CREDIT AND MARKET STRATEGY
MUNICIPAL MARKET WEEKLY
March 11, 2019
Munis followed Treasuries higher on the week, bolstered by another round of very strong fund inflows (+$798 mil. wk; +$10.372 bil. YTD), negative weekly net supply of -$7.5 bil., and gross supply of $6.7 bil., with roughly half being encapsulated by two super-sized transactions in two high-tax states ($2.3 bil. CA GO and $914 mil. NYC GO). Given the backdrop, all new issue did unsurprisingly well, the Cal deal in particular with 3.2x subscription ($8.2 bil. of orders) between retail and institutional investors. The secondary market was also robust with trading at ~20% above average and BWICS ~6% below average that resulted in steadily increasing prices. Clearly, the -$74 bil. reduction of tax-exempts by banks during 2018 (recently reported by the Fed) has had zero effect on Muni market demand as the slack has been picked up by retail investors, particularly those in high-tax states. Last week the MMD scale was unchanged in 2yrs at 1.58%, but bumped aggressively in the higher yielding spots -- 10yrs and out, led by the 30yr spot, which fell -11 bps to end at 2.89%. SIFMA was lower by -7 bps to 1.67%, or 105% of 1yr MMD, 100% of 5yr MMD, and 67% of 1mL. The S&P Main Muni index returned +39 bps (+1.60% YTD) underperforming Treasuries for the week, which returned +79 bps (+74 bps YTD).
Peak Muni. Although Munis mostly underperformed Treasuries on the week, the frenzied clamor for tax-exempts has sent Muni valuations to peak valuations of the 2000s. As indicated by the 10yr ratio, which as of last Friday hit 77.7%, current valuations are 10 ratios rich vs the 3yr average (88%) and 15 ratios rich vs the average since 2000 (93%). Provided fund inflows remain robust, Munis could experience bouts of outperformance (still lower ratios), although “regression to the mean” implies that current valuations are likely temporary. We like effective duration of between 8-9 yrs in a 70/30 barbell (70% 1-6yr / 30% 18-21yr), including laddered fixed rate and/or floating rate (given SIFMA at 100% of 5yr MMD) and longer maturities (20-30yrs) with 8-10yr calls. This strategy captures...
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SAMUEL A. RAMIREZ & COMPANY, INC.
QUARTERLY MACROECONOMIC OUTLOOK
FINANCIAL STRATEGIES GROUP – 1st QUARTER 2019
Please find attached Ramirez & Co.’s Quarterly Macroeconomic Outlook. In our report, we continue to monitor the US economy, global events and the Fed’s outlook on the economy and rates:
- In 2018, with accommodative fiscal and monetary policies, and strong global growth, US real GDP grew at about 3% – somewhat above the economy’s longer-run growth potential, which the Fed estimates to be a bit below 2%.
- The FOMC begins to take a more judicious stance towards the future path of monetary policy – in light of the cumulative 225 bps tightening, 100 bps of which occurred in 2018.
- FOMC participants estimate that the neutral longer-run federal funds rate is in the 2.5%-3.5% range, whose lower bound is near the current rate.
- As the FOMC becomes more uncertain about the tightening effects of the balance sheet roll down, it begins to pay more attention to the maturity structure of the portfolio and the balance of Treasuries vs. mortgage-backed securities.
Members of our Financial Strategies Group, Niso Abuaf, Konstantin Semyonov and Duncan Sinclair, would be happy to discuss further any of the material with you.
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