Muni Update

September 24, 2018


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

 

Municipal Market Recap

Prices on municipals weakened daily through Wednesday. On Thursday they were mixed, as the front-end weakened, while bonds maturing 10 years and longer were steady. On Friday prices on municipals were mostly steady across the curve. Issuance for the week is projected to be $3.13B, which is below last week’s $6.39B in issuance, according to revised data from Thomson Reuters. This drop in issuance is not at all surprising, given that market participants this week will be forced on the upcoming monetary policy meeting of the Federal Open Market Committee (FOMC) and the looming end of the quarter. We also note that State and local governments are expected to sell about $4.3B in municipal bonds over the next month, the lowest 30-day visible supply total since July 3rd.

 

Municipal bond funds reported investors put cash into funds for the week, as weekly reporting funds experienced inflows of $140.805MM, after experiencing outflows of $136.494MM the week prior. The four-week moving average remained positive at $8.742MM, after being a positive $68.122MM 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 were each unchanged from Thursday to Friday and they ended the week at 1.93%, 2.59% and 3.23%, respectively. Overall, week-over-week the yield on the two-year General Obligation (GO) bond rose nine basis points (bps), while the yield on the 10-year GO bond rose four bps and the yield on the 30-year GO bond rose seven bps.

 

Last week the yields on the two-, 10- and 30-year maturities on the MMA Triple-A Scale each rose one bp from Thursday to Friday and they ended the week at 1.83%, 2.58% and 3.20%, respectively. Overall, week-over-week the yields on the two- and 30-year GO bonds each rose seven bps, while the yield on the 10-year GO bond rose five bps.

 

U.S. Treasuries prices were mixed on Monday, as the front- and long-end maturities were steady, while intermediate maturities weakened. On Tuesday prices weakened across the curve. On Wednesday prices 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 was steady, while bonds maturing 10 years and longer strengthened. On Friday they were mixed, as bonds maturing 10 years and in were steady, while the long-end strengthened. Overall, week-over-week the yield on the 10-year maturity rose eight bps and closed the week at 3.07%. Meanwhile the yield on the two-year maturity rose three bps week-over-week and closed the week at 2.81%. This resulted in a week-over-week 2s/10s spread of 26 bps, five bps wider then last week’s 2s/10s spread of 21 bps. The yield on the 30-year maturity rose seven bps week-over-week and finished the week at 3.20%.

 

Weekly Bond Issuance is Forecasted to be $3.13B for the Trading Week

Total issuance for the coming week is estimated to be $3.13B, which is below last week’s $6.39B in issuance, according to revised data from Thomson Reuters. This drop in issuance is not all that surprising, given that market participants this week will be forced on the upcoming monetary policy meeting of the FOMC and the looming end of the quarter.

The biggest deal of the week will come from the competitive arena, as the State of Wisconsin is slated to sell $260.565MM of Series 2018B GO bonds on Tuesday. Proceeds of the sale will be used for various governmental purposes.

In the negotiated sector, the Dormitory Authority of the State of New York (DASNY) plans to offer $150.0MM of Series 2018A revenue bonds on Tuesday after a one-day retail order period. Also on Tuesday, the New Orleans Aviation Board plans to offer $109.24MM of special facilities revenue bonds and refunding bonds.

Moving west, the successor Agency to the Redevelopment Agency of Pomona, California plans to offer $130.435MM of taxable Series 2018BI tax allocation refunding bonds on Wednesday. We also note that the Ohio Higher Educational Facilities Commission plans to offer $113.735MM of Series 2018 hospital revenue bonds for the University Hospital Health System.

 

Municipal Bond Funds Posted Inflows for the Week        

Municipal bond funds reversed course after two weeks of outflows and posted inflows, as market participants put cash back into funds for the week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $140.850MM, after experiencing outflows of $136.494MM the week prior. The four-week moving average remained positive at $ 8.742MM, after being a positive $68.122MM the week prior.

Long-term municipal bond funds had inflows of $134.403MM in the latest week after experiencing inflows of $121.885MM the week prior. Intermediate-term funds had outflows of $80.745MM after inflows of $81.138MM the week prior. National funds had inflows of $158.227MM after experiencing outflows of $106.754MM the week prior. High-yield municipal funds reported inflows of $156.236MM in the latest week, after inflows of $160.042MM the week prior. Exchange traded funds reported inflows of $35.766MM, after outflows of $236.814MM 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 (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, as August roll-off money that still needs to be reinvested comes to an end. 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 one, two, three, and five-year maturities all widened, with the largest widening occurring in the one-year maturities, five bps. Meanwhile the spreads on the 10- and 15-year maturities tightened, with the largest tightening occurring in the 10-year maturity, six bps. The spread on the 30-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 weaker, as retail investors got the first shot at the biggest deal of the week, a $1.59B Texas Water Development Board offering of State Water Implementation Revenue Fund for Texas bonds, ahead of institutional pricing on Tuesday. 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 each rose one bp, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed on Monday, as U.S. stocks sold off early, stabilized in negative territory for most of the session, but added to those losses in late-afternoon trading to finish near the lows. On the day, the yields on the two- and 30-year maturities were steady, while the 10-year maturity rose one bp. The 10-year municipal-to-Treasury was unchanged on Monday from last Friday’s level of 85.3%, while the 30-year municipal-to-Treasury ratio bumped up to 101.3% on Monday from last Friday’s level of 101.0%.

Last Tuesday prices on municipal bonds were weaker, as the $1.59BTexas Water Development Board’s tax-exempt revenue bond deal was priced and repriced for institutions, after holding a one-day retail order period on the tax-exempts. On the day, the yields on the two- and 10-year GO bonds each rose two bps, while 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, 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 four bps and the yield on the 30-year maturity rose seven bps. The 10-year municipal-to-Treasury ratio fell to 84.9% on Tuesday from Monday’s level of 85.3%, while the 30-year municipal-to-Treasury ratio fell to 100.6% on Tuesday from Monday’s level of 101.3%.

Last Wednesday prices on municipals were weaker, as market participants saw several new issues come to market, as well as brisk secondary market activity amid U.S. Treasury weakness. On the day the yield on the two-year GO bond rose four bps, 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 mixed on Wednesday, as U.S. stocks and yields closed mixed on Wednesday as investors continued to digest the recent U.S.-China trade developments. On the day, the yield on the two-year maturity was steady, while the yield on the 10-year maturity rose four bps and the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 84.1% on Wednesday from Tuesday’s level of 84.9%, while the 30-year municipal-to-Treasury ratio fell to 100.0% on Wednesday from Tuesday’s level of 100.6%.

Last Thursday prices on municipals were mixed, as the last of the big deals came to market, with issuers in Colorado, Minnesota and Florida leading the pack. 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 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 maturity was steady, while the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity fell two bps. The 10-year municipal-to-Treasury ratio bumped up to 84.4% on Thursday from Wednesday’s level of 84.1%, while the 30-year municipal-to-Treasury ratio rose to 100.6% on Thursday from Wednesday’s level of 100.0%.

Last Friday prices on municipals were unchanged, as market participants were looking ahead to the coming week’s $3.13B in new issue bond volume, the FOMC’s meeting and the end of the third quarter. 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.

U.S. Treasury prices also finished the day mixed, as U.S. stocks traded mixed 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 fell one bp. The 10-year municipal-to-Treasury was unchanged on Friday from Thursday’s level of 84.4%, while the 30-year municipal-to-Treasury ratio bumped to 100.9% on Friday from Thursday’s level of 100.6%.

Taxable Market







Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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