Municipal Market Update

Transcription

1 Wells Fargo Advisors (WFA) Fixed Income Analysis Municipal Market Update Demand remains strong as municipal bond sales continue to lag February 9, 2018 Dorian Jamison, Municipal Analyst Summary» Municipal bond funds see fifth consecutive week of inflows.» Tax-exempt new issue supply is expected to total $3.5 billion during the week of February 12, below the 2017 weekly average of $7.3 billion.» Municipal bond issuance fell 41 percent, year-over-year, in January Bond Flows Municipal bond funds see fifth consecutive week of inflows. As reported on February 7, U.S. municipal bond funds posted net inflows of $674.9 million compared with $235.9 million of net inflows the prior week, according to Lipper FMI. During 2017 U.S. municipal bond funds posted approximately $10 billion of net inflows, according to Lipper FMI. Year-to-date net inflows have already totaled approximately $3.9 billion (See Figure 1). Bond Sales Spreads to AAA Thomson MMD Curve 5 Year Current 1-Day 1-Week 1-Month 3-Month 1-Year AAA Yield % 3.2% 15.7% 34.3% 27.2% AA 12 bps 0.0% (7.7%) 20.0% 9.1% 20.0% A 43 bps 0.0% (2.3%) 4.9% 4.9% 7.5% BBB 74 bps 0.0% (1.3%) 2.8% 2.8% 4.2% 10 Year Current 1-Day 1-Week 1-Month 3-Month 1-Year AAA Yield % 1.3% 20.4% 23.5% 7.6% AA 22 bps 0.0% (4.3%) 10.0% 10.0% 4.8% A 51 bps 0.0% (1.9%) 2.0% (1.9%) (15.0%) BBB 86 bps 0.0% (1.1%) 1.2% (1.1%) (10.4%) 30 Year Current 1-Day 1-Week 1-Month 3-Month 1-Year AAA Yield % 1.4% 14.7% 10.8% (2.0%) AA 23 bps 0.0% (8.0%) 15.0% 4.5% (11.5%) A 52 bps 0.0% (3.7%) 4.0% 0.0% (18.8%) BBB 84 bps 0.0% (2.3%) 2.4% 0.0% (16.0%) According to Thomson Reuters, tax-exempt new issue supply is expected to total $3.5 billion during the week of February 12, below the 2017 weekly average of $7.3 billion. The Bloomberg 30-day visible supply fell $1.110 billion to $5.579 billion on February 8, below the 12-month average of $ billion. The total is Source: Thomson Municipal Market Monitor (TM3) as of 2/8/18 Past performance is not an indication of future results. comprised of $1.829 billion of competitive bonds and $3.749 billion of negotiated bonds. Commonwealth of Pennsylvania Financing Authority tobacco settlement revenue bonds, Mounds View Independent School District #621 (MN) general obligation bonds, and Highland Park Independent School District (TX) general obligation bonds are among the noteworthy issues expect to come to market the week of February 12. Please see pages 6-7 of this report for Important Disclosures, Disclaimers and Analyst Certification Page 1 of 7

2 In December 2017, municipal issuance reached a record high $64.1 billion, a 200 percent increase year-overyear, as state and local governments rushed to beat the year-end deadline to sell tax-exempt advance refunding bonds imposed by the passage of the Tax Cut and Jobs Act of Municipal bond issuance is expected to fall in 2018 due to the elimination of tax-exempt advance refunding bonds following the passage of the Tax Cut and Jobs Act. Municipal bond issuers sold approximately $19.7 billion in tax-exempt and taxable debt in 521 issues in January, a 41 percent decrease from January 2017, according to data tracked by Thomson Reuters. New money issuance increased 11 percent, year-over year, to approximately $16.4 billion in 405 issues, in January Refunding volume decreased 77 percent, year-over-year, to approximately $1.9 billion in 97 issues in January 2018, following the elimination of advance refundings by the Tax Cut and Jobs Act. Volume among the largest issuing sectors of the market has been mixed year-over-year. The biggest decrease occurred in electric power sector issuance which fell 97 percent to approximately $27 million in three issues, in January 2018, compared to approximately $998 million in eight deals, in January The biggest increase occurred in water and sewer utility bond issuance which rose 47 percent to approximately $2.8 billion in 49 issues, in January 2018, compared to approximately $1.9 billion in 81 deals, in January Yield Curve From March 13, 2017 the Municipal Market Data (MMD) 10-year triple-a benchmark yield fell 66 basis points (100 basis points equals 1 percent) from 2.49 percent, the 2017 high, to 1.83 percent on June 7, 2017 near a 10-month low due to below average supply and increased demand from historically attractive muni-to-treasury yield ratios. However, by July 11, the MMD 10-year yield had risen 22 basis points to 2.05 percent a two-month high due to declining municipal bond relative values. Since then, below average supply and strong demand again pushed municipal bond yields lower. However, the MMD 10-year yield rose 21 basis points to 2.21 percent, on November 29, following the passage of the Tax Cuts and Jobs bill by the House of Representatives. Since that time the MMD 10-year yield fell 33 basis points to 1.88 percent--a three-month low, on December 7, but has risen to 2.42 percent, a 11-month high, as of February 2 (See Figure 2). Due to the shape of the, the yield on the MMD 15-year maturity represents more than 90 percent of the entire triple-a municipal. The yield on the MMD eight-year maturity represents more than 75 percent of the triple-a municipal, while the yield on the two-year maturity makes up more than 50 percent of the high grade (See Figure 3). Year-to-date, the municipal market returned -1.2 percent after returning 4.9 percent in 2017, as measured by the S&P Municipal Bond Index. In comparison, the municipal market has returned 2.3 percent and 2.7 percent, during the past three and five years, respectively. Page 2 of 7

