Municipal Market Weekly Ramirez Municipal Strategy

Transcription

1 ***INSTITUTIONAL USE ONLY*** Municipal Market Weekly Critical Week Ahead Events of this year have seemingly built up to this week with a confluence of events poised to determine the trajectory of market sentiment for the next several months, possibly years. This week we have a Fed meeting, a Fed chair decision by Trump, various economic data on jobs, and tax reform all in one week. This is combined with the cloud of Mueller s investigation into the Trump campaign s collusion with Russia during the 2016 election and yesterday s grand jury indictment of Paul Manafort, Trump s former campaign chairman. Trump is expected to choose Jay Powell, a market neutral for Fed chair, although the decision isn t final and could occur on Thurs, or any day that Trump decides to tweet the decision. Second, we have a Fed rates decision on Wed, although even if data supports a third rate hike in 2017, the committee is expected to stand firm and instead raise rates in Dec. Also on Wed, we have a tax policy announcement with Ways and Means Chairman Brady expected to unveil the Republican tax plan. The plan is already off to an inauspicious start given yesterday s news that the vaunted corporate tax cut may be gradually phased-in through 2022 instead of immediately implemented at 20%. Also, a raft of economic data will be released by various providers this week, including several employment reports, consumer confidence and purchasing manager indices, employment cost index, factory orders, durable goods. The BOJ and BOE are also set to make rate decisions. Municipals underperformed Treasuries last week but outperformed during (most of) October, as MMD caught up with Treasuries that fell hard the week prior on Fed rate talk and the prospect of John Taylor, an inflation hawk, being the next Fed chair. US rates were volatile in the beginning of last week, mostly influenced by continued speculation of Taylor as front-runner for Fed chair, although markets calmed upon news that Powell is the front-runner. Also calming markets was solid Q3 economic data, including better than expected GDP and consumer spending growth that came in at 3% and 2.4%, respectively, which marked six consecutive months of above-average economic growth. The ECB announced a scaled back, but extended QE program, indicating higher Eurozone rates, and there was also forward progress on US tax reform. House Republicans on Thursday passed a budget resolution, that along with a Senate resolution the week prior, allows for a fasttrack process for a tax bill by year-end. Despite the volatility and a weak 2yr Treasury auction during the week, Treasury yields edged only slightly higher on the week, with Treasuries advancing 1-2bps across the curve. MMD, ever the laggard, was cut between 4-10 bps across the curve, including 7 bps in 10yrs and 10bps in 30yrs. Muni / Treasury ratios in 5, 10, and 30 years are still rich at 70%, 84%, and 98%, respectively, but were cheaper nevertheless. In addition to catching up with Treasuries, Munis were impacted by the monsoon of new issue supply ($12 bil.), including the $4.5 bil. IL GO deal. Mutual fund inflows were again positive at $262 mil. on the week and +$10.25 bil. YTD. Also in contrast to the week prior s flattening trend, Treasury 5s30s was steeper by 2bps (89bps) and MMD 5s30s was steeper by 5 bps (142 bps). It was also notable last week that the 10yr Treasury traded through its 2.40% resistance level, briefly touching 2.47%, although ending Friday at 2.40%. The Treasury market is stronger this week as the vaunted Republican proposal to cut corporate tax rates hit some resistance. Most fixed-income indices were down on the week due to the weaker Treasury market and record high equity indices. The Main Muni index lost -29bps on the week to end at +436 bps YTD, Treasuries lost -17 bps to end at +183 bps YTD, Corp IG lost 6 bps to