Municipal Market Weekly Ramirez Municipal Strategy

Transcription

1 ***INSTITUTIONAL USE ONLY*** Municipal Market Weekly Page 1 Munis outperformed Treasuries last week on strong fund inflows ($946 mil.), the second consecutive week of outsized fund inflows which have totaled $1.9 bil. in the first three weeks of Muni outperformance last week and YTD is remarkable given the steep sell-off in Treasuries which last week was driven by hopeful signs of a resolving US-China trade conflict and stronger US factory output. The record long US Gov t shutdown, political turmoil in the UK over PM May s failed Brexit deal, and slowing growth in the EU remain countervailing forces, although the bullish trade news appeared to overwhelm these macro concerns on the week. The week s most significant events revolved around China offering to close the trade deficit with the US over a six year period and the possibility that Trump will lift Chinese import tariffs. Markets were also buoyed by Fed reports that US manufacturing output rose 1.1% in Dec, 2018 and total industrial production grew 0.3% in Dec on strong vehicle production. The strong factory results for Dec indicate that lower taxes and a strong job market are aiding US manufacturing growth. On the week, the AAA MMD scale in 2yrs-5yrs was bumped -2 bps and cut +3 bps in 15yr-30yrs resulting in MMD 2s30s to bear steepen +5 bps to 136 bps. SIFMA declined -11 bps to 1.28%, or 75% of 1yr MMD and 51% of 1m Libor. In contrast to MMD, Treasury yields were weaker by an average of +10 bps across the curve, including +12 bps in the 5yr (2.62%). Treasury 2s30s bear flattened by -1 bps to 49 bps as the 2yr yield rose +9 bps to 2.61% and the 30yr yield rose +8 bps to 3.11%. Importantly, Treasury 2s5s is no longer inverted, having steepened by +3 bps to +1 bps after the 5yr yield rose +12 bps to 2.62%. The S&P Main Muni index returned +4 bps on the week (+40 bps YTD) led by intermediate and long-intermediate tax-exempts, both of which returned +11 bps for total returns of +59 bps YTD and +63 bps YTD. Treasury returns last week were -40 bps for a total of -43 bps YTD. The S&P 500 large cap index returned +287 bps on the week and has completely erased 2018 losses at +654 bps YTD. The Fed s recent, dovish posture on future rates hikes and slowing US and global growth have heretofore encouraged investors to increase allocations to Munis in Jan as a safe-haven tax-shelter, evidenced by the strong fund inflows YTD. The mandates for Munis YTD are mostly for short and intermediate durations, however, as investors remain cautious on longer duration. The investor preference for short and intermediate term bonds has been evident in the primary market all month, including last week where new issue beyond 20yr maturities struggled to attract buyers at initial prices, although most deals cleared the market after spreads were widened. The heavy demand for maturities inside 20yrs has resulted in compression of the 2yr ratio to 65% (-3.2 ratios) and the 10yr ratio at 79.4% (-3.2 ratios) to below 3yr averages and the 5yr ratio to below the 1yr average at 69.8% (-4.2 ratios). The 30yr ratio compressed -1.6 ratios on the week to 98.5%, still within fairly valued range. Ratios inside 20yrs should continue to modestly tighten provided that fund inflows remain robust, although any reversal of sentiment will likely be met with Muni underperformance. As we have seen many, many times before As we have discussed previously, we think that longer durations (20-30yrs) should outperform shorter and intermediate durations in 2019 as US and global growth slows and investors embrace longer durations vs current sentiment for short and intermediate tenors. We like a 70/30 barbell (70% in 1yr-6yr mtys; 30% in 19-21yr mtys) with effective duration of ~7.5 yrs and average maturity of 16 yrs. This strategy captures 95% of the MMD yield curve, maximizes credit spread and rolldown while limiting volatility. We also like generally maintaining higher than average credit quality of AA or higher rated GO names and A or better revenue names (please refer to 2019 Outlook). This week s primary market calendar is +14% above the 12 week average at $6.1 bil., including $4.6 bil. in negotiated offerings. The negotiated space is led by $700 mil. Main St Natural Gas (GA) on day-to-day status, $535 mil CT Hlth & Ed for Yale University (Aaa/AAA) pricing on Thurs, $426 mil. NJ Turnpike (A2/A+/A) pricing on Thurs, $258 mil. Iowa SRF (Aaa/AAA/AAA) pricing on Wed, and $250 mil. Honolulu, HI (Aa1) pricing on Wed. Competitively, the market is led by $301 mil. Boulder Valley SCD, CO (Aa2/AA+/AA+) and $138 million Norfolk Capital Impr, VA (Aa2/AA+/AA+), both selling on Wed. Gross supply YTD is $14.85 bil. (+57% YoY). The 30 day net supply is estimated at -$10.53 bil., comprised of +$8.47 bil. new issue against -$19 bil. of maturing (-$13.95 bil.) and called bonds ($5.05 bil.). The states that stand to experience the largest change in outstanding debt include Texas (-$3.66 bil.), New York (-$2.17 bil.), Minnesota (-$1.79 bil.), Massachusetts (-$1.06 bil.), and California (-$940.6 mil.). We project total net supply in 2019 at -$31 bil. (-$2.6 bil. avg / mo), which includes gross supply of ~$341 bil. (+8% YoY) against -$371 bil. of maturities (-$280 bil.) and calls (-$91 bil.). The projected -$31 bil. of negative net supply is further enhanced by coupon reinvestment; assuming reinvestment of ~50% of coupon, excess demand should be ~+$109 bil., or +$9.1 bil. / month avg. Risk catalyst dates loom on the horizon, notably March 1, the deadline for US-China trade deal and March 29, the Brexit deadline. In the meantime, markets will focus on the continuing US Gov t shutdown, Davos, and related remarks on global economic slowdown, as well as Trump twitter tantrums, corporate earnings, and EU and BOJ policy meetings. Data releases this week include MBA mortgage apps, various manufacturing indices (Richmond, Markit PMI), durable goods, and new home sales. No Fed speakers this week due to Fed meeting next week. Trump vs. Rudy Giuliani. 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 70/30 Barbell strategy: 70% 1-6 yrs; 30% yrs Eff duration of 7.5 yrs. Short and Intermediate bonds (with 8-10yrs cals); capture ~95% of curve, fast reinvestment, optimal rolldown Best rolldown is generally 8-19yrs. Coupon: 5%+ (lower convexity vs 4%) Credit: AA- or better GO; A or better Revenue (select names)

