As the market continued to digest Wednesday’s first public offerings of Build America Bonds, municipals showed continued strength with yields dipping three to five basis points.
Leading the new-issue market yesterday, JPMorgan priced $242.3 million of revenue bonds for Georgia’s Private Colleges and Universities Authority. The bonds mature from 2009 through 2029, with term bonds in 2032 and 2035. Yields range from 0.68% with a 3% coupon in 2010 to 4.96% with a 5% coupon in 2035. Bonds maturing in 2009 will be decided via sealed bid. The bonds, which are callable at par in 2019, are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s.
The market is also expecting an increase in taxable supply over the next week in the form of Build America Bonds, after the first deals were priced Wednesday under the program created from the American Recovery and Reinvestment Act of 2009.
The University of Minnesota Wednesday came to market with BABs, one of two issuers to do so at approximately the same time. The deal contains both a tax-exempt and taxable component. The $44.6 million tax-exempt series matures from 2009 through 2021, with yields ranging from 0.58% to 3.91%. The $37.3 million series of BABs, which was oversubscribed, matures in 2028, yielding 6.38% with a 6.3% coupon. According to sources close to the transaction, the final all-in-cost for the university — net of the subsidy from the federal government — was 3.81% on the 20-year bond issue. The tax-exempt equivalent from Municipal Market Data on a 20-year double-A rated bond was approximately 4.80%.
Also Wednesday, JPMorgan priced $250 million of taxable BAB s for the University of Virginia. The bonds were issued as a 30-year bullet maturity and will go to fund certain new capital expenditures for the university. The bonds, which are rated triple-A by all three major rating agencies, were five times oversubscribed, allowing them to price at a taxable rate of 6.22%, according to a JPMorgan press release. They also yield 154 basis points more than Wednesday’s MMD triple-A general obligation yield curve. The yield is 32% higher than the tax-exempt scale. The issuer will receive 35% cash subsidy under the legislation. The bonds also yielded 255 basis points higher than Wednesday’s 30-year Treasury, which yielded 3.67%.
George Strickland, managing director and portfolio manager at Thornburg Investment Management in Santa Fe, N.M., said he was somewhat surprised by how the BABs priced, considering there was no point of comparison for these issues.
“I was a little surprised. For the buyer of the bonds, though, I don’t believe it looks any different than any other taxable muni, and there’s been plenty of those bonds around to benchmark it off of,” he said. “But the beauty of it is the issuer gets 35% of their interest back from the federal government, so their net cost is lower than they could do in the tax-exempt market.”
Additionally, the New Jersey Turnpike Authority sale slated for Tuesday has been increased to $1.75 billion from $650 million and the BAB piece is expected to be $1.25 billion, up from the initial plan of $250 million.
Meantime, Moody’s Wednesday assigned an A2 rating and Fitch Ratings and Standard & Poor’s assigned A ratings to California’s planned $4 billion taxable GO sale. The deal will include billions of dollars of BABs that will be structured with bullet maturities in 2034 and 2039. The deal is slated to come to market early next week. Standard & Poor’s also affirmed its A rating with a stable outlook on the state’s $68.9 billion of existing GO debt and its SP-2 rating on the state’s $5 billion of revenue anticipation notes.
In the secondary market yesterday, yields declined by three to five basis points.
“We’re seeing some more gains today,” a trader in New York said. “Definitely firmer today. There’s been some decent activity so far, but things are definitely cheaper, probably three basis points or so. It’s still fairly quiet, I’d say, but business is getting done.
The Treasury market showed some losses yesterday. The yield on the benchmark 10-year Treasury note, which opened at 2.76%, was quoted near the end of the session at 2.83%. The yield on the two-year note was quoted near the end of the session at 0.91% after opening at 0.85%. And the yield on the 30-year bond, which opened at 3.66%, was quoted near the end of the session at 3.72%.
As of Wednesday’s close, the triple-A muni scale in 10 years was at 109.3% of comparable Treasuries, according to MMD. Additionally, 30-year munis were 127.9% of comparable Treasuries. Also, as of the close Wednesday, 30-year tax-exempt triple-A rated GOs were at 142.2% of the comparable London Interbank Offered Rate.
In economic data released yesterday, initial jobless claims for the week ended April 11 came in at 610,000, after a revised 663,000 the previous week. Economists polled by Thomson Reuters had predicted 655,000 initial jobless claims,
Housing starts came in at 510,000 in March, after a revised 572,000 the previous month. Economists polled by Thomson Reuters had predicted 540,000 housing starts. Also, building permits came in at 513,000 in March, after 564,000 the previous month. Economists polled by Thomson had predicted 550,000 building permits.