end at +527 bps YTD, and the Global Agg lost 60 bps to end at +531 bps YTD. Connecticut GO 10yr spreads tightened by about 10 bps following the state legislature s passing a veto-proof budget bill on Thursday. The spread tightening in CT GOs follows the prior week when the CT s 10yr GO bond spreads widened 10 bps amidst a continued budget impasse. Puerto Rico GO 8% due 2035 bonds continue to slide, trading below $30 as 70% of the island is still without power one month after the hurricane. Separately, the Florida Cat Fund, the reinsurer for FL property insurers, expects to remain in strong financial health following estimated Hurricane Irma losses of between $3-6 bil. Last week s monstrous $12 bil. new issue Muni calendar was well received among investors, despite being +70% above the 12-week moving average as there were several new names in the market, including Gainesville (FL) Regional Utilities that had $3 bil. in orders for $416 mil. of bonds, and of course, Illinois $4.5 bil. GOs in the negotiated space. The IL deal mostly consisted of 5% coupon term bonds due in Final pricing was MMD+137 bps for the 2020 maturity out to MMD+172 bps for the 2028 maturity. There were some unsold balances initially on the IL GO deal, but most bonds were cleaned up towards the end of the week at slightly higher spreads vs original. Trading accounts were among the largest buyers of IL and other new issues. This week s calendar is a manageable $7.2 bil., split between $4.6 bil. negotiated and $2.5 bil. competitive, consistent with the 12-week moving average. The negotiated space is led by $737 mil. VA, $401 mil. Phoenix Airport, $346 mil. PA Turnpike, $227 mil. Baltimore, and $234 Broad Institute. Competitive deals are led by $684 mil. Montgomery Cnty, MD. Muni new issue supply is down -19% YoY at $306.6 bil, mostly in-line with our 2017 projections of 14%. Net supply over the next 30 days is -$9.71 bil., comprised of $12.3 bil. new issues, $11.5 bil. maturing, and $10.5 bil. announced calls. The states that stand to experience the largest change in outstanding debt include New York (-$3.44 bil.), California (-$3.03 bil.), Arizona (+$968 mil.), Maryland (+$857 mil.), and Florida (-$598 mil.). Trade Ideas Long Duration, Credit Down Page 1 Nothing is cheap, but we still think there is opportunity for long-end outperformance despite manageable signs of inflation. We also like buying longer maturity A rated bonds (20-30yr) with 7-9yr calls, and selling bonds with 5yr calls. There is currently an approximate +40 bps pickup for call extension and credit. The credit light A rated sectors, the bulk of which include healthcare, transportation, and higher-ed, remain fairly valued. Peter L. Block Managing Director Credit Strategy (212) peter.block@ramirezco.com Spencer Feit Associate Credit Strategy (212) spencer.feit@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: Barbell A barbell portfolio strategy remains optimal with effective duration of about 10yrs (20yr avg maturity), to both hedge downside risk (short) and preserve income (long). Forward Treasury rates in one year imply continued flattening of the curve with range-bound long-end rates. Scenarios MMD Callable Curve (5% Cpn) - 1Y Total Return Projections* Mty 1-30y 1-5y 6-10y 11-15y 16-20y 21-25y 26-30y Eff Dur Unch 3.52% 1.80% 3.13% 3.64% 3.74% 3.70% 3.65% 1Y Fwd 2.08% 1.14% 1.86% 1.90% 2.00% 2.20% 2.48% +25 bps 0.93% 1.08% 1.25% 1.12% 0.99% 0.82% 0.65% +50 bps -1.64% 0.37% -0.60% -1.37% -1.74% -2.05% -2.33% 1-10y 11-20y 21-30y Optimal (Barbell) 36% 0% 64% TR: 2.20% Eff Dur: 9.68 WAM*: 22.4 Market Performance Indicators WEEK ENDING: 10/27/17 INDEX MONITOR TOTAL RETURN (%) YIELD (%) Eff YTD 12M WTD YTD Lo Hi Mean Vol Z-score INDEX Dur Week Oct YTD risk adj 12M risk adj 3Y 5Y 10/27/17 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 CORP-MUNI GLOBAL / CORP GLOBAL AGG US CORP-IG US CORP-HY Rich Fair Cheap *Rich/Cheap: +/- 1.5 Z-scr

