Muni Update

September 17, 2018


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

 

Municipal Market Recap

 

Prices on municipals were steady across the curve on Monday. On Tuesday they weakened across the curve. On Wednesday they were mixed, as the front-end was steady, while bonds maturing 10 years and longer weakened. On Thursday they were mixed again, as the front-end weakened, while bonds maturing 10 years and longer were steady. On Friday prices on municipals weakened across the curve. Volume for the week is projected to be $7.05B, which is just above last week’s $6.94B in revised issuance. We do note that CUSIP Global Services reported that municipal CUSIP requests surged in August, an indication of rising supply in the near term. The total identifier requests for all municipal securities, which includes bonds, long-term and short-term notes, and commercial paper, rose 12.0% to 1,221 last month from 1,090 in July. On a year-over-year basis, however, total municipal identifier request volume is still down 14.7% through August.

 

Municipal bond funds reported investors pulled cash out of funds for a second week in a row, as weekly reporting funds experienced outflows of $136.494MM, after experiencing outflows of $181.441MM the week prior. The four-week moving average remained positive at $68.122MM, after being a positive $215.252MM 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 yields on the two-, 10- and 30-year maturities on the MMD Triple-A Scale each rose two basis points (bps) from Thursday to Friday and it ended the week at 1.84%, 2.55% and 3.16%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond rose four bps, while the yields on the 10- and 30-year GO bonds each rose six bps.

 

Last week the yield on the two-and 30-year maturities on the MMA Triple-A Scale each rose one bp from Thursday to Friday and they ended the week at 1.76% and 3.13%, respectively. Meanwhile, the yield on the 10-year maturity rose two bps on the MMD Triple-A Scale from Thursday to Friday, and ended the week at 2.53%. Overall, week-over-week the yield on the two-year GO bond rose five bps, while the yield on the 10-year GIO bond rose three bps and the yield on the 30-year GO bond rose two bps.

 

U.S. Treasuries prices were mixed on Monday, as the front-end weakened while prices on bonds maturing 10 years and longer strengthened. On Tuesday they weakened across the curve, while on Wednesday they reversed course and strengthened across the curve. On Thursday they were mixed, as the front-end weakened, while bonds maturing 10 years and longer strengthened.  On Friday they weakened to close the week. Overall, week-over-week the yield on the 10-year maturity rose five bps and closed the week at 2.99%. Meanwhile the yield on the two-year maturity rose seven bps week-over-week and closed the week at 2.78%. This resulted in a week-over-week 2s/10s spread of 21 bps, two bps tighter then last week’s 2s/10s spread of 23 bps.  The yield on the 30-year maturity rose three bps week-over-week and finished the week at 3.13%.

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

Total issuance for the coming week is estimated to be $7.05B, which is just above last week’s $6.94B in issuance, according to revised data from Thomson Reuters. This week’s trading calendar is comprised of $5.28B in negotiated offerings and $1.77B in competitive offerings.

Topping off the new issue calendar this week is the Texas Water Development Board’s $1.63B revenue bond deal. The deal is set to price for institutions on Tuesday after holding a one-day retail order period. The offering is composed of $1.59B of Series 2018B state water implementation revenue fund for Texas revenue bonds and $35.0MM of Series 2018C taxable bonds. The deal is rated AAA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch). On Thursday Colorado will price $500.0MM of Series 2018A certificates of participation (COPs). The deal is rated Aa2 by Moody’s Investors Service (Moody’s) and AA- by S&P.

In the competitive arena, the Maryland Department of Transportation is selling $605.0MM of Series 2018 consolidated transportation bonds, second issue. The deal is rated Aa1 by Moody’s, AAA by S&P and AA+ by Fitch.

Municipal Bond Funds Posted Outflows for a Second 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 $136.494MM, after experiencing outflows of $181.441MM the week prior. The four-week moving average remained positive at $68.122MM, after being a positive $215.252MM the week prior.

Long-term municipal bond funds had inflows of $121.885MM in the latest week after experiencing outflows of $127.634MM the week prior. Intermediate-term funds had inflows of $81.138MM after inflows of $4.958MM the week prior. National funds had outflows of $106.754MM after experiencing outflows of $124.108MM the week prior. High-yield municipal funds reported inflows of $160.042MM in the latest week, after inflows of $15.431MM the week prior. Exchange traded funds reported outflows of $236.814MM, after outflows of $43.094MM 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 few 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 still 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, and five-year maturities all tightened, with the largest tightening occurring in the three and five-year maturities, two bps. Meanwhile the spreads on the one, 15 and 30-year maturities widened, with the largest widening occurring in the 30-year maturity, three bps. The spread on the 10-year maturity was unchanged week-over-week.

Daily Overview of the General Market for the Week Ending September 21st

Last Monday prices on municipals were steady, as market participants were eyeing the $6.3B long-term bond supply for the week. On the day, the yields on the two-, 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 mixed on Monday, as U.S. stock prices were mixed for the session. On the day, the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio bumped up to 85.0% on Monday from last Friday’s level of 84.7%, while the 30-year municipal-to-Treasury ratio rose to 100.7% on Monday from last Friday’s level of 100.0%.

Last Tuesday prices on municipal bonds were weaker, as the competitive arena took center stage, led by sales from Washington, Florida, and Nevada issuers. 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 three 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 gains for the session. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose five bps and the yield on the 30-year maturity rose four bps. The 10-year municipal-to-Treasury ratio fell to 84.6% on Tuesday from Monday’s level of 85.0%, while the 30-year municipal-to-Treasury ratio slipped to 100.3% on Tuesday from Monday’s level of 100.7%.

Last Wednesday prices on municipals were mixed, as market participants saw several new issues come to market, including deals from issuers in North and South Carolina and California. 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 one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices were stronger on Wednesday, as U.S. stocks posted mixed results for the session. On the day, the yield on the two-year maturity fell two bps, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio bumped up to 85.2% on Wednesday from Tuesday’s level of 84.6%, while the 30-year municipal-to-Treasury ratio rose 101.0% on Wednesday from Tuesday’s level of 100.3%.

Last Thursday prices on municipals were mixed, as market participants aggressively digested a deal from Nevada. On the day, the yield on the two-year Go bond rose 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.

U.S. Treasury prices also finished the day mixed, as U.S. stock prices rose during the session. On the day, the yield on the two-year matured rose two bops, while the yields on the 10- and 30-year maturities each fell one bp. The 10-year municipal-to-Treasury ratio bumped up to 85.5% on Thursday from Wednesday’s level of 85.2%, while the 30-year municipal-to-Treasury ratio bumped up to 101.3% on Thursday from Wednesday’s level of 101.0%.

Last Friday prices on municipals weakened, as market participants were looking ahead to the coming week’s $7.05B in new issue bond volume. On the day, the yields on the two-, 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 traded higher for the session. On the day, the yield on the two-year maturity rose two bps, while the yields on the 10- and 30-year maturities each rose three bps. The 10-year municipal-to-Treasury slipped to 85.3% on Friday from Thursday’s level of 85.5%, while the 30-year municipal-to-Treasury ratio was slipped to 100.0% on Friday from Thursday’s level of 101.3%.







Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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