Traders Tuesday spoke of how this week’s Chicago Board of Education deal that Jefferies & Co. priced would represent a sort of bellwether for the municipal market, based on how it was structured.
If Wednesday’s results were any indication, then the deal’s pricing sounded a positive note for the market.
Jefferies priced the $405.7 million of unlimited-tax general obligation bonds to be heavily weighted on the long end of the curve, according to Roy Carlberg, head of underwriting at the firm.
The bonds were rated Aa3 by Moody’s Investors Service, AA-minus by Standard & Poor’s, and A-plus by Fitch Ratings.
Yields ranged from 5.05% with a 5.50% coupon in 2038 to 5.23% with a 5.25% coupon in 2041. Some credits were repriced anywhere between two and four basis points firmer, Carlberg said.
“We had $400 million of bonds that we structured to meet various types of institutional demand,” he said. “So, we broke it up, creating a premium structure, a discount structure, and a more par-ish structure to capture that demand. We were able at the end of the day to generate a substantial book. And we were able to reprice better, based on that oversubscription.”
A large number of the week’s negotiated deals reached the market to mixed results Wednesday as concessions were rife, traders said. And while most eyes were on the primary, there were selective pieces getting done at some slight concessions in the secondary, a trader in New York said.
Tax-exempt yields are starting to follow Treasury yields on their ascent, according to the Municipal Market Data scale. They were steady through one year, but ended the day higher after that point.
Muni yields were two to four basis points higher through six years. Beyond that, they were two or three basis points weaker.
The benchmark 10-year muni yield weakened Wednesday. It rose three basis points to 2.58%; it has soared 61 basis points since it reached a record low on Sept. 23.
The two-year yield climbed two basis points on the day to 0.45%. The 30-year yield also increased two basis points, to 3.75%.
Treasury yields started the morning with pronounced weakening but retraced their steps somewhat as the day progressed. The benchmark 10-year Treasury yield jumped five basis points to 2.21%. In a little more than a week, it has soared 42 basis points.
The 30-year leapt nine basis points to 3.20%. The two-year yield actually fell two basis points to 0.29%.
The industry anticipates a drop in volume this week. Roughly $6.93 billion is expected, on the heels $8.23 billion last week. The negotiated side saw the day’s largest deals.
Leading the way, Bank of America Merrill Lynch priced $757.5 million of New York City Transitional Finance Authority future tax-secured refunding subordinate bonds fiscal 2003, Subseries A-1 and future tax-secured subordinate bonds fiscal 2012 Series B and C. The bonds were rated Aa1 by Moody’s and AAA by Standard & Poor’s and Fitch.
Yields for the largest series, $507.6 million of fiscal 2003 Subseries A-1 bonds, ranged from 1.38% with a 5.00% coupon in 2015 to 3.59% with a 5.00% coupon in 2025.
Yields for the $43 million fiscal 2012 Series B bonds ranged from 0.40% with a 5.00% coupon in 2012 to 3.75% with a 5.00% coupon in 2027.
Yields for the $206.9 million fiscal 2012 Series C bonds ranged from 0.68% with a 5.00% coupon in 2013 to 4.10% with a 4.00% coupon in 2031.
Citi priced for retail $492.1 million of California Public Works Board lease revenue bonds in three series. The bonds were rated A2 by Moody’s and BBB-plus by Standard & Poor’s and Fitch.
Bonds for the largest series — $237.5 million for various capital projects, with maturities ranging from 2013 to 2031 — were not offered to retail.
Yields for the smallest series, $101.3 million for the Trustees of the California State University to fund various CSU projects, ranged from 1.42% with a 3.00% coupon in 2014 to 5.14% with a 5.00% coupon in 2029. Debt maturing in 2030 and 2031 wasn’t offered to retail.
Yields for the $153.3 million series for the Department of Corrections and Rehabilitation ranged from 1.23% with a 3.00% coupon in 2013 to 5.29% with a 5.25% coupon in 2029. Credits maturing in 2030 and 2031 were not offered to retail. Debt maturing in 2012 was offered in a sealed bid.
JPMorgan priced $229 million of taxable Tennessee GOs. The bonds are rated Aaa by Moody’s, AA-plus by Standard & Poor’s, and AAA by Fitch.
Yields range from a plus-25 basis point spread to Treasury with a 0.125% coupon in 2013 to a plus-100 basis point spread to Treasury with a 4.375% coupon in 2031. Credits maturing in 2012 were offered in a sealed bid.
There are a few reasons behind why muni yields have hit a rough patch recently, according to BMO Capital Markets analyst Justin Hoogendoorn.
To begin with, last month’s new issuance rose to the second-highest monthly supply level in 2011. In the wake of the summer’s light supply and the debt-ceiling crisis, it was easily absorbed, he wrote in a research report.
“However, issuance over the past week or so began to point toward market reluctance to add paper,” he added. “Higher issuance expectations through yearend caused investors to pause purchases, as a substantial amount of refunding activity hit the market.”
In addition, higher Treasury yields prompted muni investors to reevaluate where they can add tax-exempts, Hoogendoorn wrote. The 10-year Treasury yield sits around 50 basis points above its lowest levels, pushing muni yields higher.
Also, investors are worried about credit spreads, he wrote. The spread between single-A and triple-A bonds has widened to 100 basis points again.
Several single-A and even low double-A spreads widened over the past week as some lower-quality deals struggled to price.
As Treasuries struggled, the equities markets saw a boost in trading across the major indexes. Each ended up by at least 0.90%.
The Dow Jones Industrial Average ended up almost 103 points on the day.