3 Page 3 AAA MMD / Rates & Ratios YIELDS (%) Lo Hi Mean SD Z-Score 10/27/ /20/2017 1/3/ /28/ M 12M 12M 12M 12M 4Y 2 Yr 67% 65% 100% 99% 62% 108% 79% Yr 70% 68% 91% 86% 62% 103% 77% Yr 84% 82% 94% 94% 80% 106% 91% Yr 98% 95% 99% 99% 91% 108% 99% UST 2 Yr Yr Yr Yr AAA MMD 2 Yr Yr Yr Yr Legend: Rich Fair Cheap *Rich/Cheap: +/- 1.5 Z-score 10Y 30Y 10Y 30Y MUNI TAX-EXEMPT SPREADS 10/31/17 Avg Min Max SD Z-Scr AA A BBB AA A BBB HY AA-->A A-->BBB AA-->A A-->BBB BBB-->HY

4 Page 4 Muni Primary Market Gross Supply ($ in millions) As of 10/27/17 Last Week 11, wk Moving Avg 7,249.3 YTD 306,606.7 Weekly Visible Supply ($ in millions) Week of 10/30/17 Total 7,227.8 Comp. 2,575.4 Neg. 4, Day Visible Supply ($ in millions) Current 2017 High 2017 Low Total $ Date $ Date Total 10, ,007.8 (1/10) 2,461.7 (6/30) Comp. 4, ,134.2 (10/13) 1,146.5 (6/29) Neg. 6, ,684.4 (1/10) 1,153.6 (6/30) Source: Bond Buyer Top Competitive Issuances Coming to Market Underwriters will attempt to market $7.23 bil. of municipals in the week of 10/30, led in the negotiated space by $737 mil. VA Small Business Fing, $416 mil. Phoenix Civic Impt Corp, and $347 mil. PA Tpk Commission. The competitive calendar is highlighted by $684 mil. Montgomery Co Consol, $294 mil. Santa Clara Co, and $ 242 mil. FL St BOE Lottery Rev. Issuer State Amount ($ 000 s) Montgomery Co Consol MD 684,310 Santa Clara Co CA 294,105 FL St BOE Lottery Rev FL 242,080 FL St BOE Peco FL 147,265 MA Cmwlth GANS MA 142,640 Top Negotiated Issuances Coming to Market Issuer State Amount ($ 000 s) VA Small Business Fing VA 737,000 Phoenix Civic Impt Corp AZ 416,250 PA Tpk Commission PA 346,715 Baltimore Mayor & City MD 227,000 San Diego Govts Assoc CA 204,510 Ramirez Negotiated Issuances Coming to Market Issuer State Amount ($ 000 s) Senior Manager Ramirez Role Connecticut HFA CT 229,545 RBC Co-Manager Economic Calendar Monday (10/30) Tuesday (10/31) Wednesday (11/1) Thursday (11/2) Friday (11/3) Personal Income Employment Cost Index FOMC Rate Decision Initial Jobless Claims Change in Nonfarm Payrolls Personal Spending Chicago Purchasing Manager MBA Mortgage Applications Continuing Claims Change in Manufact. Payrolls PCE Core Conf. Board Consumer Confidence ADP Employment Change Bloomberg Consumer Comfort Unemployment Rate Dallas Fed Manf. Activity 4-Week Bill Auction Markit US Manufacturing PMI Fed Speakers: Powell, Dudley, Bostic Trade Balance 3-Month Bill Auction ISM Manufacturing ISM Non-Manf. Composite 6-Month Bill Auction ISM Prices Paid Factory Orders Cash Management Bill Construction Spending Durable Goods Orders Cap Goods Orders Markit US Service/Composite PMI Fed Speaker: Kashkari

5 Page 5 Muni Market Demand Tax-exempt inflows continued in the week ending October 25, with inflows totaling $262 million, which is 29% below the 12-week moving average of $372 million. Source: Lipper Fund Flows US Lipper Fund Flows Sector Flow Change ($B) YTD ($B) Tax-Exempt Inflow: Inflow: Money Market Inflow: Inflow: Taxable Inflow: Inflow: Equities Inflow: Inflow: Source: Lipper Fund Flows Muni Market Supply Over the next 30 days we see net muni market supply at -$9.71 bil., comprised of $12.33 bil. new issues, $11.54 bil. maturing, and $10.50 bil. announced calls. The states that stand to experience the largest change in outstanding debt include New York (-$3.44 bil.), California (-$3.03 bil.), Arizona (+$968 mil.), Maryland (+$857 mil.), and Florida (-$598 mil.). We estimate long-term new issue gross supply for 2017 at $368 bil., for a decline of about $60 bil., or -14%, which incorporates $204 bil. of new money bonds and $164 bil. of refundings. We expect 2017 to end with net market supply at +$38 bil., Ramirez, Ramirez

6 Page 6 Ramirez Managed Deals $229,545,000 Connecticut Housing Finance Authority Housing Mortgage Finance Program Bonds 2017 Series F Issue: Bonds are rated Aaa/AAA. Pricing Thursday, November 2, Ramirez & Co. is Co-Manager of this transaction. Proceeds will be used to finance home mortgage loans and to refund certain outstanding debt. Security: The Bonds are general obligations of the Connecticut Housing Finance Authority (CHFA), payable from revenues derived from mor tgage loans financed by the authority. The Bonds are on parity with $3.81 billion of outstanding Housing Mortgage Finance Program (HMFP) Bonds as of June 30, Outstanding debt under the program consists of $2.46 billion fixed rate bonds and $1.35 billion variable rate bonds. Credit Overview: CHFA is a self-supported public instrumentality of the State of Connecticut. HMFP was established in 1972 as a funding vehicle for CHFA s singlefamily and multi-family programs. As of December 31, 2016, the HMFP s asset-to-liability ratio was 124%. The program s profitability was 10%. As of June 30, 2017 the authority s mortgage loan portfolio totaled $3.91 billion, consisting of $3.19 billion (81%) single-family and $724 million (19%) multifamily loans. Approximately 86% of the single-family portfolio is insured by FHA or RD or guaranteed by VA, whereas 11% is uninsured due to the loans having LTVs of less than 80%. The remaining 3% represents conventionally insured loans. Seriously delinquent loans (90+ days delinquent) represent 6.10% of the single-family loans as of 8/31/17. CHFA purchases only first -lien fixed-rate loans with a standard 30-year amortization period. Under the multifamily portfolio, mortgage loans financed with the proceeds of HMFP bonds consists of 139 developments. Approximately 12% of the developments are insured or partially insured under various FHA programs, and the remainder is uninsured. Approximately 37% of the developments are further secured by Section 236 or Section 8 program subsidies.

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)).