One of the largest deals postponed during the recent muni selloff priced Tuesday as a stable market restored issuers’ confidence to borrow in the primary market.
Against the backdrop of a much calmer market this week, Citi priced $662.9 million of Louisiana Tobacco Settlement Financing Corp. asset-backed refunding bonds.
"I would have waited because I think the market was settling down but I understand this is what happens when you get yourself in a position where you have to sell in order to balance your budget," said State Treasurer John Kennedy on the tobacco bond sale. " I think they left money on the table. This is a classic example of why you shouldn't balance the budget with smoke and mirrors. Sometimes the mirror breaks, and when that happens, funding for important priorities goes up in smoke."
In a statement, Louisiana Commissioner of Administration Kristy Nichols said Citi believed entering the market now was the best option and allowed investors to focus on the sale ahead of a growing new-issue calendar in the coming weeks that may compete for attention. The corporation priced ahead of Friday's economic release on employment and the risk of an unfavorable reaction in the bond market.
Yields ranged from 1.27% with a 5% coupon in 2016 to 5.30% with a 5.25% coupon in 2035. Bonds maturing between 2024 and 2035 are callable at par between 2015 and 2023.
Yields were lowered as much as five basis points from the premarketing wire released Monday on bonds maturing inside 10 years and in 2035. Yields on bonds maturing between 2024 and 2027 were raised 10 basis points.
The refunding bonds are rated BBB-plus by Fitch Ratings. Bonds maturing between 2016 and 2023 are rated A by Standard & Poor’s and bonds maturing between 2024 and 2033 are rated A-minus by S&P. Bonds maturing in 2035 were given a BBB-plus rating by S&P.
The largest deal yet of the week came against the backdrop of strong July 1 reinvestment money which helped support the primary. “The market has definitely calmed down and come back quite a bit, but there’s no supply,” a New York trader said.
Other traders said increasing supply could determine where the market goes next. “Supply is definitely the wild card,” a New Jersey trader said. “Next week or the week after could be large supply weeks.”
Overall, the market had an even, but cautious, tone Tuesday. “Am I seeing some business and some buyers? I definitely am, no doubt, but I am also seeing sellers,” the New York trader said. “I am bidding, but I have to bid with an erosion risk. Discounts are so out of favor right now.”
Also taking advantage of the steady tone was New York’s Metropolitan Transportation Authority, which priced for institutions $336 million of revenue bonds following a retail order period Monday. RBC Capital Markets priced the bonds that were initially sold to retail June 19 and orders were cancelled due to market volatility.
Traders said a third of the deal went to retail Monday, though yields were higher than what the MTA received in its June retail order period.
In repricing, yields ranged from 0.20% with a 2% coupon in 2013 to 4.73% with a 5% coupon in 2043. The bonds are callable at par in 2023. Yields were lowered as much as seven basis points from preliminary pricing Tuesday morning after being lowered as much as three basis points from retail pricing Monday.
In other primary deals, Goldman, Sachs & Co. priced $128.8 million of State Board of Regents for Utah University general revenue and refunding bonds, rated Aa1 by Moody’s and AA by Standard & Poor’s.
Yields ranged from 1.99% with a 5% coupon in 2019 to 4.33% with a 5% coupon in 2043. The bonds are callable at par in 2023.
Beyond the few primary deals that priced, traders said the market was quiet. “It’s flat and a holiday week,” a second New York trader said. “Trades are going through OK but there’s just not a lot.”
“MUB is up like 0.2% so we will be flat going into the holiday,” the New Jersey trader said Tuesday morning. “No trader wants to own bonds over the holiday. We want to be as light as possible.”
This trader added going into the selloff, bonds like Detroit and Puerto Rico were much cheaper. Now, some of those have started to recover. One insured Detroit sewer bond with a 5.75% coupon was trading back up at par, this trader said.
Indeed the market has made a comeback but analysts at Interactive Data caution any rally could be stopped if big buyers start to unload again. “While much has been made in the media of very large municipal fund outflows, the sizable July 1 reinvestment pool from called and matured bonds is being viewed as a potential offset,” the analysts wrote. “This appears to be providing support for the broader sector in the near term. However, recent crossover buyers could test any subsequent rallies should they look to quickly unwind positions.”
In the secondary market, trades compiled by data provider Markit showed mostly strengthening.
Yields on Los Angeles County Metropolitan Transportation Authority 5s of 2020 fell four basis points to 1.95% and California Public Works Board 5s of 2020 slipped three basis points to 2.24%.
Yields on Pennsylvania 5s of 2025 and Foley, Ala., Utilities Board 5s of 2027 fell two basis points each to 3.10% and 3.66%, respectively.
Yields on Washington 5s of 2026 and Grapevine, Texas, 3s of 2019 fell one basis point each to 3.30% and 2.00%, respectively.
Other trades were weaker. Yields on New York City Municipal Water Finance Authority 5s of 2045 rose three basis points to 4.43% and Ohio’s Buckeye Tobacco Settlement Financing Authority 5.875s of 2047 increased one basis point to 7.51%.
Yields on the Municipal Market Data scale ended unchanged across the curve. The 10-year and 30-year yields were steady for the fourth session at 2.56% and 3.83%, respectively. The two-year was flat at 0.50% for the fifth session.
Yields on the Municipal Market Advisors scale ended mostly flat as well. The 10-year yield rose one basis point to 2.73%. The 30-year yield was unchanged at 3.95% for the third session and the two-year was steady at 0.53% for the fourth session.
Treasuries were stronger Tuesday. The benchmark 10-year yield slipped two basis points to 2.47%. The two-year and 30-year yields fell one basis point each to 0.35% and 3.47%, respectively.
