker, as new deals from Florida and New York priced ahead of the State of Illinois’ $4.5B sale slated for Wednesday. On the day the yields on the two- and 10-year GO bonds each rose one bp, while the yield on 30-year GO bond rose three bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also weaker, as the three major equity indices rebounded Tuesday. The Dow gained 168 points (0.72%), and it was enough to push the index to another record close, while smaller gains for the S&P and NASDAQ left those indices several points short of another milestone. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose four bps. The 10-year municipal-to-Treasury ratio fell to 81.3% on Tuesday from Monday’s level of 81.9%, while the 30-year municipal-to-Treasury slipped to 94.5% on Tuesday from Monday’s level of 94.8%.

Last Wednesday prices on municipals weakened, as the State of Illinois came to market with $4.5B of GO bonds, the biggest tax-exempt deal of the year. On the day the yield on the two-year GO bond rose two bps, while the yield on the 10-year GO bond rose four 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 also finished the day weaker, as bond investors found themselves stuck between the push and pull of equity weakness, stronger economic data, and stretched technical levels. All three major indices dropped 0.5% on the day. On the day, the yield on the two-year maturity rose four bps, while the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury ratio rose to 82.0% on Wednesday from Tuesday’s level of 81.3%, while the 30-year municipal-to-Treasury ratio rose to 95.6% on Wednesday from Tuesday’s level of 94.5%.

Last Thursday prices on municipals weakened, as issuers from Maryland and California sold over $1.0B of bonds by competitive bid. 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 rose two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day weaker, as U.S. stocks closed mixed.  The U.S. Dollar rallied nearly 1.0% to its highest level since July. On the day, the yields on the two-, 10- and 30-year maturities each rose one bp. The 10-year municipal-to-Treasury ratio rose to 82.5% on Thursday from Wednesday’s level of 82.0%, while the 30-year municipal-to-Treasury ratio rose to 96.0% on Thursday from Wednesday’s level of 95.6%.

Last Friday prices on municipals finished the week steady, as market participants prepped for the estimated $6.7B in new issue paper expected to come to market. On the day, the yields on the two-, 10- and 30-year GO bonds were all unchanged, 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 three bps, while the yields on the 10- and 30-year maturities each fell two bps. The 10-year municipal-to-Treasury ratio rose to 83.1% on Friday from Thursday’s level of 82.5%, while the 30-year municipal-to-Treasury ratio rose to 96.6% on Friday from Thursday’s level of 96.0%.

 



 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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