Municipal Market Weekly Ramirez Municipal Strategy

Transcription

1 ***INSTITUTIONAL USE ONLY*** Municipal Market Weekly Page 1 Municipals rallied and outperformed Treasuries during the shortened Thanksgiving holiday week as US rates continued to benefit from fears of slower global growth, plunging oil prices (-11% on week), US-China trade war, FAANG stocks, hard Brexit, Italy s budget debacle, and a stronger US dollar. US economic data also came in slightly weaker vs expectations, including Univ of Michigan consumer sentiment and Markit Manufacturing PMI. Treasuries were generally stable on the week despite risk-off sentiment affecting equities, with 2s30s bull flattening by -5 bps to 48 bps on a +2 bps increase in the 2yr yield and a -3 bps decline in the 30yr yield. Investors appear to be awaiting this week s slew of economic data points, FOMC minutes, and several Fed speakers, including Fed Chairman Powell (Wed) for any hint of dovish monetary policy. Fed funds futures currently indicate a high probability (77%) of a +25 bps hike in Dec, although a less than 40% probability for hikes in Trump s upcoming meeting with Xi Jinping on Saturday at G-20 will also be closely watched for any hints of de-escalating trade tensions. Municipals outperformed Treasuries due to immaterial new issue supply ($1.1 bil. and wellreceived) amidst orderly processing of the ninth consecutive week of fund outflows (-$332 mil.; +$4.1 bil. YTD) and related, above-average bid-wanteds Mon/Tues. MMD 2s30s bull flattened by -3 bps to 126 bps following scale bumps across the curve that averaged -3.6 bps, including -4 bps in 10yrs and -5 bps in 30 yrs. SIFMA rose +3 bps to 1.69%, or 87% of 1yr MMD and 73% of 1mL. The S&P 500 index and DJIA both erased gains for the year while Munis gained +27 bps on the week (-20 bps YTD) and Treasuries gained +14 bps (-141 bps YTD). IG Corporate also continues to experience knock-on effects of the equity rout, with the IG Corp index down -6 bps on the week and -314 bps YTD. Munis generally should maintain a firm tone for the next several months due to favorable market technicals, including higher absolute yields (+30% YTD), slightly negative net supply (see below), fairly-valued ratios, and strong Nov-Jan reinvestment. Risks include rich-to-fair credit spreads (Pg. 2) and still bloated dealer balance sheets at $22 bil., or 18% above-average and biased (55%) in long duration. The macro backdrop risks include continued market volatility, mild level of US inflation, ongoing Fed balance sheet taper, and higher Treasury supply to fund the Federal deficit. Given these factors, in addition to a MMD 2s30s that is steep (126 bps) vs Treasuries (48 bps), we see little incentive or need to extend duration beyond ~20yrs or assume outsized credit risk. We note that higher quality 5% bonds with maturities of 15-20yrs and calls inside 5yrs are now trading at a discount to longer calls (+50 bps) of similar maturities. We also note that despite our preference for higher credit quality names, there is some opportunity currently in higher quality A rated Hospitals, created recently by fund outflows in High Yield Muni funds (4 wk avg of -$258 mil./ week). Cal names also continue to read slightly cheaper vs the last 12 months as investors continue to push back on sub-mmd pricing. This week is back to the races with $7.9 bil. of gross supply, led in the negotiated market by $856 mil. NYC GO, $849 mil. Chicago BOE, $318 mil. Detroit Downtown Dev, and $245 mil. Wash Met Area Transit (Ramirez Co-Sr). Competitively, $350 mil. NYC GO and $311 mil. FL DOT lead the slate. Gross supply YTD is $289 bil, or -15% YoY and we estimate only ~$36 bil. of new issue supply through year-end, which would put gross supply YTD at ~$325 mil., or -25% YoY and very close to our (un-altered) 2018 forecast of $317 bil. Assuming this new issue supply forecast holds, redemptions and calls of about $40-$50 bil. will likely result in slight negative net supply. Over the next 30 days, we see net muni market supply at -$12.18 bil., comprised of +$12.49 bil. new issues against -$24.67 of maturing ($16.95 bil.), and announced calls ($7.72 bil.). The states that stand to experience the largest change in outstanding debt include New Jersey (-$2.46 bil.), Ohio (-$1.77 bil.), Washington (-$1.16 bil.), Georgia (-$931.4 mil.), and Florida (+$706.4 mil.). We expect to release our new issue supply forecast mid-dec and incorporate our thoughts regarding increased new issue supply, if any, that may result from the $51 bil. of bond measures that passed in the midterm elections along with any bipartisan Federal infrastructure plan, including the possibility of taxable, BAB-like bonds. We are somewhat bearish on a meaningful Federal infrastructure plan at this time as funding sources for any new bonds first need to materialize, which in our view, is a long-shot. As noted above, investors will be all ears for the various Fed speakers slated to speak this week, especially Chairman Powell on Wed (see Pg 4) at the NY Economic Club, and the Fed meeting minutes from the committee s Nov 8 meeting. The numerous economic data releases this week include 3Q18 GDP, Core PCE, new home sales, continuing claims and Treasury sales of $39 bil. 2yr, $40 bil. 5yr, and $32 bil. 7 yr. We continue this week to have Brexit concerns, a Thanksgiving hangover, and a ringside seat for Trump vs Xi on Saturday, which will undoubtedly be the main event to end the week. Peter L. Block Managing Director Credit Strategy (212) peter.block@ramirezco.com Cem Baloglu AVP Credit Strategy (212) cem.baloglu@ramirezco.com John Young Managing Director Underwriting (212) john.young@ramirezco.com Alan Greco Managing Director Sales & Trading (212) alan.greco@ramirezco.com

