Investors Leave Secondary In Favor of Cheap Primary

Borrowers in the tax-exempt market enticed investors with high yields in the primary, keeping the focus on new issues and pushing yields higher in the secondary market for the week.

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And while higher-yielding deals in Puerto Rico and Chicago attracted investors, one issuer in Michigan decided borrowing costs were too expensive.

Saginaw County, Mich., postponed a $60 million general obligation limited tax pension obligation bond deal to avoid the fallout from Detroit’s July 18 bankruptcy filing and emergency manager Kevin Orr’s restructuring plan that suggested general obligation bondholders be treated as unsecured creditors. This was the third Michigan issuer in two weeks to delay a sale, following Genesee County on a $54 million bond deal and Battle Creek for a $16 million sale.

Public Financial Management, the county’s financial advisor for the deal, said more time was needed to communicate with potential investors and distinguish this credit from other issues affecting the market. “We wanted to be sure that investors fully understood the underlying strength of this credit, given current market conditions,” said Kari Blanchett, a director at PFM. “Priced in the current market, the Saginaw offering would not fully meet the county’s financing objectives.”

Robert Belleman, county administrator, said he is hopeful that investors will see the appropriate credit quality in a month or so.

Other issuers had more success this week. Puerto Rico Electric Power Authority tapped the markets with $673 million, the first borrowing from Puerto Rico in 2013. The deal was two times oversubscribed with orders totaling over $1.5 billion and long-term, higher-coupon paying bonds were reallocated to shorter, lower-coupon paying maturities.

“Even though the transaction took place in a very volatile market environment, marked by a lower demand for municipal bonds due to significant bond fund outflows and in the shadow of Detroit’s bankruptcy, it was successfully received by investors,” according to a statement by the Government Development Bank for Puerto Rico.

Chicago’s O’Hare airport also successfully tapped the market with $250 million of bonds with insurance by Assured Guaranty Municipal Corp. on longer maturing debt. Yields were lowered as much as 15 basis points in repricing.

Chicago Mayor Rahm Emanuel’s administration said it received more than $1 billion of orders from more than 75 investors. While institutional buyers provided anchor orders on each maturity retail buyers submitted more than $39 million of orders. “Due to pre-marketing efforts and investors receptivity to the credit, the city was able to secure a true interest cost of 5.57% on the bonds,” the statement said.

In the secondary market, trading activity was mixed, according to Interactive Data. On Monday there were 43,010 trades, down from the previous Monday’s 43,346 trades. Par value rose to $5.470 billion from $5.064 billion. Institutional participation of volume traded picked up to 55% from 54%.

Tuesday’s activity was reversed with the number of trades increasing while over volume traded fell. Trades rose to 48,745 from 47,308 the week before. Volume traded fell to $7.212 billion from $8.112 billion. Institutional participation dropped down to 60% of volume traded from 64% the week before.

Wednesday, activity fell with 48,523 trades from 48,959 trades the previous Wednesday. Volume traded slipped to $8.160 billion from $10.155 billion. Institutional participation in volume fell to 63% from 70%.

For the week, yields on the Municipal Market Data scale rose. The 10-year yield increased one basis point through Thursday to 2.72% and the 30-year yield rose six basis points to 4.28%. The two-year was steady at 0.43% for the week.

The Municipal Market Advisors scale was mixed. The two-year yield slipped one basis point to 0.54% and the 10-year yield fell two basis points to 2.90% for the week through Thursday. The 30-year yield rose two basis points to 4.34%.

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