The municipal market was weaker by between two and 10 basis points yesterday, depending on the maturity, as California took center stage in the primary.
Citi and Bank of America Merrill Lynch priced $3.4 billion of taxable bonds for the Golden State yesterday, including $2.5 billion of Build America Bonds. The deal was upsized from an originally planned $2 billion total due to demand.
Bonds from the $2.5 billion series of taxable BABs mature in 2022, 2036, and 2040, with yields ranging from 6.435% with a 6.65% coupon in 2018, or 4.18% after the 35% federal subsidy, to 7.481% with a 7.625% coupon in 2036, or 4.86% after the subsidy.
The yield including the subsidy on the 30-year BABs is 79 basis points lower than the 5.65% the state’s most recent 30-year tax-exempt debt yielded when it priced on March 11.
The bonds were priced to yield between 255 and 315 basis points over the comparable Treasury yields, and contain a make-whole call at Treasuries plus 45 basis points. The $1 billion 2036 maturity has a make-whole call until March 2020, at which point it is callable at par.
A senior Citi executive involved in the deal said having the 10-year call on the 2036 bonds was a significant development, in that BAB buyers are generally not interested in a 10-year par call, but California was able to market $1 billion of such bonds in the transaction.
“A lot of the demand up until now has been from domestic life insurance companies and pension funds, and in order to get asset liability matches, they want as long duration as they can get in high-quality names like this, but they want it on a non-callable basis,” the executive said.
“California ended up pricing $1 billion in callable bonds. That’s a vestige of the tax-exempt market usually,” he said. “That’s something that a lot of the buyers resisted originally, but they were able to do a billion dollars worth of 10-year optionally callable bonds, expanding the callable taxable market, while giving the state flexibility going forward.”
Bonds from the $900 million of traditional taxable bonds mature in 2012, 2016, 2017, 2018, and 2019, with yields ranging from 5.27% with a 5.5% coupon in 2016 to 6.035% with a 6.2% coupon in 2019. Bonds maturing in 2012 were decided via sealed bid. The bonds were priced to yield between 190 and 215 basis points over the comparable Treasury yields, and contain a make-whole call at Treasuries plus 45 basis points.
The Citi executive also noted the large international interest in the California bonds, with roughly $1.25 billion in direct international orders being received, more than one third of the ultimate deal size. Investors all over the globe, including the Far East, Europe, and Latin America, were contacted ahead of the pricing.
“There’s been a process of making this market, if you will, because even in the states it was very hard for people who invest in the taxable market to understand the creditworthiness of municipalities,” he said.
“It was a much greater feat to get international buyers to fully understand the creditworthiness of the municipal market at large. The BABs market is going to continue to expand internationally, and with that expansion and demand, I expect that yield premiums are likely going to contract, and California obviously has been a beneficiary of this expansion of demand with the price that they were able to borrow.”
The credit is rated Baa1 by Moody’s Investors Service, A-minus by Standard & Poor’s, and BBB by Fitch Ratings.
Meanwhile, JPMorgan priced $822.2 million of revenue bonds for the Puerto Rico Electric Power Authority. The bonds were priced with a high yield of 5.40% with a 5.25% coupon in 2040, according to market sources. Further pricing information on the deal was not available by press time.
Yields in the secondary market were higher by about five basis points overall, with most of the weakness situated in the short end of the curve. Traders said tax-exempt yields were higher by as much as eight to 10 basis points inside of 10 years, while yields after 20 years were higher by about two basis points.
“There’s fairly substantial weakness out there, but it’s concentrated mostly on the short end,” a trader in New York said. “There’s a pretty big bid-wanted list out there mostly in 2016 that’s helping to define some of the weakness in the market.”
“We’re down a good five, six, seven basis points, depending on what you’re trading,” a trader in Los Angeles said. “Most of the eyes are on the new issues, though, especially out here. There isn’t a ton trading in the secondary.”
The Treasury market showed losses. The benchmark 10-year note was quoted near the end of the session with a yield of 3.90% after opening at 3.85%. The yield on the two-year finished at 1.10% after opening at 1.09%. The yield on the 30-year bond was quoted near the end of the session at 4.77% after opening at 4.73%.
The Municipal Market Data triple-A scale yielded 3.05% in 10 years and 3.84% in 20 years, compared to Wednesday’s levels of 2.95% and 3.81%. The scale yielded 4.17% in 30 years, up from 4.16% Wednesday.
Yesterday’s triple-A muni scale in 10 years was at 76.8% of comparable Treasuries and 30-year munis were at 87.9%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 94.3% of the comparable London Interbank Offered Rate.
In economic data released today, initial jobless claims decreased to 442,000 for the week ending March 20.
Economists expected 450,000 initial claims and 4.560 million continuing claims, according to the median estimate from Thomson Reuters.
