Muni Update

October 7, 2019


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


Municipal Market Recap

Municipal prices started the week steady across the curve. On Tuesday prices were mixed, as the front-end was steady, while bonds maturing 10 years and longer strengthened. Municipal prices strengthened daily for the rest of the week. Issuance for the trading week is forecasted to be $6.42B, which is below last week’s revised total of $6.99B in new issue paper that came to market. This week’s projected issuance, together with secondary market opportunities should provide market participants with a number of opportunities, especially given the continued strong demand in the municipal market. Driving this strong demand in the municipal market is the continuing combination of high redemption flows and inflows into municipal bond mutual funds, which continues to be strong at this time.

State and local government debt lost 0.80% in September, per Bloomberg, and lost 75 basis points (bps) in the month, per ICE BofAML Municipal Bond Index, the first down month of the year and the biggest decline since January 2018. The drop came as U.S. Treasurys sold off, and as new debt sales weighed on performance, with supply of bonds 46.0% higher than it was the same month a year earlier, as governments raced to capture lower interest rates. The securities (tax-free) however, are still headed for a 6.7% return this year, the best year for the asset class since 2014.

Investors in municipal bond funds put cash into funds for a 39th week, as weekly reporting funds experienced inflows of $883.952MM, after experiencing inflows of $4.637B the week prior. The four-week moving average was a positive $915.232MM, after being a positive $889.269MM the week prior. Investors still facing low or negative rates overseas continue to find higher-yielding U.S. assets attractive, especially since municipal bonds are off to their best start in five years. Municipal securities have been bolstered by low supply and strong demand. All these factors, including investors plowing billions into municipal-bond mutual funds, as investors seek to reduce their tax burden 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 fell two bps from Thursday to Friday and they ended the week at 1.11%. Meanwhile the yields on the 10- and 30-year maturities on the MMD Triple-A Scale each fell one bp from Thursday to Friday and they ended the week at 1.32% and 1.91%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond fell 11 bps, while the yields on the 10- and 30-year GO  bonds each fell 10 bps.

Last week the yield on the two-year maturity on the MMA Triple-A Scale fell three bps from Thursday to Friday and ended the week at 1.11%. Meanwhile the yields on the 10- and 30-year maturities on the MMA Triple-A Scale each fell one bp from Thursday to Friday and they ended the week at 1.48% and 2.09%, respectively. Overall, week-over-week the yield on the two-year GO bond fell eight bps, while the yield on the 10-year GO bond fell nine bps and the yield on the 30-year GO bond fell 10 bps.


New-Issue Volume is Forecasted to Be Just Over $6.42B for Trading Week

Total new issuance for the coming trading week per IHS Markit Ipreo is estimated to be $6.42B, which is just below the revised total of $6.99B in new issue paper that came to market last week. This week’s trading calendar consists of $4.47B of negotiated deals and $1.95B of competitive offerings. There are 23 deals scheduled that are $100.0MM or larger in par, with four of them being competitive offerings.

Notable deals this week include the $343.465MM public utility subordinate lien revenue refunding taxable bonds from the District of Columbia’s Water and Sewer Authority on Tuesday. The deal is expected to mature serially from 2020 through 2034 and have term bonds in 2039 and 2048.

On Thursday, the Massachusetts Water Resources Authority plans to offer $596.970MM of general revenue refunding taxable green bonds. The deal is expected to mature serially from 2020 through 2034 and have a term bond in 2039. The deal is rated Aa1 by Moody’s Investors Service (Moody’s) and AA+ by both Standard and Poor’s Global Ratings (S&P) and Fitch Ratings (Fitch). Also on Thursday, the University of Nebraska plans to offer $513.405MM of facilities corporation university system taxable bonds. The deal is rated Aa1 by Moody’s and AA by S&P.

In the short-term sector, the New York Metropolitan Transportation Authority (NYMTA) is expected to sell $600.0MM of transportation revenue bond anticipation notes (RANs) on Thursday.


Municipal Bond Funds Post Inflows for a 39th Week

Investors in municipal bond funds put cash into funds for a 39th week, as weekly reporting funds experienced inflows of $883.952MM in the latest week, after experiencing inflows of $1.637B the week prior. This marks the fifth time in the past 12 weeks inflows have been less than $1.0B, including the fourth time in the past five weeks. The four-week moving average was a positive $915.232MM, after being a positive $889.269MM the week prior.

Long-term municipal bond funds had inflows of $558.384MM in the latest week after experiencing inflows of $1.516B the week prior. Intermediate-term funds had inflows of $228.241MM after inflows of $267.395MM in the week prior. National funds had inflows of $767.441MM after experiencing inflows of $1.386B the week prior. High-yield municipal funds reported outflows of $209.214MM in the latest week, after outflows of $427.837MM the week prior week. Exchange traded funds reported inflows of $21.505MM after inflows of $275.726MM the week prior.


