Muni Update

October 9, 2018



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

 

Municipal Market Recap

 

Prices on municipals were mixed on Monday, as the front- and long-ends saw prices weaken, while intermediate maturities were steady. On Tuesday they were mixed again, as the front-end strengthened, while bonds maturing 10 years and longer were steady. On Wednesday they weakened, as strong economic news drove yields higher across the curve. On Thursday they were mixed, as the front-end was steady, while bonds maturing 10 years and longer weakened.  Friday was a repeat of Thursday’s price action for municipals. Issuance for the week is projected to be $4.4B, which is below last week’s $8.1B in issuance, according to revised data from Thomson Reuters. The decrease in weekly issuance was anticipated due to markets being closed on Monday for the Columbus Day Holiday. Market participants will look to secondary market bid lists to offer additional opportunities this week.

 

Municipal bond funds reported investors pulled cash out of funds for a second week, as weekly reporting funds experienced outflows of $43.626MM, after experiencing outflows of $384.796MM the week prior. The four-week moving average was a negative $106.017MM, after being a negative $140.470MM 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 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 it ended the week at 2.03%. Meanwhile, the yield on the 10-year maturity rose two basis points (bps) and the yield on the 30-year maturity rose four bps on the MMD Triple-A Scale from Thursday to Friday, and they ended the week at 2.68% and 3.35%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond rose six bps, while the yield on the 10-year GO bond rose 10 bps and the yield on the 30-year GO bond rose 16 bps.

 

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 1.83%. Meanwhile, the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose four bps on the MMA Triple-A Scale from Thursday to Friday, and they ended the week at 2.69% and 3.30%, respectively. Overall, week-over-week the yield on the two-year GO bond rose seven one bps, while the yields on the 10- and 30-year GO bonds each rose 11 bps.

 

U.S. Treasury prices weakened on Monday across the curve. On Tuesday prices were mixed, as the front-end was steady, while bonds maturing ten years and longer strengthened. Starting on Wednesday and for the rest of the week, prices on U.S. Treasuries weakened daily across the curve. Overall, week-over-week the yield on the 10-year maturity rose 18 bps and closed the week at 3.23%. Meanwhile the yield on the two-year maturity rose seven bps week-over-week and closed the week at 2.88%. This resulted in a 2s/10s spread of 35 bps, 11 bps wider then last week’s 2s/10s spread of 24 bps. The yield on the 30-year maturity rose 21 bps week-over-week and finished the week at 3.40%.

Weekly Bond Issuance is Forecasted to be $4.4B for the Trading Week

Total issuance for the coming holiday-shortened trading week is estimated to be $4.4B, which is below last week’s $8.1B in issuance, according to revised data from Thomson Reuters. This decrease was anticipated due to markets being closed for the Columbus Day Holiday. The overall calendar is composed of $3.6B of negotiated deals and $815.3MM of competitive sales. Most sales this week are jammed into a two-day timeframe.

Topping the negotiated sector will be the $400.MM Series 2018 C GO bond offering from of the Maricopa County Special Health Care District, Arizona. The deal is set to price the Series on Thursday. Proceeds from the sale will be used for capital improvements or renovations to the district’s hospitals and ambulatory and outpatient facilities. The deal is rated Aa3 by Moody’s Investors Service (Moody’s) and AAA by Fitch Ratings (Fitch). Also on Thursday, the North Texas Tollway Authority plans to offer $347.0MM of Series 2018 second tier revenue refunding bonds. The deal is rated A2 by Moody’s and A by S&P Global Ratings(S&P).

In the competitive arena, the Fremont Unified School District, California is selling $127.0MM of Series C Election of 2014 GOs on Wednesday. Proceeds are being issued to acquire, repair and build the district’s equipment, sites and facilities. The deal is rated AA- by S&P. In the short-term competitive sector, the Louisville and Jefferson County Metropolitan Sewer District, Kentucky is selling $226.0MM of sewer and drainage system subordinated bond anticipation notes on Tuesday.

Municipal Bond Funds Post Outflows for a Second Week        

Municipal bond funds posted outflows for a second week, as market participants pulled cash out of funds for the week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $43.626MM, after experiencing outflows of $384.796MM the week prior. The four-week moving average was a negative $106.017MM, after being a negative $140.470MM the week prior.

