Market Post: Deals Arrive as Secondary Shows a Slight Slackening in Yields

The municipal market appeared flat to slightly weaker through midday Thursday as more heavy deals priced in the primary market.

“We’re flat to drifting,” a trader in Chicago said. “There’s some more impetus to do well, as there’s still more new issuance to come this week.”

But muni participants have also taken note of a late-Wednesday report by Moody’s Investors Service that placed on review for downgrade most of Puerto Rico’s debt. Yields for much the commonwealth’s paper have climbed in the secondary, as a result. Reports in the morning showed yields on Puerto Rico paper trading at least 15 basis points higher than they did one day earlier.

The market should expect more redemptions from mutual funds consequently, the trader said.

“People thought they were buying a Connecticut fund, a Cal fund or a New York fund that didn’t necessarily have Puerto Rico in it; now the cat’s out of the bag,” he added. “This may knock some people out of their fund, because they’ll see their NAVs and want to get out. They’ll look for high-rated paper.”

Trading in the secondary market has come at a price Thursday, he said. Traders are paying up to clear transactions around 19 years and in on the yield curve.

“So far, it’s been difficult to buy on the bid side, and tough to sell on the offer,” the trader said. “No one wants to step up and no one wants to cut and run; it’s a stalemate.”

The week’s calendar still holds investors’ interest. According to market estimates, more than $11 billion should reach the market; another significant portion is expected to arrive today.

In the negotiated market, Goldman, Sachs & Co. priced $573.4 million of Foothill/Eastern Transportation Corridor Agency toll road refunding revenue bonds in three series and an additional one of junior lien toll road refunding revenue bonds.

The three series, totaling $375 million of toll road refunding revenue bonds, are rated Ba1 by Moody’s and BBB-minus by Standard & Poor’s and Fitch Ratings. They are all structured as term maturities in 2053 with mandatory tender dates ranging from 2018 through 2023.

Yields in the three series include 2.75%, 3.875% and 4.875% with coupons of 5.00%, 5.00% and 5.50%, respectively.

The fourth series, $198.7 million of junior lien toll road refunding revenue bonds, is rated Ba1 by Moody’s and BB-plus by S&P and Fitch. Yields range from 6.375% with a 6.25% coupon in 2033 to 6.625% with a 6.50% coupon in 2043.

In the competitive market, Bank of America Merrill Lynch won $571 million of Empire State Development Corporation New York State Urban Development Corporation personal income tax general purpose revenue bonds. The bonds are rated AAA by Standard & Poor’s and AA by Fitch.

Yields ranged from 3.07% with a 5.00% coupon in 2024 to 4.50% with a 5.00% coupon in 2043. The bonds are callable at par in 2023.

B of A Merrill also won $350 million of Illinois taxable general obligation bonds. They are rated A3 by Moody’s and A-minus by Standard & Poor’s and Fitch.

The bonds mature between 2014 and 2020, with a term maturity in 2038. Yields range from 0.74% with a 1.00% coupon in 2014 to 5.65% priced at par in 2038. The bonds are priced to yield 175 basis points over comparable Treasuries.

Yields on the Municipal Market Data triple-A scale had yet to be updated by midday. They started the day’s session unchanged.

Muni yields ended Wednesday flat, with the benchmark triple-A 10-year yield at 2.72%. The 30-year remained at 4.16%. The two-year held at 0.33% for a 19th straight session.

Yields on the Municipal Market Advisors benchmark triple-A scale closed the day unchanged throughout the curve. The 10-year held at 2.75%. The 30-year yield remained at 4.39%, while the two-year held at 0.36%.

Treasury yields have weakened Thursday. The benchmark 10-year yield has risen three basis points to 2.88%, while the 30-year yield has increased four basis points to 3.89%. The two-year has increased two basis points to 0.33%.

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