NCSHA 2018 HFA Institute Municipal Market Update
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The Aaa GO MMD Index is the Baseline for Tax Exempt Bond Pricing The Yield Curve Continues its Flattening 6.00% 01/08/2018 01/09/2017 01/08/2007 01/08/1997 5.50% 5.00% 4.50% Yield 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Maturity (year) 01/08/2018 01/09/2017 01/08/2007 01/08/1997 Source: TM3 3
Tax Exemption Drives a Competitive Advantage Relative Performance of Municipal Yields Versus Treasuries 5 Year MMD (1) and 5 Year UST 10 Year MMD and 10 Year UST 30 Year MMD and 30 Year UST 2.50% 5Y MMD 5Y UST 2.80% 10Y MMD 10Y UST 3.60% 30Y MMD 30Y UST 2.30% 2.60% 3.40% 2.10% 2.40% 3.20% 1.90% 2.20% 3.00% 1.70% 2.80% 2.00% 1.50% 2.60% 1.30% 1.80% 2.40% 1.10% 1.60% 2.20% 0.90% 1.40% 2.00% 0.70% 1.20% 1.80% 5 Year MMD 10 Year MMD 30 Year MMD Low 1.12% 09/08/2017 Low 1.69% 11/04/2016 Low 2.46% 12/07/2017 High 1.91% 12/01/2016 High 2.58% 12/01/2016 High 3.35% 12/01/2016 Current 1.66% 01/08/2018 Current 2.01% 01/08/2018 Current 2.59% 01/08/2018 Current % of UST 72.49% Current % of UST 81.05% Current % of UST 92.17% (1) MMD stands for Municipal Market Data; a daily index all municipal bond pricings are based off of Bloomberg. 4 Source: Bloomberg
Indicative Fixed Rate Housing Bond Pricing (Assumes Aaa Credit) Source: Sales, Trading & Underwriting Assumes market conditions of January 8, 2017 MMD and credit spreads will fluctuate without out notice, based upon then-prevailing market conditions Tax exempt municipal bonds paying interest subject to AMT will typically spread 15 35 bps wider to MMD 5
Tax Exempt Weekly SIFMA Index vs. Taxable ICE-LIBOR 9.00 300% 8.00 250% 7.00 6.00 200% 5.00 150% 4.00 3.00 100% 2.00 50% 1.00 0.00 0% 01/02/2008 01/02/2009 01/02/2010 01/02/2011 01/02/2012 01/02/2013 01/02/2014 01/02/2015 01/02/2016 01/02/2017 01/02/2018 SIFMA Swap Index % of 1-Month LIBOR Source: Bloomberg 6
2018 Municipal Supply will be Greatly Impacted by 2017 Year End Volume Monthly Projected Supply and Redemptions $60.0 2017 Actual Issuance 2018 Projected Issuance 2018 Projected Redemptions $50.0 $40.0 Par Amount ($ in billions) $30.0 $20.0 $10.0 $0.0 January February March April May June July August September October November December 30-Day Visible Supply 10-year AAA MMD (11/1 12/31/2017) 25.00 30-Day Visible Supply Average 2.30% 10 Year MMD 20.00 2.20% $ BIllions 15.00 10.00 5.00 2.10% 2.00% 1.90% 1.80% 0.00 1.70% Summary Statistics (Billions) Max $23.47 Min $2.46 Avg. $10.88 Curr. $6.81 Summary Statistics Max 2.21% Min 1.88% Avg. 2.03% Curr. 2.01% 7 Source: RBCCM, Securities Data Corporation, TM3
Overview of Key Market Themes Market Commentary December FOMC minutes revealed a balanced discussion on inflation and rate hikes. Tax reform could spur inflation and hikes, but continued sub-2% inflation could slow the pace of hikes. The Fed sees three rate hikes this year; futures are pricing in a 75% chance of a hike in March. Municipal supply totaled $410bn in 2017, down a mere 4.2% from the previous year. December set a new record for monthly supply, with $71.1bn pricing during the month. The five-week period following Thanksgiving brought $85.4bn of new-issue volume to the market. $4.78 billion of housing bond offerings brought to market in five week period following Thanksgiving. Last week s supply totaled a modest $770mm, and this week s calendar is expected to total $4bn. Industry estimates range between $285 million (RBC) and $400 million (BAML), representing projected declines of between 8% and 34% from the $410 billion issued during 2017 A significant supply-demand imbalance is expected for 1Q18, when projected principal redemptions and coupon payments will dwarf projected new issue volume Tax reform may reduce demand from banks and insurance accounts, particularly for high-grade bonds. These accounts may look at lower-rated credits, longer maturities, and lower coupons to meet yield bogeys. However, demand from SMAs, bond funds, and individuals may increase due to fewer tax shelters. Interest Rate Forecast 10-Year UST Yield Forecasts 4Q18 Actual Forecast RBC CM 3.30% Period 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 Interest on Excess Fed Funds Rate Reserves 1.00 1.25 1.25 1.50 1.75 2.00 2.25 2.50 Goldman Sachs Wells Fargo 3.00% 2.95% 3-month UST 0.76 1.03 1.06 1.39 1.55 1.80 2.05 2.30 Raymond James 2.92% 2-Year UST 1.27 1.38 1.47 1.89 2.10 2.35 2.55 2.75 Median 2.92% 5-Year UST 1.93 1.89 1.92 2.20 2.50 2.70 2.90 3.05 BAML 2.90% 10-Year UST 2.40 2.31 2.33 2.40 2.80 3.00 3.15 3.30 Fannie Mae 2.50% 30-Year UST 3.02 2.84 2.86 2.74 3.20 3.35 3.50 3.60 Moody's 2.35% Source: RBCCM, http://www.rbc.com/economics/economic-reports/pdf/financial-markets/fmm-january2018.pdf Thomson Reuters, Bloomberg as of January 8, 2018. 8