Muni Update

September 4, 2018


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

 

Municipal Market Recap

 

Prices on municipals were steady on Monday across the curve. On Tuesday they were mixed, as the front- and long-ends weakened, while intermediate maturities were steady. On Wednesday they weakened across the curve. On Thursday they were mixed, as the front-end weakened, while bonds maturing 10 years and longer were steady. On Friday they were mixed again, as bonds maturing 10 years and in were steady, while the long-end strengthened. Volume for the week is projected to be $3.6B, which is below last week’s $4.5B in revised issuance. This lower level of issuance is expected due to the holiday-shortened trading week. The current supply-demand imbalance (demand continues to outpace supply), should continue to prove favorable for municipal performance. This week’s level of new issue supply together with secondary market opportunities should provide market participants with opportunities to fill their needs.

 

Municipal bond funds reported investors put cash into funds for a fourth week in a row last week, as weekly reporting funds experienced inflows of $212.052MM, after experiencing inflows of $378.371MM the week prior. The four-week moving average was a positive $416.251MM, after being a positive $271.150MM 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- and 10-year maturities on the MMD Triple-A Scale were unchanged from Thursday to Friday and they ended the week at 1.70% and 2.44%, 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 3.02%. Overall, week-over-week the yield on the two-year General Obligation (GO) bond rose six bps, while the yield on the 10-year GO bond rose one bp 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 each unchanged from Thursday to Friday and they ended the week at 1.66%, 2.46% and 3.07%, respectively. Overall, week-over-week the yields on the two- and 10-year GO bonds each rose two bps, while the yield on the 30-year GO bond rose four bps week-over-week.

 

U.S. Treasuries prices weakened across the curve on Monday. On Tuesday they were mixed, as the front-end was steady, while bonds maturing 10 years and longer weakened. On Wednesday they were mixed again, as bonds 10 years and in were steady, while the long-end strengthened. On Thursday they strengthened across the curve. On Friday they were mixed, as bonds maturing 10 years and in strengthened, while the longer-end weakened. Overall, week-over-week the yield on the 10-year maturity rose three bps and closed the week at 2.85%. Meanwhile the yield on the two-year maturity fell one bp week-over-week and closed the week at 2.62%. This resulted in a 2s/10s spread of 23 bps, four bps wider than last week’s 2s/10s spread of 19 bps. The yield on the 30-year maturity rose five bps week-over-week and finished the week at 3.02%.

Weekly Bond Volume is Forecasted to be $3.6B for the Trading Week

Total volume for the coming week is estimated to be $3.6B, which is below last week’s $4.5B in issuance, according to revised data from Thomson Reuters. This week’s trading calendar is comprised of $1.6B in negotiated offerings and $2.0B in competitive offerings. This week’s projected low level of issuance is expected, due to the holiday-shortened trading week. We note, there are several big bond issues awaiting buyers when they return from the long weekend.

The New York City Transitional Finance Authority (NYC TFA) will issue $1.4B of future tax secured subordinate fiscal 2019 bonds. On Thursday, the NYC TFA will price $900.0MM of tax-exempt fixed-rate bonds after a two-day retail order period. Additionally, the NYC TFA will sell $500.0MM million of taxable bonds in two competitive sales on Thursday. The deals are rated Aa1 by Moody’s Investors Service (Moody’s) and AAA by S&P Global Ratings (S&P) and Fitch Ratings (Fitch).

Also on Thursday, the State of California is competitively selling over $989.0MM of GO and GO refunding bonds in three sales. The offerings consisting of $516.035MM of tax-exempt various purpose GO refunding bonds, Bidding Group C, $338.38MM of tax-exempt various purpose GOs, Bidding Group B, and $134.855MM of taxable various purpose GO and refunding bonds, Bidding Group A. The deals are rated Aa3 by Moody’s and AA- by S&P and Fitch.

There are several higher education deals of note on the upcoming calendar. The University of Chicago plans to offer $400.0MM of Series 2018C taxable fixed-rate bonds on Thursday. The deal is rated Aa2 by Moody’s, AA- by S&P and AA+ by Fitch. Also on Thursday, the University of North Dakota plans to offer $92.99MM of tax-exempt and taxable green certificates of participation. The deal is rated A1 by Moody’s. Purdue University plans to offer $90.0MM of student fee bonds this week. The deal is rated AAA by Moody’s and S&P.

Finally this week, the New Jersey Housing and Mortgage Finance Agency plans to offer $165.0MM of multi-family revenue bonds. The deal is rated AA- by S&P.

Municipal Bond Funds Posted inflows for a Fourth Week        

Municipal bond funds posted inflows, as market participants put cash into funds for the week, according to the latest data from Lipper. The weekly reporting funds saw inflows of $212.052MM, after experiencing inflows of $378.371MM the week prior. The four-week moving average was a positive $416.251MM, after being a positive $271.150MM the week prior.

Long-term municipal bond funds had inflows of $368.851MM in the latest week after experiencing inflows of $348.356MM the week prior. Intermediate-term funds had inflows of $97.445MM after inflows of $90.321MM the week prior. National funds had inflows of $194.565MM after experiencing inflows of $389.960MM the week prior. High-yield municipal funds reported inflows of $222.454MM in the latest week, after inflows of $240.718MM the week prior. Exchange traded funds reported inflows of $57.435MM, after inflows of $82.831MM 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 four 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 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 5.0% and higher coupons. Week-over-week, bank qualified spreads were mixed, as the spreads on the one, two, three, five, 10 and 15-year maturities all widened, with the largest tightening occurring in the two-year maturity, six bps. Meanwhile the spread on the 30-year maturity was unchanged week-over-week.