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3 Market Performance Page 3 WEEK ENDING: 11/23/18 TOTAL RETURN (%) YIELD (%) WTD YTD Lo Hi Mean Vol Z-score INDEX WTD Nov '18 Oct '18 4Q18 3Q18 2Q18 1Q /23/18 Δ Δ 12M 12M 12M 12M 12M 3Y TREASURY-TERM TREASURY - ALL SHORT SHORT-INT INTRMD LONG-INT LONG MUNICIPAL-TERM SHORT SHORT-INT INTRMD LONG-INT LONG MUNICIPAL-QUALITY MUNI-EXEMPT MUNI-TAXABLE HIGH-GRADE 'A' RATED 'BBB' RATED HIGH YIELD MUNICIPAL-SECTOR PRE-RE GO DED TAX WTR-SWR PUB PWR HEALTHCARE HIGHER ED TRANSPORT HOUSING TOBACCO IDB GLOBAL / CORP / EQUITY S&P GLOBAL AGG US CORP-IG US CORP-HY Rates & Ratios This Wk Last Wk End Qtr End Yr Mean Value WTD MTD QTD YTD 11/23/18 11/16/18 9/28/18 12/29/17 12M 3Y 12M 3Y Perf Perf Perf Perf AAA MMD / UST Ratios Ratios Ratios Ratios 2 Yr 71% 72% 70% 82% 71% 78% Fair Fair -1.2 Out -1.3 Out 1.2 Under Out 5 Yr 77% 78% 74% 76% 74% 77% Fair Fair -0.8 Out 0.0 Under 3.0 Under 1.5 Under 10 Yr 85% 86% 84% 81% 85% 89% Fair Fair -0.9 Out -1.3 Out 1.5 Under 3.7 Under 30 Yr 99% 99% 99% 92% 98% 98% Fair Fair -0.7 Out -0.5 Out -0.3 Out 7.0 Under UST BPS BPS BPS BPS 2 Yr Cheap Cheap Yr Fair Cheap Yr Fair Cheap Yr Cheap Cheap AAA MMD BPS BPS BPS BPS 2 Yr Cheap Cheap Yr Cheap Cheap Yr Fair Cheap Yr Cheap Cheap

