Muni Update

September 10, 2018


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

 

Municipal Market Recap

Prices on municipals on Tuesday and Wednesday weakened across the curve. On Thursday they were mixed, as bonds maturing 10 years and in were steady, while the longer-end weakened. On Friday prices on municipals weakened across the curve. Volume for the week is projected to be $6.3B, which is well above last week’s $2.3B in revised issuance. We note that while the pace of issuance could pick up in September, in each of the last five years September volume has been lower than August. From 2013-2017, August volume has been, on average, the 3rd heaviest month of the year, while September has been the 11th. Last month’s volume was the second heaviest of the year. Still, the forecasted higher level of new issue supply this week together with secondary market opportunities should provide market participants with opportunities to fill their needs and contribute to prove favorable for municipal performance.

 

Municipal bond funds reported investors pulled cash out of funds last week, as weekly reporting funds experienced outflows of $181.441MM, after experiencing inflows of $212.052MM the week prior. The four-week moving average remained positive at $215.252MM, after being a positive $461.251MM the week prior. Investors still facing low rates overseas continue to find higher-yielding U.S. assets attractive. These factors, plus the high level of municipal redemptions over the next few months, should have both traditional and non-traditional market participants continuing to look for opportunities, especially if yields rise.

Last week the yield on the two-year maturity on the MMD Triple-A Scale rose five basis points (bps) from Thursday to Friday and it ended the week at 1.80%. Meanwhile, the yield on the 10-year maturity rose two 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 2.49% and 3.10%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond rose 10 bps, while the yield on the 10-year GO bond rose five bps and the yield on the 30-year GO bond rose eight bps.

 

Last week the yield on the two-year maturity on the MMA Triple-A Scale rose three bps from Thursday to Friday and it ended the week at 1.74%. Meanwhile, the yields on the 10- and 30-year maturities each rose two bps on the MMD Triple-A Scale from Thursday to Friday, and they ended the week at 2.50% and 3.11%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond rose eight bps, while the yields on the 10- and 30-year GO bonds each rose four bps.

 

U.S. Treasuries prices weakened across the curve on Tuesday. On Wednesday they were mixed, as bonds maturing 10 years and in were steady, while the long-end weakened. On Thursday they strengthened across the curve, while on Friday they reversed course and weakened across the curve. Overall, week-over-week the yield on the 10-year maturity rose nine bps and closed the week at 2.94%. Meanwhile the yield on the two-year maturity rose nine bps week-over-week and closed the week at 2.71%. This resulted in a week-over-week unchanged 2s/10s spread of 23 bps.  The yield on the 30-year maturity rose eight bps week-over-week and finished the week at 3.10%.

Weekly Bond Volume is Forecasted to be $6.3B for the Trading Week

Total volume for the coming week is estimated to be $6.3B, which is well above last week’s $2.3B in issuance, according to revised data from Thomson Reuters. This week’s trading calendar is comprised of $4.4B in negotiated offerings and $1.9B in competitive offerings.

The biggest deal of the week is expected to be the Las Vegas Convention and Visitors Authority’s $500.0MM offering of Series 2018B convention center expansion revenue bonds set for Thursday. The deal is rated Aa3 by Moody’s Investors Service (Moody’s) and A+ by S&P Global Ratings (S&P).

Wednesday is scheduled to be a busy day as a number of deals are scheduled to price including the Poudre School District R-1 of Larimer County, Colorado’s $375.0MM of Series 2018 GOs. The deal is rated Aa2 by Moody’s. Indianapolis plans to offer $358.0MM of Series 2018A water system first lien refunding revenue bonds. This deal is rated Aa3 by Moody’s, AA by S&P and A+ by Fitch Ratings (Fitch). Finally on Wednesday, the Sarasota County Public Hospital District, Florida plans to offer $350.0MM of Series 2018 fixed-rate hospital revenue bonds for the Sarasota Memorial Hospital. The deal is rated A1 by Moody’s and AA- by Fitch.

In the competitive arena, the Shoreline School District No. 412, Washington, is selling $206.81MM of unlimited tax GO bonds under the Washington State School District Credit Enhancement Program on Tuesday. The deal is rated AA+ by S&P.

Municipal Bond Funds Posted Outflows for the Week        

Municipal bond funds posted outflows, 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 $181.441MM, after experiencing inflows of $212.052MM the week prior. The four-week moving average remained positive at $215.252MM, after being a positive $416.251MM the week prior.

