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Weekly Muni Snapshot | July 26, 2021

Municipal New Issuance: The size of the negotiated calendar for this past week was consistent with the average weekly total of approximately $7.5 billion in new issue volume. The largest and most notable deals for the week were the $ 890 million Salt Lake City Airport Revenue bonds which consisted of both AMT and non-Amt bonds. The Oregon Education Districts issued taxable bonds in the sum of $660 million, while the Los Angeles County Metropolitan Transportation Authority issued $514 million in revenue bonds. If you look at the historical level of issuance for the past few years $7.5 billion would be an average weekly volume, but for 2021 the average weekly volume has been greater than that. There are a few reasons as to why issuance has increased as many state and local government has experienced an increase from higher taxes revenue than originally forecasted, and or are waiting for more clarity on what the federal infrastructure plan will be and will look to issue debt for multiple projects.

 

Municipal Secondary Trading: Secondary trading for the week totaled approximately $21.17 billion in volume. The total amount of secondary trading is still well below the historical averages weekly as we are used to seeing an average of $31 billion on a weekly basis dating back to 2019 and 2020. According to Bloomberg reports, customers put out roughly $2.08 billion in bid lists for the week which Is down slightly from the prior week where customer bids-wanted were $2.2 billion.

Municipal Spread: Municipal bond performance was lackluster this past week as we saw very little change in yield levels from the week prior. Yields on the Bloomberg 10-year notes fell only by 1.3 basis points for the week to 0.846%. With the very little movement in municipals and a modest rally in Treasuries, municipals bonds improved slightly and are now yielding 65.88% of Treasuries up from the prior week of 66.38% but ratios remain lower than a month ago when they were at 68.46%. The scarcity of new bonds as well as increase of the flow of funds have left ratios at or near their all-time lows and valuations at historically high levels. The municipal curve only steepened by 2.8 basis points to 131 basis points for the week.

For the 20th straight week, municipal bond mutual funds saw a weekly inflow as investors added $1.73 billion in new cash according to Refinitiv Lipper US Fund Flows Data, this follows last week’s $2.24 billion increase. One aspect that is interesting to note we have started to see high-yield funds start to gain a larger percentage of the weekly inflow with this week high-yield funds seeing a weekly gain of $579 million as investors reach for additional yield in the current low interest rate environment.

In the coming weeks there will be a surge of cash will hit the municipal-bond market, as investors are set to receive approximately $46 billion in principal payments in August, the biggest payout of 2021 as well as $13.7 billion coming from interest payments. These reinvestment proceeds coupled with investors pouring money into mutual funds with an average weekly inflow of $1.9 billion each week this is causing concern as it far exceeds the amount of new bond sales and is a huge supply and demand mismatch. With record high valuations and scarcity of new debt issues this has left many money managers struggling to find value in both the new issue and secondary markets. With this news, it is expected that ratios will continue to remain at or near the all-time its lows until we start to see the supply and demand rebalancing. Demand for tax exempt bonds remains high, fueled by President Biden’s push for higher taxes, and if supply doesn’t pick up in September and October spreads will continue to be tight. If supply does pick up spreads could potentially widen and would be a welcome development for municipal fund managers.

Municipal Supply: Supply for the week will be very light once again, with a total negotiated supply of just $5.2 billion. The largest and most notable deals of the week will the $734.1 million State of Washington limited tax general obligation and refunding bonds which will have taxable and tax-exempt bonds. The City of Philadelphia will be issuing $297 million in tax-exempt bonds, and Michigan State Housing Development Authority will plan to issue $289 million in single-family mortgage revenue social bonds.