Municipal Market Weekly Ramirez Municipal Strategy

Transcription

1 ***INSTITUTIONAL USE ONLY*** Municipal Market Weekly Page 1 Municipals roundly underperformed last week after Treasuries caught a late-week, global safe-haven bid on various geopolitical events, most notably a potential economic meltdown in Turkey. Treasuries were mostly range bound-through Wednesday as the Treasury auctioned $60 bil. of 3/10 yr debt ($18 bil. of 30yr debt sold on Thursday) to fund the increasing federal budget deficit, as well as despite continued US-China trade tensions and new US sanctions on Russia related to the UK spy poisoning case. Risk-on quickly turned to risk-off on Thursday and Friday as investors globally sought out Treasuries as the market laser-focused on the Turkish economic crisis and potential contagion, exacerbated by Trump tariffs. Friday also had a US CPI print for July at 0.2% with Core CPI at 2.4% YoY for the strongest 12-month gain in about 10yrs, although this news was overshadowed by the unfolding events in Turkey. Munis, as usual, couldn t keep up with Treasuries despite the presence of strong mutual fund inflows ($623 mil. on the week; $7.65 bil. YTD), continued summer reinvestment flows, and negative net supply. The issue lately affecting the Muni market includes investor pushback on fatigued names, both in the primary and secondary, tight ratios, and investor preference to remain invested short-term, thereby hurting support for intermediate and longer (20-30yr) bonds. Last week was no exception with the $8.0 bil. calendar receiving only a mixed reception. Dealer liquidity also remains somewhat soft due to above-average inventory (+47%) driven by a continued deluge of VRDO puts. The VRDO puts caused SIFMA to reset 16 bps higher on the week to 1.45%, or 97% of 1yr MMD and 70% of 1- month LIBOR. SIFMA should inevitably reverse course as the relationship to 1yr MMD, currently 97%, surpasses 100%+. On the week, Treasury 5s30s bull steepened 4 bps to 28 bps and 2s30s was 1 bps steeper at 42 bps. In contrast, MMD 5s30s and 2s30s were both unchanged at 106 bps and 141 bps, respectively. The S&P Main Muni index gained 12 bps last week (YTD gains +25 bps) while Treasuries gained 54 bps on the week, bringing YTD returns to -89 bps. Munis underperformed by an average of 1.31 ratios on the week improving relative value, although values generally remain rich-to-fair across the board. The one exception, however, is the 30yr MMD spot, which underperformed by 1.8 ratios last week and is now reading cheap vs Treasuries on a 1yr basis at 100.4%, but still reads fairly valued on a 3yr basis. The cheaper 30yr level may finally be cheap enough to entice trading accounts to support the previously unsupported 20yr and 30yr sectors, thereby possibly aiding the new issue calendar near-term. Muni supply this week is the largest of the year at $11.90 bil. at about 182% of the 12-week moving average, with a variety of less-frequent and yieldier issuers coming to market, including $2.28 bil. Denver Airport, $915 mil. Allegheny Hospital, $889 mil. Connecticut State, $717 mil. Miami-Dade Airport, and $710 mil. Golden State (Cal) Tobacco. Competitively, Florida DOT is selling $170 mil. GO bonds on Wed. Total gross supply YTD is $193.6 bil., or 15% YoY, which is surprising to the upside vs our call for total supply at -27% YoY ($317 bil). For now, we are maintaining our full-year supply projection at $317 bil. as we think issuance, likely new money, could decelerate in 2H18 as rates ultimately move higher given two additional Fed rate increases. Over the next 30 days, net muni market supply is -$15.6 bil., comprised of $12.85 bil. new issue against $28.4 bil. of maturing ($18.25 bil.) and called ($10.21 bil.) bonds. The states that stand to experience the largest change in outstanding debt include Texas (-$8.17 billion), California (-$3.14 bil.), New Jersey (-$2.28 bil.), New York (-$2.14 bil.), and Colorado (+$1.86 billion). Spread compression and a still flat MMD 2s30s (141 bps) has created high valuations within most Muni sectors and across the yield curve, creating lower incentive for investors to extend duration beyond ~15yrs or assume credit risk. As rates are likely to march higher with wider spreads along with economic growth, we think it makes sense to improve portfolio credit quality into AA or better general market names and selectively add some credit risk in A rated Hospitals, Higher Ed, and Pub Power (Pg 3). We favor shorter-call structures (5-8yr calls) inside 15 yrs maturities, which captures 80-90% of the MMD yield curve, has optimal roll return (~50 bps), and are generally cheaper vs shorter and more expensive 2-4 yr call structures. New issue supply should take center stage this week vs the secondary in Munis while the Turkey crisis should consume the geopolitical landscape and affect several other markets. There are no Fed speakers this week, although there are some economic data points, including import/export prices, Empire Manufacturing, Nonfarm productivity, Unit labor costs, Retail Sales, Housing Starts, Leading Index. Trump vs Turkey, China, Russia, Harley Davidson, Omarosa. 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

2 Page Strategy Ladder or 70/30 Barbell strategy (depending on mandate) Defensive posture; 5yr-7yr eff duration Intermediate bonds (14-16yr) with shorter calls (5-8yrs); cheaper vs shorter calls, capture ~90% of curve, fast reinvestment, optimal rolldown Best rolldown is generally 8-15yrs. Coupon: 5%+ (lower convexity vs 4%) Credit: AA GOs, A rated or better (select names)