Long-term municipal bond funds had inflows of $91.187MM in the latest week after experiencing outflows of $371.535MM the week prior. Intermediate-term funds had outflows of $140.647MM after inflows of $131.732MM the week prior. National funds had inflows of $28.651MM after experiencing outflows of $346.384MM the week prior. High-yield municipal funds reported outflows of $113.789MM in the latest week, after outflows of $129.551MM the week prior. Exchange traded funds reported inflows of $116.152MM, after outflows of $152.012MM 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. The primary reason is that GM opportunities still present chances to pick up 4.0% and higher coupons. Week-over-week, bank qualified spreads were mixed, as the spreads on one, two, three and five-year maturities all widened, with the largest widening occurring in the one-year maturity, eight bps. Meanwhile, week-over-week the spreads on the 10, 15 and 30-year maturities all tightened, with the largest tightening occurring in the 30-year maturity, 13 bps.

Daily Overview of the General Market for the Week Ending October 5th

Last Monday prices on municipals were mixed, as market participants were eyeing the $7.5B in long-term bond supply for the week. On the day, the yields on the two- and 30-year GO bonds each rose two bps, while the yield on the 10-year GO bond was steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker on Monday, as U.S. stocks posted gains for the session driven in part by the news that Canada joined the three-way trade accord between the U.S. and Mexico. While the new terms of the USMCA were not remarkably different than the NAFTA terms, investors were relieved that a deal was not being inked that excluded Canada. 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 fell to 83.8% on Monday from last Friday’s level of 84.6%, while the 30-year municipal-to-Treasury fell to 99.4% on Monday from last Friday’s level of 100.0%.

Last Tuesday prices on municipal bonds were mixed, as a wave of new issue supply swept into the market, led by New York and California issuers. 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 were steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also mixed, as U.S. stocks traded mixed on the session. The Dow rallied 0.46% to a new record close while the NASDAQ sank by an almost-equal 0.47%. The S&P 500 moved between positive and negative territory but ultimately ended unchanged. On the day, the yield on the two-year maturity was steady, while the yields on the 10- and 30-year maturities each fell three bps. The 10-year municipal-to-Treasury ratio rose to 84.6% on Tuesday from Monday’s level of 83.8%, while the 30-year municipal-to-Treasury bumped up to 100.3% on Tuesday from Monday’s level of 99.4%.

Last Wednesday prices on municipals weakened, as market activity was brisk and strong economic news helped push yields higher. Even the taxable municipal market outperformed both U.S. Treasuries and corporates on the day. On the day, the yields on the two- and 30-year GO bonds each rose six bps, while the yield on the 10-year GO bond rose four bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were also weaker on the day, as U.S. stock prices rose for the session. On the day, the yield on the two-year maturity rose three bps, while the yields on both the 10- and 30-year maturities rose 10 bps. The 10-year municipal-to-Treasury ratio fell to 83.2% on Wednesday from Tuesday’s level of 84.6%, while the 30-year municipal-to-Treasury ratio fell to 99.1% on Wednesday from Tuesday’s level of 100.3%.

Last Thursday prices on municipals were mixed and with no major bond deals to be priced, prices in the municipal market were hammered by rising U.S. Treasury yields. 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 rose four bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day weaker, as U.S. stock prices initially fell, but as the day progressed stocks rose to finish the down but off their lows. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity rose four bps and the yield on the 30-yearaturity rose five bps. The 10-year municipal-to-Treasury ratio bumped up to 83.4% on Thursday from Wednesday’s level of 83.2%, while the 30-year municipal-to-Treasury ratio fell to 98.8% on Thursday from Wednesday’s level of 99.1%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to the coming holiday-shortened trading week’s $4.4B in new issue bond volume. On the day, the yield on the two-year GO bond was steady, while the yield on the 10-year GO bond rose two bps and the yield on the 30-year GO bond rose four bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day weaker, as U.S. stocks prices fell for the session. On the day, the yield on the two-year maturity rose one bp, while the yield on the 10-year GO bond rose four bps and the yield on the 30-year GO bond rose five bps. The 10-year municipal-to-Treasury fell to 83.0% on Friday from Thursday’s level of 83.4%, while the 30-year municipal-to-Treasury ratio slipped to 98.5% on Friday from Thursday’s level of 98.8%.







Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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