September 25, 2017
In this week’s Municipal Market Update, we highlight the following:
- Prices on municipals weakened daily through Wednesday, on Thursday they were mixed and on Friday they strengthened, as reflected by weekly data for the Municipal Market Data (MMD) Triple-A Scale; also shown are the yields for the Municipal Market Advisors (MMA) Triple-A Scale and US Treasuries for the week;
- New issue volume for the week is expected to be $9.92B;
- Municipal bond funds posted inflows for the week;
- Demand in the Bank Qualified (BQ) market remains strong;
- Day-by-day recap of activity in the General Market.
Municipal Market Recap
Municipal bond funds posted inflows for the 11th week, as weekly reporting funds experienced $573.978MM of inflows in the latest reporting week, after experiencing inflows of $241.383MM the week prior. The four-week moving average was positive at $573.978MM, after being in the green at $396.692MM 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 continue to 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 were steady, while the long-end strengthened. On Friday prices were mixed again. The front-end weakened, while the intermediate area was stable and the long-end strengthened. Prices on municipals also started the trading week weaker and continued to weaken through Wednesday. They closed Thursday mixed, as bonds ten-years and in weakened and the long-end was steady. On Friday prices strengthened across the curve. Volume for this trading week is projected to be $9.92B, which is well above last week’s revised level of $5.37B. While supply has been down this year, it has been especially slow as of late, so this jump in issuance together with secondary market opportunities should help address the continued strong demand in the municipal sector.
This week’s calendar is packed with data and, more importantly, Fedspeak. On the economic calendar, the most important reports of the week are likely to be August’s Durable Goods Orders report (indicator of business investment and consumer confidence), August’s personal income and spending reports (indicators of consumer strength), and August’s PCE inflation report (indicator of future monetary policy). However, the headlines are more likely to be dominated by the Fedspeak as a number of Fed officials will be talking this week. Additionally, the markets will be digesting the German election results this week, as well as comments from the presidents of both the ECB and BOE.
Last week the yield on the two-year maturity on the MMD Triple-A Scale fell four basis points (bps) from Thursday to Friday and they ended the week at 0.89%. Meanwhile, the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity fell two bps on the MMD Triple-A Scale Thursday to Friday and they ended the week at 1.92% and 2.78%, respectively. Overall, week-over-week the yields on the two- and 10-year year general obligation (GO) bonds each rose three bps, while the yield on the 10-year GO bond rose eight bps and the yield on the 30-year GO bond rose two 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 0.95%, 2.00% and 2.82%, respectively. Overall, week-over-week the yields on the two- and 30-year maturities each rose two bps, while the yield on the 10-year maturity rose three 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 six bps and closed the week at 2.26%. Meanwhile the yield on the two-year maturity also rose six bps week-over-week and closed the week at 1.44%. This resulted in a week-over-week 2s/10s spread that was unchanged, at 82 bps. The yield on the 30-year maturity rose two bps week-over-week and finished the week at 2.79%.
New Issue Volume is Expected to be $9.92B
Total volume for the trading week is estimated to be $9.92B, well above last week’s $5.37B in issuance, according to revised data from Thomson Reuters. This week’s calendar consists of $7.15B in negotiated deals and approximately $2.77B in competitive sales, according to data from Thomson Reuters. The coming week has 24 deals scheduled $100.0MM or larger, with nine of those coming from the competitive route.
The largest deal of the week will come from the Texas Water Development Board (Board) when it sells $1.06B of state water implementation revenue fund for Texas revenue bonds on Tuesday. The deal is the largest in the Board’s history and carries top-notch ratings of triple-A by S&P Global Ratings (S&P) and Fitch Ratings (Fitch). The New Jersey Turnpike Authority plans to offer $579.0MM of revenue SIFMA LIBOR index bonds also on Tuesday. The deal is rated A2 by Moody’s Investors Service (Moody’s), A+ by S&P and A by Fitch. Also on Tuesday the State of Oregon will offer $578.0MM of full faith and credit tax anticipation notes (TANs), following a one-day retail order period. The TANs are rated MIG 1 by Moody’s, SP-1+ by S&P and F1+ by Fitch.
On Wednesday the Pennsylvania Economic Development Financing Authority plans to offer $432.915MM of revenue bonds for the University of Pittsburgh Medical Center. The deal is rated A1 by Moody’s, A+ by S&P and AA- by Fitch.
On the competitive side, Washington State is set to sell a total of $555.0MM in five series of GO bonds, including the largest individual competitive sale of $435.025MM on Tuesday. The five series GO backed bonds are rated Aa1 by Moody’s and AA+ by S&P and Fitch.
Finally, the State of Minnesota is selling a total of $846.795MM of GO taxable and GO state trunk highway refund and GO various purpose and refunding bonds through five separate sales on Wednesday. The deals carry a rating of triple-A by Fitch.
Municipal Bond Funds Posted Inflows for the Week
Municipal bond funds posted inflows for the 11th week, as market participants continued to put cash into funds, according to the latest data from Lipper. The weekly reporters saw $573.978MM of inflows, after inflows of $241.383MM the week prior. The four-week moving average was positive at $352.562MM, after being in the green at $396.692MM the week prior.