Long-term municipal bond funds had outflows of $127.634MM in the latest week after experiencing inflows of $368.851MM the week prior. Intermediate-term funds had inflows of $4.958MM after inflows of $97.445MM the week prior. National funds had outflows of $124.108MM after experiencing inflows of $194.565MM the week prior. High-yield municipal funds reported inflows of $15.431MM in the latest week, after inflows of $222.454MM the week prior. Exchange traded funds reported outflows of $43.094MM, after inflows of $57.435MM the week prior.

Demand in the Bank Qualified (BQ) Market Remains Strong

The BQ market continues to see good two – way flows with both buying and selling from market participants. For banks, the primary focus of activity over the past four months has been selling shorter (6 years and in) maturities with lower yields and reinvesting out on the curve (12+ years). This trade has worked 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. With August roll-off money to be reinvested, 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 the two, three, five, 10 and 15-year maturities all tightened, with the largest tightening occurring in the two, five and  15-year maturities, two bps. Meanwhile the spreads on the one and 30-year maturities widened, with the largest widening occurring in the 30-year maturity, five bps.

Daily Overview of the General Market for the Week Ending September 14th

Last Tuesday prices on municipal bonds were weaker, as market participants were eyeing the $3.6B long-term bond supply for the week, while retail investors got a first crack at the New York City Transitional Finance Authority’s future tax secured subordinate bonds, as a two-day retail order period was opened. On the day, the yields on the two- and 30-year GO bonds each rose one bp, while the yield on the 10-year GO bond rose two bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were weaker also, as U.S. stocks posted losses for the session. On the day, the yield on the two-year maturity rose four bps, while the yield on the 10-year maturity rose five bps and the yield on the 30-year maturity rose seven bps. The 10-year municipal-to-Treasury ratio fell to 84.8% on Tuesday from last Friday’s level of 85.6%, while the 30-year municipal-to-Treasury ratio fell to 98.7% on Tuesday from last Friday’s level of 100.7%.

Last Wednesday prices on municipals weakened again, as retail investors lined up on Wednesday to get more New York City Transitional Finance Authority bonds, while the New York Metropolitan Transportation Authority remarketed a 2015 deal. On the day the yield on the two-year GO bond rose four bps, while the yield on the 10-year GO bond rose one bp and the yield on the 30-year GO bond rose two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were mixed on Wednesday, as U.S. stocks posted losses for the session. On the day, the yields on the two- and 10-year maturities were steady, while the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio bumped up to 85.2% on Wednesday from Tuesday’s level of 84.8%, while the 30-year municipal-to-Treasury ratio bumped up to 99.0% on Wednesday from Tuesday’s level of 98.7%.

Last Thursday prices on municipals were mixed, as market participants aggressively digested deals from New York City and California. On the day, the yields on the two- and 10-year GO bonds were steady, while the yield on the 30-year GO bonds rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day stronger, as the NASDAQ led losses in U.S. equities for a third day in a row, with its 0.9% drop easily eclipsing a 0.4% decline for the S&P 500 and a 0.1% move up for the Dow. The tech sector fell 0.8% and remained a drag on the S&P 500, but was bettered by energy companies for the bottom spot on the sector ladder. On the day, the yields on the two- and 10-year maturities each fell two bps, while the yield on the 30-year maturity fell three bps. The 10-year municipal-to-Treasury ratio rose to 85.8% on Thursday from Wednesday’s level of 85.2%, while the 30-year municipal-to-Treasury ratio rose to 100.3% on Thursday from Wednesday’s level of 99.0%.

Last Friday prices on municipals weakened, as market participants were looking ahead to the coming week’s $6.3B in new issue bond volume. On the day, the yield on the two-year GO bond rose five bps, 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 also finished the day weaker, as U.S. stocks traded lower for the session. On the day, the yield on the two-year maturity rose seven bps, while the yield on the 10-year maturity fell rose six bps and the yield on the on the 30-year maturity rose five bps. The 10-year municipal-to-Treasury fell to 84.7% on Friday from Thursday’s level of 85.8%, while the 30-year municipal-to-Treasury ratio was slipped to 100.0% on Friday from Thursday’s level of 100.3%.

Taxable Market





 



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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