Demand in the Bank Qualified (BQ) Market Remains Strong

BQ market participants expect demand to continue to outpace supply again this week and therefore will focus on opportunities in both the primary and secondary markets. BQ participants continue to have significant demand for municipal paper due in large part to having to replace rolloffs due to redemptions. BQ participants continue to find attractive opportunities in the new issue market both in size and structure (15- to 25-year maturity range) in both BQ and in general market paper, due in part to the lower tax rates from tax reform and attractive yields.

We continue to encourage participants to utilize extension swaps, especially given the strong bids for short paper by retail investors in high tax states, as a way roll out the curve for more yield with little to no drop-off in credit quality. Also participants should be looking at credit clean-up of their portfolio in this current environment. Week-over-week, bank qualified spreads widened, with the largest widening occurring in the two- and three-year maturities, 22 bps each.


Daily Overview of the General Market for the Week Ending October 4th

Last Monday prices on municipals were steady, as market participants prepped for the $9.26B of new issue offerings scheduled to hit this week. 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. stocks posted gains for the session. The Dow was up 0.36%, while the S&P was up 0.50% and the NASDAQ rose 0.75%. On the day, the yield on the two-year maturity was unchanged, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio rose to 84.5% on Monday from last Friday’s level of 84.0%, while the 30-year municipal-to-Treasury ratio rose to 94.8% Monday from last Friday’s level of 94.4%.

Last Tuesday prices on municipals were mixed, as a number of the week’s larger deals were priced. On the day, the yield on the two-year GO bond was unchanged, 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. Treasurys strengthened, as U.S. stocks posted losses for the session due to a slowdown in manufacturing which is often an early indicator of problems in the wider economy showed up. Factory activity contracted in September for the second straight month; by some measures it was the worst month in a decade. This contributed to the Dow finishing down 1.28%, while the S&P was down 1.23% and the NASDAQ was down 1.13%. The yield on the two-year maturity fell seven bps, while the yield on the 10-year maturity fell three bps and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 85.5% on Tuesday from Monday’s level of 84.5%, while the 30-year municipal-to-Treasury ratio was unchanged on Tuesday from Monday’s level of 94.8%.

Last Wednesday municipal prices strengthened, as once again a number of new issue offerings came to market, including two big transportation bond offerings which together totaled over $1.0B. On the day, the yield on the two-year GO bond fell two bps, while the yields on the 10- and 30-year GO bonds each fell three bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasurys also strengthened, as U.S. stocks opened down, and quickly slumped to down more than 2.0% on the day. A partial recovery left the S&P 500 down 1.8% and below its 100-day moving average for the first time in a month. Paired with Tuesday’s 1.2%, the index notched back-to-back losses in excess of 1% for the first time this year. On the day, the yield on the two-year maturity fell eight bps, while the yield on the 10-year maturity fell five bps and the yield on the  30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio rose to 86.3% on Wednesday from Tuesday’s level of 85.5%, while the 30-year municipal-to-Treasury fell to 94.3% on Wednesday from Tuesday’s level of 94.8%.

Last Thursday prices on municipals strengthened, as the last of the week’s offerings came to market including nearly $1.0B of taxable and tax-exempt bonds from New York City. On the day, the yield on the two-year GO fell seven bps, while the yields on the 10- and 30-year GO bonds each fell five bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also strengthened, as US stocks seesawed in the morning before turning positive for the rest of session. The Dow was up 0.5%, while the S&P was up 0.8% and the NASDAQ rose 1.12%. On the day, the yield on the two-year GO bond fell nine bps, while the yield on the 10-year maturity fell six bps and the yield on the 30-year maturity fell five bps. The 10-year municipal-to-Treasury bumped up to 86.4% on Thursday from Wednesday’s level of 86.3%, while the 30-year municipal-to-Treasury ratio slipped to 94.1% on Thursday from Wednesday’s level of 94.3%.

On Friday prices on municipals strengthened for a third day, as market participants were looking ahead to the coming trading week’s $6.42B in new long-term debt offerings. On the day, the yield on the two-year GO bond fell two bps, 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 mixed, as U.S. stocks posted gains for the session, ending what has been a volatile week. Investors are betting that signs of an economic slowdown are strong enough to keep the Federal Reserve on track to continue cutting interest rates, a move that would boost stock prices. The Dow was up 1.42%, while the S&P and the NASDAQ were up 1.42% and 1.40%, respectively. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year maturity fell two bps and the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio rose to 86.8% on Friday from Thursday’s level of 86.4%, while the 30-year municipal-to-Treasury ratio rose 95.0% on Friday from Thursday’s level of 94.1%.


Taxable Market






Dennis Porcaro

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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