Triple-B rated credits from Puerto Rico Electric Power Authority and Chicago O’Hare International Airport whetted investors’ appetites for higher yields, causing the secondary market to weaken Tuesday.
Morgan Stanley issued a consensus wire for $600 million of PREPA power revenue bonds ahead of Wednesday’s pricing. Traders said prices looked cheap. The bonds are rated Baa3 by Moody’s Investors Service, BBB by Standard & Poor’s, and BBB-minus by Fitch Ratings.
PREPA was chosen as the first Puerto Rico government body to return to the bond market since last year as it has some of the best bond ratings.
The bonds yielded 6.75% with a 7.25% coupon in 2030, 7% priced at par in 2033, 7.05% with a 6.75% coupon in 2036, and 7.15% with a 7% coupon in 2043. The bonds are callable at par in 2023 except bonds maturing in 2030 which are callable at par in 2018.
“People are digesting Puerto Rico today,” a New York trader said. “It might be the type of deal where the crossovers will come in.”
One Chicago trader said PREPA came cheaper than people were expecting, forcing sellers out of the secondary and into the primary. “As soon as the wire hit customer bid-wanted lists starting growing,” this trader said. “People are raising cash to buy. It could be so cheap that everyone jumps in and puts a little stability into the market.”
Bank of America Merrill Lynch repriced $249.7 million of O’Hare Airport customer facility charge senior lien revenue bonds, rated Baa1 by Moody’s and BBB by Standard & Poor’s. Bonds maturing between 2028 and 2033 and portions maturing in 2043 were wrapped by Assured Guaranty Municipal Corp., and rated A2 by Moody’s and AA-minus by Standard & Poor’s.
Yields ranged from 2.13% with a 5% coupon in 2018 to 5.65% with a 5.5% coupon and 5.85% with a 5.75% coupon in a split 2043 maturity. The bonds are callable at par in 2023. Yields were lowered as much as 13 basis points in repricing.
“There is some interest on the longer-end -- 15 years and out -- which, coincidentally or not, is the insured part,” the New York trader said.
A second Chicago trader said he wasn’t surprised to see how well the deal priced. “I’ve been thinking that Chicago bonds were oversold following the superdowngrade and the market seems to be recognizing that,” he said, referring to the three-notch lowering of the city’s rating by Moody’s Investors Service last month. “Too much has been made of the Detroit/Chicago comparison, and there is definitely a lot of value to be found in the Chicago GO’s and the revenues, and even most of the suburbs.”
Also in the primary market, Barclays priced for retail $639.9 million of Regents of the University of California medical center pooled revenue bonds, rated Aa2 by Moody’s, AA-minus by Standard & Poor’s, and AA by Fitch. Institutional pricing is expected Wednesday. The retail pricing comes as traders have said California spreads have been tightening over the last two trading sessions amid an overall weaker market.
Yields ranged from 0.53% with a 2% coupon in 2015 to 5% priced at par in 2043. Bonds maturing in 2014 were offered via sealed bid. Portions of bonds maturing between 2027 and 2048 were not offered for retail. The bonds are callable at par in 2023.
In the competitive market, Citi bought $465.2 million of Minnesota GOs, rated Aa1 by Moody’s and AA-plus by Standard & Poor’s and Fitch.
The first pricing consisted of $265.2 million of various purpose GOs. Yields ranged from 0.72% with a 5% coupon in 2016 to 4.38% with a 4.25% coupon in 2033. Bonds maturing in 2014 and 2015 were offered via sealed bid. The bonds are callable at par in 2023.
The second pricing consisted of $200 million of trunk highway GOs. Yields ranged from 0.72% with a 5% coupon in 2016 to 4.35% with a 4.25% coupon in 2033. Bonds maturing in 2014 and 2015 were offered via sealed bid. The bonds are callable at par in 2023.
Traders said the prices looked expensive. Yields on bonds with 5% coupons maturing between 2016 and 2026 were priced at the Municipal Market Data scale to as much as five basis points above. Meanwhile, the triple-A to double-A MMD spread ranged from 10 to 28 basis points on those same maturities.
With the focus on the primary market, secondary activity slowed Tuesday afternoon. “The new-issues are dominating the market so there is no secondary action until those price,” a New York trader said.
Secondary market trade data compiled by Markit showed weakening.
Yields on New Jersey State Turnpike Authority 5s of 2038 jumped four basis points to 4.78% and Chicago Board of Education 5s of 2017 rose three basis points to 2.39%.
Yields on Pennsylvania 5s of 2022 and Minnesota General Fund 5s of 2028 rose one basis point each to 2.86% and 3.83%, respectively.
Yields on California 7.625s of 2040 and Oklahoma Turnpike Authority 5s of 2016 rose one basis point each to 5.30% and 0.73%, respectively.
Tuesday, yields on the Municipal Market Data scale ended as much as three basis points higher after rising three basis points Monday. The 10-year yield rose one basis point to 2.73% and the 30-year yield increased three basis points to 4.28%. The two-year finished flat at 0.43% for the 15th consecutive session.
Yields on the Municipal Market Advisors scale from three basis points lower to one basis point higher. The 10-year yield fell three basis points to 2.90% and 30-year yield rose one basis point4.34%. The two-year was unchanged at 0.55% for the fourth session.
After weakening in the morning session, Treasuries traded mostly flat by the afternoon. The two-year and benchmark 10-year yields were steady at 0.32% and 2.64%, respectively. The 30-year yield slid one basis point to 3.73%.
