Muni Update

September 11, 2017


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

 

Municipal Market Recap

Municipal bond funds posted inflows for the seventh week, as weekly reporting funds experienced $250.368MM of inflows in the latest reporting week, after experiencing inflows of $344.518MM the week prior. The four-week moving average was positive at $483.038MM, after being in the green at $578.250MM 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 rise. While the uncertainty surrounding tax reform, infrastructure, and the pace of Fed tightening is causing some market participants to continue to be observers more than buyers at this time, retail participation remains strong.

U.S. Treasury prices started the trading week stronger across the curve and then seesawed over the next two days. On Friday they were unchanged. Prices on municipals were unchanged in the front-end the entire week. On Tuesday the intermediate and long-end strengthened. On Wednesday the 10-year maturity strengthened, while the long-end was steady.  On Thursday the intermediate and long-end strengthened again, while on Friday the intermediate areas were steady and the long-end strengthened. Volume for the trading week is projected to be $7.45B, which is above last week’s revised level of $2.39B that was expected given the shortened trading week. Municipal yields have moved lower, but were not able to keep up with U.S. Treasuries. The front end is rich, but we note longer-dated bonds are getting close or even cheap to their fair values. Still, we expect this level of issuance coupled with secondary market opportunities will address the continued strong demand in the municipal sector.

Last week the yields for the two- and 10-year maturities on the MMD Triple-A Scale was unchanged from Thursday to Friday and they ended the week at 0.85% and 1.81%, respectively. Meanwhile the yield on the 30-year maturity fell one basis point (bp) on the MMD Triple-A Scale from Thursday to Friday and ended the week at 2.65%. Overall, week-over-week the yield on the two-year general obligation (GO) bond was unchanged, while the yield on the 10-year GO bond fell seven bps and the yield on the 30-year GO bond fell six bps.

Last week the yields on the two- and 10-year maturities on the MMA Triple-A Scale were unchanged from Thursday to Friday and ended the week at 0.89%, and 1.91%, respectively. Meanwhile the yield on the 30-year maturity on the MMA Triple-A Scale fell two bps from Thursday to Friday and ended the week at 2.74%. Overall, week-over-week the yield on the two-year maturity fell three bps, while the yield on the 10-year maturity fell five bps and the yield on the 30-year maturity fell four bps.

Prices on U.S. Treasuries started last week stronger. They weakened on Wednesday only to strengthen again on Thursday. On Friday they were steady. Overall, week-over-week the yield on the 10-year maturity fell 11 bps and closed the week at 2.06%. Meanwhile the yield on the two-year maturity fell seven bps week-over-week and closed the week at 1.27%. This resulted in a week-over-week 2s/10s spread of 79 bps, four bps tighter than last week’s 2s/10s spread of 83 bps. The yield on the 30-year maturity fell 10 bps week-over-week and finished the week at 2.68%.

 

New Issue Volume is Expected to be $7.45B

Total volume for the trading week is estimated to be $7.45B, which is above last week’s $2.39B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $4.98B in negotiated deals and approximately $2.4B in competitive sales, according to data from Thomson Reuters. There are 19 deals scheduled that are $100.0MM or larger, with four coming from the competitive arena.

The largest deal of the week will come from New York City (NYC), as the City will price $855.56MM of GO bonds on Thursday after a two-day retail order period. The deal is rated Aa2 by Moody’s Investors Service (Moody’s) and AA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch). In addition to this deal, NYC plans to offer $250.0MM of taxable GOs in two separate competitive sales on Thursday.

The second largest overall deal and largest competitive deal is set to come from the Maryland Department of Transportation when it sells $500.0MM of consolidated transportation bonds on Wednesday. The deal is rated Aa1 by Moody’s, triple-A by S&P and AA+ by Fitch. Also this week the Regents of the University of Minnesota plan to offer $424.0MM of GO, GO refunding and GO taxable refunding bonds on Wednesday. The offerings are rated Aa1 by Moody’s and AA by S&P.

 

Municipal Bond Funds Posted Inflows for the Week       

Municipal bond funds posted inflows for the seventh week, as market participants continued to put cash into funds, according to the latest data from Lipper. The weekly reporters saw $250.368MM of inflows, after inflows of $344.518MM the week prior. The four-week moving average was positive at $483.038MM, after being in the green at $578.250MM the week prior.

Long-term municipal bond funds had inflows of $105.638MM in the latest week after inflows of $248.440MM the week prior. Intermediate-term funds had inflows of $74.141MM after inflows of $35.870MM the week prior. National funds had inflows of $290.814MM after inflows of $339.475MM the week prior. High-yield municipal funds reported inflows of $165.070MM in the latest week, after experiencing inflows of $184.234MM the week prior. Exchange traded funds reported inflows of $2.169MM, after inflows of $80.152MM the week prior.

 

Demand in the Bank Qualified (BQ) Market Remains Strong

The new issue calendar for this week does pick up from last week’s holiday-shortened lighter calendar. This increase in issuance together with secondary market opportunities should provide market participants with opportunities to pick up attractive structures in the steepest part of the curve (10+ 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 (7 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 were wider in every maturity except the five-year spot, which tightened by 12 bps. The three-year maturity week-over-week widened the most, nine bps.

 

Daily Overview of the General Market for the Week Ending September 8th

Last Tuesday prices on municipals were mixed, as the bulk of the week’s issuance came to market. 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 three bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were stronger across the curve on Tuesday, as a flight to quality began.  On the day, the yield on the two-year maturity fell five bps, while the yield on the 10-year maturity fell 10 bps and the yield on the 30-year maturity  fell nine bps. The 10-year municipal-to-Treasury ratio rose on Tuesday to 89.4% from Friday’s level of 86.6%, while the 30-year municipal-to-Treasury ratio rose to  99.6% on Tuesday from Friday’s level of 97.5%.

Last Wednesday prices on municipals finished the day mixed, as primary action dwindled down to the week’s last few deals. On the day, the yields on the two- and 30-year GO bonds were steady, while the yield on the 10-year GO bond fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day weaker. On the day, the yield on the two-year maturity rose one bp, while the yields on the 10- and 30-year maturities each rose three bps. The 10-year municipal-to-Treasury ratio fell on Wednesday to 87.6% from Tuesday’s level of 89.4%, while the 30-year municipal-to-Treasury ratio fell to 98.5% on Wednesday from Tuesday’s level of 99.6%.

Last Thursday prices on municipals finished mixed, as the market quieted down. On the day, the yield on the two-year GO bond was unchanged, while the yield on the 10-year GO bond fell three bps and the yield on the 30-year GO bond fell two bps, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices finished the day 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 four bps. The 10-year municipal-to-Treasury ratio rose to 87.9% on Thursday from Wednesday’s level of 87.6%, while the 30-year municipal-to-Treasury ratio rose to 99.3% on Thursday from Wednesday’s level of 98.5%.

Last Friday prices on municipals finished the week mixed, as market participants prepped for the estimated $7.45B in new issue paper expected to come to market. On the day, the yields on the two- and 10-year GO bonds were unchanged, while the yield on the 30-year maturity fell one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasuries prices finished the week unchanged. On the day, the yields on the two-, 10- and 30- year maturities were steady. The 10-year municipal-to-Treasury ratio was unchanged from Thursday’s level of 87.9%, while the 30-year municipal-to-Treasury ratio fell to 98.9% on Friday, from Thursday’s level of 99.3%.

 



 


Dennis Porcaro

Senior Vice President

Vining Sparks IBG,

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