4 Page 4 Muni Primary Market Gross Supply ($ in millions) As of 11/23/18 Last Week 1, wk Moving Avg. 6,196.8 YTD 289,040.7 Weekly Visible Supply ($ in millions) Week of 11/26/18 Total 7,924.7 Comp. 2,067.1 Neg. 5,857.6, Ramirez 30-Day Visible Supply ($ in millions) Current 2018 High 2018 Low Total $ Date $ Date Total 9, ,653.6 (8/13) 2,017.8 (6/28) Comp. 2, ,795.3 (5/14) (1/26) Neg. 6, ,292.2 (8/9) (6/28) Source: Bond Buyer Top Competitive Issuances Coming to Market Issuer State Amount ($ 000 s) New York NY 350,000 FL ST Dept of Transprtn FL 311,645 Westchester Co NY 202,555 Alabama AL 163,780 Sioux Falls SD #49-5 SD 135,645 Top Negotiated Issuances Coming to Market Issuer State Amount ($ 000 s) New York NY 856,045 Chicago BOE IL 849,305 Detroit Downtown Dev Auth MI 318,390 Wash Met Area Transit Auth DC 245,085 Ohio St OH 188,795 Underwriters will attempt to market $7.9 bil. of munis in the week of 11/26, led in the negotiated space by $856 mil. New York City, $849 mil. Chicago BOE, and $318 mil. Detroit Downtown Dev Auth. The competitive calendar is highlighted by $350 mil. New York City. Ramirez Negotiated Issuances Coming to Market Issuer State Amount ($ 000 s) Senior Manager Ramirez Role Wash Metro Area Transit Auth DC 245,085 Citi Co-Senior New York NY 856,045 BAML Co-Manager Economic Calendar Monday (11/26) Tuesday (11/27) Wednesday (11/28) Thursday (11/29) Friday (11/30) Chicago Fed Nat. Activity Index FHFA House Price Index MoM MBA Mortgage Applications Personal Income Chicago Purchasing Manager Dallas Fed Manf. Activity Conf. Board Consumer Confidence Wholesale Inventories MoM Personal Spending Fed Speaker - Williams U.S. to Sell USD39 Bln 3-Month Bills U.S. to Sell USD36 Bln 6-Month Bills U.S. to Sell 8-Week Bills GDP Annualized QoQ Initial Jobless Claims U.S. to Sell 4-Week Bills Core PCE QoQ Continuing Claims U.S. to Sell USD39 Bln 2-Year Notes U.S. to Sell USD40 Bln 5-Year Notes New Home Sales Bloomberg Consumer Comfort Fed Speakers - Clarida/Bostic/ Evan/George U.S. to Sell USD18 Bln 2-Year Floating Rate Notes Reopening Pending Home Sales NSA YoY U.S. to Sell USD32 Bln 7-Year Notes FOMC Meeting Minutes Fed Speaker - Powell Fed Speakers - Powell / Kaplan / Mester / Evans / Harker / Kashkari / Rosengren

5 Page 5 Muni Market Demand Tax-exempt mutual funds reported outflows for the ninth consecutive week with outflows of $332 million for the week ending November 21st. This compares to the 12-week moving average of a $386 million outflow. US Lipper Fund Flows Source: Lipper Fund Flows Sector Flow Change ($B) YTD ($B) Tax-Exempt Outflow: Inflow: Money Market Inflow: Inflow: Taxable Inflow: Inflow: Equities Outflow: Outflow: Source: Lipper Fund Flows Muni Market Supply Over the next 30 days, we see net muni market supply at $12.18 bil., comprised of $12.49 bil. new issues, $16.95 bil. maturing, and $7.72 bil. announced calls. The states that stand to experience the largest change in outstanding debt include New Jersey (-$2.46 billion), Ohio (-$1.77 bil.), Washington (-$1.16 bil.), Georgia (-$931.4 mil.), and Florida (+$706.4 mil.)., Ramirez, Ramirez

6 Page 6 Samuel A. Ramirez & Co., Inc. 61 Broadway, 29th Floor New York, NY Samuel A. Ramirez & Co., Inc., member FINRA, MSRB, SIPC. This material is proprietary to Samuel A. Ramirez & Co., Inc. or ( Ramirez ) and may not be disclosed to any third party or used for any other purpose without the prior written consent of Ramirez. Unless otherwise agreed in writing between you and Ramirez & Co, we are acting solely as a principal/underwriter in an arm s length commercial transaction in which Ramirez has financial and other interests that differ from yours. Ramirez is not acting as a municipal advisor, financial advisor or fiduciary and the information provided should not be construed as advice within the meaning of Section 15B of the Securities Exchange Act of The information in this document should not be considered research1 or its content be construed as a solicitation or recommendation. This material has been prepared for informational purposes only without regard to any particular user's investment objectives, financial situation, or means, and Ramirez is not soliciting any action based upon it. The Information contained is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. Ramirez does not provide accounting, tax or legal advice; however, you should be aware that any proposed indicative transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and or counsel. The Information should not be relied upon for the maintenance of your books and records or for any tax, accounting, legal or other purposes. Subject to applicable law, you may disclose any aspects of any potential transaction or structure described herein that are necessary to support U.S. federal income tax benefits. The information in this document reflects prevailing conditions and our views as of this date which, are subject to change. In preparing this material, we have relied upon and assumed, without independent verification, the accuracy and completeness of all the information available from internal and public sources or which was provided to us by or on behalf of Ramirez or which was otherwise reviewed by Ramirez. Even when this material contains a kind of appraisal, it should be considered preliminary, suitable only for the purpose described herein and not be disclosed or otherwise used without the prior written consent of Ramirez. Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate. 1 For purposes of the debt Rule FINRA 2242, a debt security excludes any equity security, municipal security and security-based swap (each as define under the Exchange Act) and any US Treasury (as defined in FINRA Rule 6710 (p)).