Muni Update

September 18, 2017


 

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


Municipal Market Recap

Municipal bond funds posted inflows for the tenth week, as weekly reporting funds experienced $241.383MM of inflows in the latest reporting week, after experiencing inflows of $250.368MM the week prior. The four-week moving average was positive at $396.692MM, after being in the green at $483.038MM 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 weaker across the curve and continued to weaken daily through Wednesday. On Thursday prices were mixed, as bonds ten-years and in weakened and the long-end strengthened. On Friday prices were mixed again as the front-end weakened, the intermediate area was stable and the long-end strengthened. Prices on municipals were mixed on Monday, as the front-end was steady and the intermediate and long-ends weakened. On Tuesday prices weakened across the curve. On Wednesday and Thursday they were mixed, as the front-end was steady and the intermediate and long-ends were weaker. They closed the week mixed, as the front- and long-ends were stable and the 10-year spot weakened. Volume for the trading week is projected to be $4.72B, which is below last week’s revised level of $5.61B. While supply has been down this year, it has been especially slow of late. Still, we expect this level of issuance coupled with secondary market opportunities will address the continued strong demand in the municipal sector.

 

This week’s calendar is heavy with housing reports; new starts (Tue), new permits (Tue), existing home sales (Wed), and FHFA home prices (Thu). The biggest of those reports will be Wednesday’s existing home sales given the recent weakness in both new and existing sales data.  Even with these reports, the biggest news of the week will be Wednesday’s FOMC decision. We expect three primary results: 1) the commencement of the balance sheet reduction plan, 2) mixed revisions to the FOMC’s forecasts, and 3) unchanged forward-guidance language. We also note that the press release on Wednesday will include the release of the Committee’s projections in interest rates through 2020.

 

Last week the yields for the two- and 30-year maturities on the MMD Triple-A Scale was unchanged from Thursday to Friday and they ended the week at 0.86% and 2.76%, respectively. Meanwhile the yield on the 10-year maturity rose one basis point (bp) on the MMD Triple-A Scale from Thursday to Friday and ended the week at 1.89%. Overall, week-over-week the yield on the two-year general obligation (GO) bond rose one bp, while the yield on the 10-year GO bond rose eight bps and the yield on the 30-year GO bond rose 11 bps.

 

Last week the yields on the two-, 10-, and 30-year maturities on the MMA Triple-A Scale were all unchanged from Thursday to Friday and ended the week at 0.93%, 1.97% and 2.80%, respectively. Overall, week-over-week the yield on the two-year maturity rose four bps, while the yields on the 10- and 30-year maturities each rose six bps.

 

Prices on U.S. Treasuries started last week weaker and continued to weaken through Wednesday. On Thursday and Friday they were mixed. Overall, week-over-week the yield on the 10-year maturity rose 14 bps and closed the week at 2.20%. Meanwhile the yield on the two-year maturity rose 11 bps week-over-week and closed the week at 1.38%. This resulted in a week-over-week 2s/10s spread of 82 bps, three bps wider than last week’s 2s/10s spread of 79 bps. The yield on the 30-year maturity rose nine bps week-over-week and finished the week at 2.77%.


New Issue Volume is Expected to be $4.72B

Total volume for the trading week is estimated to be $4.72B, which is below last week’s $5.61 in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $3.71B in negotiated deals and approximately $1.01B in competitive sales, according to data from Thomson Reuters. There are 10 sales scheduled for $100.0MM and larger, with two of them coming via the competitive market.

The Regents of the University of California plans to offer $854.285MM of limited project revenue bonds, to be comprised of both tax-exempts and taxables on Tuesday. The deal is rated Aa3 by Moody’s Investors Service (Moody’s) and AA- by S&P Global Ratings (S&P) and Fitch Ratings (Fitch).  The New York Metropolitan Transportation Authority plans to offer $500.0MM of revenue climate certified green bonds, also on Tuesday after a one-day retail order period. The deal is rated A1 by Moody’s and AA- by S&P and Fitch. The State of Ohio plans to offer $341.87MM of GO highway capital improvement bonds also on Tuesday. The deal is rated Aa1 by Moody’s, AAA by S&P and AA+ by Fitch.

There is a tie for the largest competitive bond sale of the week, with both deals coming from school districts. First, on Tuesday the Brookland-Cayce School District No. 2, South Carolina is scheduled to sell $100.0MM of GO bonds. The deal is rated Aa1 by Moody’s and AA by S&P. Then on Thursday, Cherry Creek School District No. 5 Colorado is slated to sell $100.0MM of GO bonds. The deal is 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 Tenth week, as market participants continued to put cash into funds, according to the latest data from Lipper. The weekly reporters saw $241.383MM of inflows, after inflows of $250.368MM the week prior. The four-week moving average was positive at $396.692MM, after being in the green at $483.038MM the week prior.