3 Figure 1: U.S. Weekly Municipal Bond Fund Flows (Aug. 8, 2014 Feb. 8, 2018) Source: Lipper FMI Figure 2: MMD AAA General Obligation 10YR Yield (Feb. 8, 2016 Feb. 8, 2018) 2/11/16 3/4/16 5/25/16 12/1/16 (Two-Year High) 2.06% (12-Month Average Line) 6/27/16 (All-Time Low) 3/13/17 (12-Month High) 7/11/17 11/16/17 2/2/18 (51-Week High) 9/7/17 (12-Month Low) Source: Thomson Municipal Market Monitor (TM3), WFA Municipal Research Past performance is not an indication of future results. Page 3 of 7

4 Figure 3: MMD AAA General Obligation Yield Curve (Feb. 8, 2017 Feb. 8, 2018) 5-yr (-33 bps) 50% to 43% of yield curve 10-yr (-32 bps) 74% to 70% of 15-yr (-33 bps) 89% to 86% of 10-yr (+49 bps) 70% to 81% of 15-yr (+34 bps) 86% to 91% of 20-yr (-37 bps) 97% to 93% of 20-yr (+30 bps) 93% to 96% of 30-yr (-28 bps) 30-yr (+22 bps) 5-yr (+74 bps) 43% to 65% of Source: Thomson Municipal Market Monitor (TM3), WFA Municipal Research Past performance is not an indication of future results Weekly Calendar SELLING ISSUE ST AMT (MM) TAX SR. MGR STATUS RATING SECURITY 02/12/2018 CMWLTH FING AUTH PA 1, N JEFFERIES LLC DAY/DAY A1/A Tobacco Master Settlement Agreement 02/13/2018 MOUNDS VIEW ISD #621-A MN N NR/AA+ School Districts 02/14/2018 HIGHLAND PARK ISD TX N Aaa/NR School Districts 02/12/2018 WAYNE ST UNIV BOG -A-REV MI N BANK OF AMERICA MERRILL TUE Aa3/A+ Higher Education 02/12/2018 KY CMWLTH -COPS-A KY N KEYBANC CAPITAL MARKETS TUE A1/NR Intergovernmental Lease/Borrowing 02/12/2018 PALM BEACH CO SCH BRD -B FL N JP MORGAN SECURITIES LLC Aa3/NR Secondary Education-Lease Backed 02/12/2018 TALLAHASSEE -REV FL N MORGAN STANLEY & CO LLC Aa3/AA Municipal Utilities 02/12/2018 COPPELL ISD -REF TX N FTN FIN CAPITAL MARKETS TUE NR/AAA School Districts 02/13/2018 LAS VEGAS VLY WTR DT -B NV N Aa1/AA+ General Obligation 02/12/2018 HUDSON CITY SCH DIST OH N STIFEL NICOLAUS & CO INC WED Aa1/NR School Districts Source: Bloomberg Page 4 of 7