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4 Rates & Ratios Page 4 Market Performance Indicators WEEK ENDING: 8/10/18 TOTAL RETURN (%) YIELD (%) Eff Aug WTD YTD Lo Hi Mean Vol Z-score INDEX Dur WTD '18 3Q18 2Q18 1Q /10/18 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 GLOBAL AGG US CORP-IG US CORP-HY This Wk Last Wk Beg Qtr Beg Yr Mean Value WTD MTD QTD YTD 8/10/18 8/3/18 7/2/18 1/2/18 12M 3Y 12M 3Y Perf Perf Perf Perf AAA MMD / UST Ratios Ratios Ratios Ratios 2 Yr 63% 62% 65% 81% 70% 79% Rich Rich 0.6 Under 1.4 Under -2.0 Out Out 5 Yr 72% 71% 72% 75% 73% 78% Fair Fair 1.5 Under 2.8 Under -0.2 Out -2.9 Out 10 Yr 85% 84% 86% 81% 85% 90% Fair Fair 1.4 Under 2.6 Under -0.2 Out 4.4 Under 30 Yr 100% 99% 98% 91% 97% 98% Cheap Fair 1.8 Under 2.8 Under 2.3 Under 9.3 Under UST BPS BPS BPS BPS 2 Yr Cheap Cheap Yr Fair Cheap Yr Fair Cheap Yr Fair Fair AAA MMD BPS BPS BPS BPS 2 Yr Fair Cheap Yr Fair Cheap Yr Fair Cheap Yr Cheap Fair

5 Page 5 Muni Primary Market Gross Supply ($ in millions) As of 8/10/18 Last Week 7, wk Moving Avg. 6,557.8 YTD 193,586.5 Weekly Visible Supply ($ in millions) Week of 8/13/18 Total 11,899.4 Comp Neg. 11,001.4, Ramirez 30-Day Visible Supply ($ in millions) Current 2018 High 2018 Low Total $ Date $ Date Total 16, ,061.3 (8/9) 2,017.8 (6/28) Comp. 2, ,795.3 (5/14) (1/26) Neg. 13, ,292.2 (8/9) (6/28) Source: Bond Buyer Top Competitive Issuances Coming to Market Issuer State Amount ($ 000 s) FL St Dept Trans FL 170,085 Celina TX 57,235 Washington St WA 47,335 Topeka - Comb Utl Rev KS 46,610 Rutherford Co TN 42,000 Top Negotiated Issuances Coming to Market Issuer State Amount ($ 000 s) Denver City and Co - Airport CO 2,276,100 Allegheny Co Hosp Dev (Allegheny Health) PA 914,860 Connecticut St CT 889,135 Miami Dade Co - Aviation FL 716,550 Golden St Tobacco CA 710,910 Underwriters will attempt to market $11.9 bil. of municipals in the week of 8/13, led in the negotiated space by $2.28 bil. Denver Airport, $915 mil. Allegheny Health, and $889 mil. Connecticut St. The competitive calendar is highlighted by $170 mil. Florida St Dept Trans. Ramirez Negotiated Issuances Coming to Market Issuer State Amount ($ 000 s) Senior Manager Ramirez Role Port Authority of NY & NJ NY 700,000 Citi Co-Senior MTA Trans Rev NY 220,000 JPM Co-Senior Denver City and Co - Airport CO 2,276,100 BAML Co-Manager Connecticut St CT 889,135 Siebert Co-Manager Miami Dade Co - Aviation FL 716,550 JPM Co-Manager Golden St Tobacco CA 710,910 Jefferies Co-Manager NYC Muni Wtr Fin Auth NY 270,000 RBC Co-Manager Economic Calendar Monday (8/13) Tuesday (8/14) Wednesday (8/15) Thursday (8/16) Friday (8/17) U.S. to Sell USD51 Bln 3-Month Bills U.S. to Sell USD45 Bln 6-Month Bills NFIB Small Business Optimism MBA Mortgage Applications Initial Jobless Claims Leading Index Import Price Index MoM Empire Manufacturing Continuing Claims U. of Mich. Sentiment New York Fed to Release Q Household Debt & Credit Report Retail Sales Advance MoM Philadelphia Fed Business Outlook U.S. to Sell 52-Week Bills Retail Sales Ex Auto MoM Housing Starts U.S. to Sell 4-Week Bills Retail Sales Ex Auto and Gas Building Permits Industrial Production MoM Bloomberg Consumer Comfort Capacity Utilization Net TIC Flows

6 Page 6 Muni Market Demand Tax-exempt mutual funds reported inflows for the week ending August 8, with an inflow of $623 million. This compares to the 12-week moving average of a $388 million inflow. US Lipper Fund Flows Source: Lipper Fund Flows Sector Flow Change ($B) YTD ($B) Tax-Exempt Inflow: Inflow: Money Market Inflow: Outflow: Taxable Inflow: Inflow: Equities Outflow: Inflow: Source: Lipper Fund Flows Muni Market Supply Over the next 30 days, we see net muni market supply at $15.60 bil., comprised of $12.85 bil. new issues, $18.25 bil. maturing, and $10.21 bil. announced calls. The states that stand to experience the largest change in outstanding debt include Texas (-$8.17 billion), California (-$3.14 bil.), New Jersey (-$2.28 bil.), New York (-$2.14 bil.), and Colorado (+$1.86 billion)., Ramirez, Ramirez

7 Page 7 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)).