The tax-exempt market is struggling to hold its ground amid the year’s largest week of municipal issuance. The primary and secondary markets were noticeably weaker, though one deal bumped up prices, showing demand is still strong for certain credits.
“Munis seem to be hanging tough, though the increasing supply will unquestionably have a drag on yields,” a Connecticut trader said.
“All in all munis feel like they have a weaker tone,” a New Jersey trader said. “It’s possible the institutional buyers took their January and February coupons, reinvested them, and now they are just content to sit and hope rates get more attractive.”
The New York City Municipal Water Finance Authority deal did not go well, the trader said. “I’m a little surprised by the pricing. The bonds that were not available during retail look like they might be having trouble and they are priced significantly cheaper,” he said. “The spreads are significantly wider than what we were looking at during retail. So it will be interesting to see how that goes.”
Munis were weaker Tuesday, according to the Municipal Market Data scale. Yields inside four years were steady while the five- and six-year yield rose two and three basis points. The 7- to 19-year yields jumped four and five basis points, while yields outside 20 years increased up to three basis points across the curve.
On Tuesday, the two-year yield ended flat at 0.26%, its record low first registered by MMD on Feb. 16. The 10-year yield jumped four basis points to 1.98% while the 30-year yield rose one basis point to 3.29%.
Treasuries were stronger Tuesday. The two-year yield fell one basis point to 0.29%. The benchmark 10-year and the 30-year yields dropped five basis points each to 1.95% and 3.08%, respectively.
In the primary market, Barclays Capital priced $1.7 billion of Puerto Rico refunding debt, rated Baa1 by Moody’s Investors Service, BBB by Standard & Poor’s and BBB-plus by Fitch Ratings. Institutional pricing was expected Wednesday but was pushed up a day.
Yields ranged from 4.02% with 4% and 5% coupons in a 2020 split maturity to 5.35% with a 5% coupon in 2041. The bonds are callable at par in 2022.
Morgan Stanley priced $505.8 million of Houston Airport System refunding bonds, rated A by Standard & Poor’s and A-plus by Fitch.
Yields on the first series, $288.2 million of subordinate-lien revenue refunding bonds subject to the alternative-minimum tax, ranged from 1.63% with a 5% coupon in 2016 to 4.30% with a 5% coupon in 2032. The bonds are callable at par in 2022. Prices were bumped between five and 10 basis points across the curve at repricing.
Yields on the second series, $217.6 million of subordinate-lien revenue refunding bonds not subject to the AMT, ranged from 2.64% with a 5% coupon in 2012 to 3.78% with a 5% coupon in 2032. The bonds are callable at par in 2022. Prices were bumped up to five basis points on the long end from preliminary pricing.
M.R. Beal & Co. priced for institutions $502.2 million of New York City MWFA water and sewer system second general resolution revenue bonds after a retail order period Monday. The credit is rated Aa2 by Moody’s and AA-plus by Standard & Poor’s and Fitch. Pricing information was not available at press time.
Bank of America Merrill Lynch priced for institutions $101.4 million of Broward County, Fla., general obligation bonds, following a retail order period Monday. The credit is rated triple-A by Moody’s and Fitch and AA-plus by Standard & Poor’s.
Yields ranged from 0.98% with 3%, 4%, and 5% coupons in a split 2017 maturity to 2.65% with a 5% coupon in 2025. The bonds are callable at par in 2022.
In the competitive market, Bank of America Merrill Lynch won the bid for $160.5 million of Virginia College Building Authority bonds, rated Aa1 by Moody’s, AA by Standard & Poor’s, and AA-plus by Fitch.
Yields ranged from 1.30% with a 5% coupon in 2018 to 3.00% at par in 2027. Credits maturing between 2014 and 2017, in 2019, in 2020, and between 2028 and 2030 were sold but not available. The bonds are callable at par in 2022.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board continued to show weakening.
Bonds from an interdealer trade of Washington 5s of 2032 yielded 3.16%, five basis points higher than where they traded a week ago.
Bonds from an interdealer trade of California Health Facilities Financing Authority 5.875s of 2023 yielded 2.21%, four basis points higher than where they traded last week.
A dealer bought from a customer Connecticut Health and Educational Facilities Authority 5s of 2041 at 4.45%, two basis points higher than where they traded a week ago.
Another dealer bought from a customer New York City MWFA 5s of 2045 at 3.85%, one basis point higher than where they traded last Thursday.
After several days to digest the news that Stockton, Calif., is getting closer to filing for bankruptcy, reaction in the municipal market remains muted.
Stockton is “not another domino” and was a “long time coming,” according to analysts at Trident Municipal Research.
“The city was hit hard by the recession and foreclosures and has been negotiating with unions in an attempt to unlock fixed costs for several years,” the analysts said. “Although the unions have made some concessions, the city is still dealing with large budget imbalances and pushing the limits of solvency.”
And while California as a whole is dealing with many budget issues, TMR analysts said there is still demand for California debt, as proven by last week’s $2 billion GO issue. “The deal’s good reception and tight credit spreads highlight the ability of the state to continue to access the capital markets at favorable rates, which is a credit positive,” they said.
The analysts do question whether the tight spreads are a true representation of the state’s financial problems, however.
“We do not see the potential for credit spreads, generally, to tighten much further,” they said. “We would avoid getting caught up in the reach for yield and look to underweight exposure to California until after more clarity develops on its ability to deal with structural deficits and-or credit spreads widen.”