5 Municipal Credit Monitor as of February 9, 2018 Benchmark 1 Ratings Yield Spread-to- Spread Change Lowest Spread Highest Spread Average Spread # BPs Current Spread is # Std Dev Current Spread is (Moody's/S&P) Yield Benchmark 3 (Weekly) 4 (12-Month) (12-Month) (12-Month) Above or Below Avg. 5 Above or Below Avg. 6 States 2 California Aa3/AA New York Aa1/AA Texas WR/AAA Pennsylvania Aa3/A Florida Aa1/AAA New Jersey A3/A North Carolina Aaa/AAA Illinois Baa3/BBB Virginia WR/AAA Ohio Aa1/AA Georgia Aaa/AAA Michigan Aa1/AA Massachusetts Aa1/AA South Carolina Aaa/AA Washington Aa1/AA Maryland Aaa/AAA Sectors 7 AA+ general ob A+ general ob BBB revenue Transportation AA Education AAA Healthcare AA Utilities AA Credits 8 Commonwealth of Puerto Rico Ca/D , , Dallas/Fort Worth International Airport A1/A County of Miami-Dade FL Aa2/AA New Jersey Transportation Trust Fund Authority Baa1/BBB Municipal Electric Authority of Georgia A1/A Port Authority of New York & New Jersey Aa3/AA Chicago IL GO Ba1/BBB Detroit, MI Water A3/A New York City GO Aa2/AA Source: Bloomberg, WFA Municipal Research 1 BVAL Muni 10-Yr Benchmark curve is the baseline curve for BVAL tax-exempt munis. It is populated with high quality US municipal bonds with an average rating of AAA from Moody's and S&P. The is built using non-parametric fit of market data obtained from the Municipal Securities Rulemaking Board, new issues calendars, and other Bloomberg proprietary contributed prices. Represents 5% couponing. 2 State Specific Yield Curves maturing in approximately 10 years 3 Difference between the state, sector, or credit yield and the benchmark yield, in basis points 4 Bond prices and yields have an inverse relationship. Yield spread changes highlighted in red have widened week-over-week, indicating bond prices have gotten cheaper relative to the benchmark. Yield spread changes highlighted in green have narrowed week-over-week, indicating bond prices have gotten richer relative to the benchmark. 5 Basis points (bps) highlighted in red are above the 12-month average. Basis points (bps) highlighted in green are below the 12-month average 6 Standard deviations highlighted in red are greater than or equal to two standard deviations above the 12-month average, indicating relative cheapness. Standard deviations highlighted in green are greater than or equal to two standard deviations below the 12-month average, indicating relative richness. Standard deviations highlighted in yellow are between one and two standard deviations away from the 12-month average, and should be monitored for relative value. 7 Muni Fair Value Yield Indices maturing in approximately 10 years 8 Yield-to-maturity of representative CUSIPs and indexes maturing in approximately 10 years Page 5 of 7

6 IMPORTANT DISCLOSURES Wells Fargo Advisors trades or may trade as principal in the fixed income securities (or in related derivatives) discussed in this report. Disclosure Information For important disclosure information, please contact: Wells Fargo Advisors Attn: Advisory Services (Disclosure Information) One North Jefferson St. Louis, MO Or call by phone: (888) Please remember to specify the issuer(s) with respect to which you would like to receive disclosure information. ANALYST CERTIFICATION: The Analyst who prepared this report hereby certifies that the views expressed in this report accurately reflect his/her personal views about the subject companies and their securities. The Analyst also certifies that he/she has not been, is not, and will not be receiving direct or indirect compensation for expressing the specific recommendation(s) or view(s) in this report. Disclaimers Prices and figures are as of the date of publication unless specified otherwise. Investments in fixed-income securities are subject to market, interest rate, credit/default, liquidity, inflation and other risks. Therefore, a general rise in interest rates can result in the decline in the bond s price. Because bond prices generally fall as interest rates rise, the current low interest rate environment can increase the bond s interest rate risk. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity. Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT). An index is unmanaged and not available for direct investment. S&P Municipal Bond Index is a broad, market value-weighted index that seeks to measure the performance of the U.S. municipal bond market. All bonds in the index are exempt from U.S. federal income taxes or subject to the alternative minimum tax. The state level municipal bond indices consist of bonds that have been issued by municipalities or municipal authorities within the 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. Wells Fargo Advisors research analysts receive no compensation in connection with the firm s investment banking, sales and trading, or principal trading revenues. Analysts may be eligible for annual bonus compensation based on the overall profitability of the firm, which takes into account revenues derived from all the firm s business activities, including its investment banking business, sales and trading, and principal trading. The Advisory Services Group (ASG) of Wells Fargo Advisors works with information received from various resources including, but not limited to, research from affiliated and unaffiliated research correspondents as Page 6 of 7

7 well as other sources. ASG does not assign ratings to or project target prices for any of the securities mentioned in this report. ASG receives research from affiliated and unaffiliated correspondent research providers with which Wells Fargo Advisors has an agreement to obtain research reports. Each correspondent research report reflects the different assumptions, opinions, and the methods of the analysts who prepare them. Any opinions, prices or estimates contained in this report is as of the date of this publication and is subject to change without notice. Credit Ratings Rating Service Credit quality Moody's Standard & Poor's Fitch Prime Aaa AAA AAA Excellent Aa AA AA Upper medium A A A Lower medium Baa BBB BBB Speculative Ba BB BB Very Speculative B, Caa B, CCC, CC B, CCC, CC, C Default Ca, C D DDD, DD, D Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. Additional information available upon request. Past performance is not a guide to future performance. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. Opinions and estimates are as of a certain date and subject to change without notice. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company Wells Fargo Clearing Services, LLC. All rights reserved. Page 7 of 7