Daily Overview of the General Market for the Week Ending September 7th

Last Monday prices on municipals were steady, as market participants were eyeing the $3.9B 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 weakened on Monday, as U.S. stocks jumped at the open on an early headline that the U.S. and Mexico had reached a trade agreement that would alter some key provisions of NAFTA. While the details seemed to reflect minor changes, Canada remained on the sidelines for now, and the red tape of congressional approval was still uncut, the fact that NAFTA hadn’t simply been put through the shredder led to markets’ sigh of relief. On the day, the yield on the two-year maturity rose four bps, while the yield on the 10-year maturity rose five bps and the yield on the 30-year maturity rose three bps. The 10-year municipal-to-Treasury ratio fell to 85.3% on Monday from last Friday’s level of 86.2%, while the 30-year municipal-to-Treasury ratio fell to 100.0% on Monday from last Friday’s level of 101.0%.

Last Tuesday prices on municipal bonds were mixed again, as a number of new offerings came to market, led by a Denver City and County deal. On the day, the yields on the two- and 10-year GO bonds each rose one bp, while the yield on the 30-year GO bond was steady, according to the final read of the MMD Triple-A Scale.

Prices on U.S. Treasuries were mixed, as U.S. stocks posted gains for the session. On the day, the yield on the two-year maturity was steady, while the yields on the 10- and 30-year maturities each rose three bps. The 10-year municipal-to-Treasury ratio fell to 84.4% on Tuesday from Monday’s level of 85.3%, while the 30-year municipal-to-Treasury ratio fell to 99.3% on Tuesday from Monday’s level of 100.0%.

Last Wednesday prices on municipals weakened, as market participants were treated to a large negotiated deal from the Commonwealth of Massachusetts and three big competitive sales from the State of Washington. On the day the yields on the two- and 30-year GO bonds each rose two bps, while the yield on the10-year GO bond 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 posted modest gains 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 ratio bumped up to 84.7% on Wednesday from Tuesday’s level of 84.4%, while the 30-year municipal-to-Treasury ratio rose to 100.3% on Wednesday from Tuesday’s level of 99.4%.

Last Thursday prices on municipals were mixed, as most of the week’s bond supply had already priced, so participants turned their attention to the short-term sector, as well as starting to look ahead to the coming holiday-shortened trading week. On the day, the yield on the two-year GO bond rose three 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 finished the day stronger, as prices on U.S. equities were mixed to mostly lower for the session. On the day, the yield on the two-year maturity rose fell three bps, while the yields on the 10- and 30-year maturities each fell two bps. The 10-year municipal-to-Treasury ratio rose to 85.3% on Thursday from Wednesday’s level of 84.7%, while the 30-year municipal-to-Treasury ratio rose to 101.0% on Thursday from Wednesday’s level of 100.3%.

Last Friday prices on municipals were mixed, as market participants were looking ahead to the coming week’s $3.6B in weekly bond volume. On the day, the yields on the two- and 10-year GO bonds were unchanged, while the yield on the 30 year GO bond fell 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 traded mixed for the session. On the day, the yield on the two-year maturity fell two bps, while the yield on the 10-year maturity fell one bp and the yield on the 30-year maturity rose two bps. The 10-year municipal-to-Treasury bumped up to 85.6% on Friday from Thursday’s level of 85.3%, while the 30-year municipal-to-Treasury ratio was fell to 100.0% on Friday from Thursday’s level of 101.0%.





August Issuance Posts one of the Highest Monthly Volume Totals of 2018 (The Bond Buyer)

Monthly new-issue volume surpassed the $30.0B mark for the fourth time this year in August, helping keep third-quarter issuance close to last year’s pace and potentially setting the stage for a more robust season of issuance in the Fall.

Despite the mark, August 2018 volume dipped year-over-year to $32.6B from $37.5B in 2017, according to Thomson Reuters data. Issuers completed 704 transactions, off from 1,080 in August 2017.

After eight months, yearly municipal volume stands at $224.6B, well short of the $263.5B mark in 2017 through August. Volume so far for the third quarter, though, sits at $59.6B, only 4.6% off of the $62.5B of long-term issuance the market saw in the third quarter of 2017.

New-money issuance in August increased 16.4% to $19.45B on 593 deals, from $16.71B on 609 deals a year earlier. Refunding volume fell to $10.1B on 107 deals, from $14.1B on 376 deals a year earlier. Combined new-money and refunding issuance dropped 56.1% to $2.97B, while issuance of revenue bonds declined 15.7% to $19.13B and GO bond sales fell to $13.42B from $14.83B.

Negotiated deal volume was up to $26.99B and competitive sales decreased by 43.2% to $5.26B. Taxable bond volume increased to $3.29B from $1.48B, while tax-exempt issuance fell by 22.5% to $26.11B. Minimum tax bond issuance rose to $3.16B from $2.38B. Deals wrapped by bond insurance dropped 34.5% to $1.41B on 99 deals from $2.16B over 164 transactions the same time the prior year.

Only two of the 10 sectors showed year-over-year increases, as public facilities gained to $2.15B from $838.0MM and environmental facilities crawled up to $251.0MM from $195.0MM. All other sectors decreased by at least 1.5%, with the development showing the biggest downfall to $384.0MM from $1.06B.

Just two types of issuers were in the green. Deals from direct issuers increased to $517.0MM from $133.0MM and cities and towns rose to $7.45B from $5.26.0B. All other issuers saw a decreased of at least 7.9%, with local authorities leading the way falling down to $3.59B from $6.94B.

California continues to have the most issuance among states so far in 2018, with  $32.89B in issuance; New York is second with $28.55B; Texas is third with $23.43B; Pennsylvania is next with $10.87B; and New Jersey rounds out the top five with $7.22B.



Dennis Porcaro

Senior Vice President

Vining Sparks IBG, LP

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