Long-term municipal bond funds had inflows of $289.549MM in the latest week after inflows of $105.638MM the week prior. Intermediate-term funds had inflows of $84.525MM, after experiencing inflows of $74.141MM the week prior. National funds had inflows of $347.544MM after inflows of $290.814MM the week prior. High-yield municipal funds reported inflows of $293.763MM in the latest week, after inflows of $165.070MM the week prior. Exchange traded funds reported outflows of $71.425MM, after experiencing inflows of $2.169MM the week prior.   


Demand in the Bank Qualified (BQ) Market Remains Strong

The new issue calendar for this week is lighter compared to last week. Still, we expect that the new issue calendar together with secondary market opportunities will provide market participants the chance to pick up attractive structures in the steepest part of the curve (15+ 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 (8 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 tighter in every maturity except the five-year spot, which widened by five bps. The 30-year maturity week-over-week tightened the most, 10 bps.  


Daily Overview of the General Market for the Week Ending September 15th

Last Monday prices on municipals were mixed, as market participants were looking ahead to a $7.45B in new issue sales that will be dominated by deals from New York City and Maryland. On the day the yield on the two-year GO bond was unchanged, while the yield on the 10-year GO bond rose two bps and the yield on the 30-year GO bond rose three bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries last Monday were weaker, as U.S. stocks leveraged overnight strength in Asia and Europe to rally sharply Monday and push global equities to all-time record highs. The lack of weekend military action in North Korea (to mark the anniversary of its day of founding) spurred a relief rally for global equities as Asian trading opened. U.S. futures spiked early as well and that overnight strength persisted throughout Monday’s session. On the day, the yield on the two year maturity rose three bps, while the yields on the 10- and 30-year maturities each rose five bps. The 10-year municipal-to-Treasury ratio fell on Monday to 86.7% from the prior Friday’s level of 87.9%, while the 30-year municipal-to-Treasury ratio fell to 98.2% on Monday from the prior Friday’s level of 98.9%.

Last Tuesday prices on municipals were weaker across the curve, as the first of the week’s issuance came to market. On the day the yield on the two-year GO bond rose one bp, while the yield on the 10-year GO bond rose three bps and the yield on the 30-year GO bond rose five bps, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were also weaker across the curve on Tuesday, as U.S. stocks rose. The Dow gained 0.28% and the S&P and NASDAQ both added 0.34%. The daily improvements were enough to push the three to new records; it was the Dow’s first since August 7th. The U.S. Dollar was essentially unchanged and remains at one of its weakest levels since January 2015. On the day, the yield on the two-year maturity rose three bps, while the yield on the 10-year maturity rose six bps and the yield on the 30-year maturity rose five bps. The 10-year municipal-to-Treasury ratio fell on Tuesday to 85.7% from Monday’s level of 86.7%, while the 30-year municipal-to-Treasury was unchanged on Tuesday from Monday’s level of 98.2%.

Last Wednesday prices on municipals finished the day mixed, as a number of larger issues came to market. On the day, the yield on the two-year GO bond was unchanged, 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 finished the day weaker, as a last-minute jump pushed U.S. equity indices positive for the day. Although marginal, the gains were enough to lift the Dow, S&P, and NASDAQ to new record highs for a second day. Leading the S&P’s 0.08% gain was a 1.2% rally in shares of energy companies. On the day, the yields on the two- and 10-year maturities each rose two bps, while the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio slipped on Wednesday to 85.4% from Tuesday’s level of 85.7%, while the 30-year municipal-to-Treasury ratio rose to 98.6% on Wednesday from Tuesday’s level of 98.2%.

Last Thursday prices on municipals finished mixed, as New York City hit the market with both negotiated and competitive sales that totaled over $1.0B. 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 rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasury prices also finished the day mixed, as U.S. stocks finished mixed. The industrials sector added 63 points to the index. Weakness in tech stocks caused the NASDAQ to underperform with a daily drop of 0.48%. The U.S. Dollar pulled back on the day and weakened against most every major currency. On the day, the yields on the two- and 10-year maturities each rose one bp, while the yield on 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio was unchanged on Thursday from Wednesday’s level of 85.4%, while the 30-year municipal-to-Treasury ratio rose to 99.3% on Thursday from Wednesday’s level of 98.6%.

Last Friday prices on municipals finished the week mixed, as market participants prepped for the estimated $4.72B in new issue paper expected to come to market. On the day, the yields on the two- and 30-year GO bonds were each unchanged, while the yield on the 10-year GO bond rose one bp, according to the final read of the MMD Triple-A Scale.

U.S. Treasuries prices finished the week mixed. On the day, the yield on the two-year maturity rose two bps, while the yield on the 10-year maturity was unchanged and the yield on the 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 85.9% on Friday from Thursday’s level of 85.4%, while the 30-year municipal-to-Treasury ratio rose to 99.6% on Friday, from Thursday’s level of 99.3%.





Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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