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Weekly Insights of a Municipal Bond Trader

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A Look Ahead – Week of June 17, 2019

Municipals performed in line with treasuries for the week with muni/treasury ratios remaining close to unchanged for the period. It feels as though mutual funds are sitting on cash, waiting on the sidelines for a back-up in rates.

New issue demand was met with mixed reception. The front end seemed to have the strongest demand as investors have shortened up duration buy sitting in cash or purchasing bonds within 3 years of maturity. Secondary trading volume was light during the week as dealers saw little follow through on the break of new issues. This week’s calendar is coming in at around $8.5bln for both negotiated and competitive new issues. The supply is picking up going into the summer and while the technicals are strong due to redemptions and coupon payments, municipals may lag just given the absolute level of rates.

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FUND FLOWS

Lipper reported combined weekly and monthly inflows of $2.6bn for the period ending June 12th, marking the 23rd consecutive week of inflows. YTD inflows moved higher to $41.2bn, continuing the best start to a year since the data series began in 1992. High Yield funds recorded $438mn of inflows, Intermediate funds received $886mn of inflows, and Long-Term funds recorded $1.7bn of inflows. YTD flows into high-yield ($8.9bn), Intermediate ($15.6bn), Long-term ($24.2bn), and California ($3.7bn) muni funds continued with new records for the period. Municipal ETF’s registered $94mn of inflows.

SPOTLIGHT

High Yield Municipal high yield funds have received their 23rd consecutive week of inflows. This is the most consecutive weeks since September of 2016. With yield levels at their lowest in some time, municipal investors have sought out riskier debt in reaching for a better yield. Year-to-date high yield municipal funds have received almost $9bln in subscriptions. This past week we started to see the spreads on some bonds in the high-yield sector back up from their most recent tights, possibly showing us that investors are starting to push back on these recent tight levels.

This was evident this past week on the new issue Michigan St. Health McLaren Health Care A1 rated 30-year bond deal that was originally priced at +85 to the AAA MMD scale. This deal had to be widened out to +98 in order to attract interest from investors. We then saw other recent single A rated names in the healthcare space widen out over 10bps from their recent tights. This is something we will be keeping a close eye on over the next couple of weeks.

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