Long-term municipal bond funds had inflows of $225.329MM in the latest week after inflows of $289.549MM the week prior. Intermediate-term funds had inflows of $113.402MM after experiencing inflows of $84.525MM the week prior. National funds had inflows of $561.769MM after inflows of $347.544MM the week prior. High-yield municipal funds reported inflows of $133.982MM in the latest week, after inflows of $293.763MM the week prior. Exchange traded funds reported inflows of $26.746MM, after experiencing outflows of $71.425MM the week prior.
Demand in the Bank Qualified (BQ) Market Remains Strong
The new issue calendar for this week picks up and together with secondary opportunities should provide market participants the chance to pick up attractive structures, especially those 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 across the curve. The five-year maturity week-over-week tightened the most, six bps.
Daily Overview of the General Market for the Week Ending September 22nd
Last Monday prices on municipals were weaker, as the New York Metropolitan Transportation Authority offered almost $600.0MM of green bonds to retail buyers. On the day the yields on the two-, 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 last Monday were weaker, as stocks recovered from early-afternoon selling to finish near session highs and at new record levels. Global sentiment strengthened ahead of the U.S. session and helped jumpstart markets at the open. The U.S. Dollar recovered with Treasury yields and stocks, after falling last Thursday and Friday. 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 Monday to 85.2% from the prior Friday’s level of 85.9%, while the 30-year municipal-to-Treasury ratio fell to 98.9% on Monday from the prior Friday’s level of 99.6%.
Last Tuesday prices on municipals were weaker across the curve, as more supply came their way with an upsized New York Metropolitan Transportation Authority’s green bond sale headlining the new issue slate. On the day the yields on the two- and 10- Go bonds each rose one bp, while the yield on the 30-year GO bond rose two 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 an early morning bid for U.S. Treasuries faded by the close and modest gains for stocks were enough to push the major indices to another round of record highs. Despite slightly stronger stocks and a seemingly endless climb in yields, the U.S. Dollar softened to its weakest level in more than a month. On the day, the yields on the two-, 10- and 30-year maturities each rose one bp. The 10-year municipal-to-Treasury ratio was unchanged from Monday’s level of 85.2%, while the 30-year municipal-to-Treasury rose to 99.3% on Tuesday from Monday’s level of 98.9%.
Last Wednesday prices on municipals finished the day weaker, after the Federal Open Market Committee, as expected, left rates unchanged at a 1.0% to 1.25% range. The Federal Reserve also announced it will begin its balance-sheet-reduction plan in October using the plan laid out earlier this year. On the day, the yields on the two-, 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 finished the day weaker, as markets remained quiet in front of the Fed’s afternoon announcement but responded quickly once the headlines hit the wires. The Fed Statement saw minor (positive, on balance) changes but it was the Fed’s dot plot that likely spurred the reaction. With the Fed still committed to another hike this year and three more in 2018, yields in the belly of the curve saw the biggest response. The U.S. Dollar also leapt on the unchanged near-term dots. The currency climbed 0.75%. Stocks initially sold-off but recovered during Fed Chair Yellen’s confident press conference appearance. On the day, the yield on the two-year maturity rose four bps, while the yield on the 10-year maturity rose three bps and the yield on the 30-year maturity rose one bp. The 10-year municipal-to-Treasury ratio fell to 80.2% on Wednesday from Tuesday’s level of 85.2%, while the 30-year municipal-to-Treasury ratio was unchanged on Wednesday from Tuesday’s level of 99.3%.
Last Thursday prices on municipals finished mixed, as the University of Virginia came to market with a 100-year taxable bond offering. 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 was steady, according to the final read of the MMD Triple-A Scale.
U.S. Treasury prices also finished the day mixed, as the markets continued to digest the fact that the FOMC seems committed to another rate hike in December. Fed Funds Futures contracts, which were pricing in just a 25% chance of a December hike two weeks ago, are now projecting a 67% chance. Stocks failed to continue their hot streak with the Dow falling for the first day in ten trading sessions, down 0.2%. The S&P dropped for the first time in five sessions, down 0.3%. The U.S. Dollar gave up almost half of its gains from Wednesday afternoon dropping 0.4%. On the day, the yields on the two- and 10-year maturities were each unchanged, while the yield on 30-year maturity fell one bp. The 10-year municipal-to-Treasury ratio rose to 85.0% on Thursday from Wednesday’s level of 80.2%, while the 30-year municipal-to-Treasury ratio rose to 99.6% on Thursday from Wednesday’s level of 99.3%.
Last Friday prices on municipals finished the week stronger, as market participants prepped for the estimated $9.92B in new issue paper expected to come to market. On the day, the yield on the two–year GO bond fell four bps, while the yield on the 10-year Go bond fell one bp 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. Treasuries prices finished the week mixed. 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. Both the 10- and 30-year municipal-to-Treasury ratios were unchanged on Friday from their Thursday levels of 85.0% and 99.6%, respectively.
Senior Vice President
Vining Sparks IBG, LP