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5 Page 5 Muni Primary Market Gross Supply ($ in millions) As of 1/18/19 Last Week 6, wk Moving Avg. 5,340.7 YTD 14,859.3 Weekly Visible Supply ($ in millions) Week of 1/22/19 Total 6,110.4 Comp. 1,488.5 Neg. 4,621.9, Ramirez 30-Day Visible Supply ($ in millions) Current 2019 High 2019 Low Total $ Date $ Date Total 7, ,160.2 (1/7) 5,231.7 (1/3) Comp. 3, ,496.2 (1/7) 2,032.4 (1/3) Neg. 4, ,664.0 (1/7) 3,199.3 (1/3) Source: Bond Buyer Top Competitive Issuances Coming to Market Issuer State Amount ($ 000 s) Boulder Vly Scd CO 301,020 Norfolk VA 138,210 Sumner Co TN 96,000 Alpine Sch Dist BOE UT 85,000 Provo UT 65,850 Top Negotiated Issuances Coming to Market Issuer State Amount ($ 000 s) Main Street Natural Gas GA 700,000 CT St Hlth & Edu Facs (Yale University) CT 535,865 NJ Turnpike Auth NJ 425,930 Iowa Fin Auth IA 258,790 Honolulu City & Co HI 250,340 Underwriters will attempt to market $6.1 bil. of munis in the week of 1/22, led in the negotiated space by $700 mil. Main Street Natural Gas, $536 mil. Yale Univ, and $426 mil. NJ Turnpike. The competitive calendar is highlighted by $301 mil. Boulder Vly Scd. Ramirez Negotiated Issuances Coming to Market Issuer State Amount ($ 000 s) Senior Manager Ramirez Role Indiana Bond Bank (Common School Fund Adv) IN 87,200 Stifel Co-Manager Pennsylvania Tpk Comm PA 84,895 Wells Co-Manager Dallas ISD TX 75,000 Wells Co-Manager Economic Calendar Monday (1/21) Tuesday (1/22) Wednesday (1/23) Thursday (1/24) Friday (1/25) ***Market Closed*** Existing Home Sales MBA Mortgage Applications Initial/Continuing Jobless Claims Durable Goods Orders ***MLK Day*** U.S. to Sell USD42 Bln 3-Month Bills U.S. to Sell USD39 Bln 6-Month Bills FHFA House Price Index MoM Bloomberg Consumer Comfort Durables Ex Transportation Richmond Fed Manufact. Index Markit US Composite PMI Cap Goods Orders Nondef Ex Air Markit US Manufacturing PMI New Home Sales Markit US Services PMI Leading Index U.S. to Sell 8-Week Bills U.S. to Sell 4-Week Bills Federal Government Shutdown will affect the release of certain economic indicators

6 Page 6 Muni Market Demand Tax-exempt mutual funds reported inflows for the first time this year with inflows of $946 million for the week ended January 16th. This compares to the 12-week moving average of a $28 million outflow. US Lipper Fund Flows Source: Lipper Fund Flows Sector Flow Change ($B) YTD ($B) Tax-Exempt Inflow: Inflow: Money Market Outflow: 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 $10.53 bil., comprised of $8.47 bil. new issues, $13.95 bil. maturing, and $5.05 bil. announced calls. The states that stand to experience the largest change in outstanding debt include Texas (-$3.66 billion), New York (-$2.17 bil.), Minnesota (-$1.79 bil.), Massachusetts (-$1.06 bil.), and California (-$940.6 mil.)., 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)).