Investors say they are not interested in the high-credit issuances coming to market this week because the bonds are likely to be too expensive.
"With high-grade, the credit quality and the safety are there," a trader in New York said. "But do you want to buy into something so high in price at this point?"
Several of the top negotiated issuances scheduled for this week earned exceptional ratings, with the Texas Public Finance Authority's $700.2 million unemployment compensation obligation assessment revenue refunding bonds on Thursday receiving Aaa by Moody's and AAA by S&P and Fitch. The New Jersey Economic Development Authority's two-part $1.2 billion sale of school facilities construction refunding bonds coming to market on Wednesday were given A1 from Moody's, A from S&P and A-plus from Fitch.
Even the largest competitive issuance this week — the State of California's two-part $750 million general obligation sale on Tuesday — earned A1 from Moody's and A from S&P and Fitch.
"I do not have a lot of money to spend right now, so I'm not focusing on any new deals," a second trader in New York said. "I do not think that is where the value is.
This year's lack of issuance has driven up prices for highly-rated municipal bonds.
Strategists are still advising investors to purchase the bonds despite their expense.
"High quality is a priority," Morgan Stanley said in a report released on Thursday. "Recommended ratings beyond our mid-A GO and mid-BBB and higher essential service revenue focus are public power at or above Baa2/BBB, state housing finance agencies Aa3/AA- and higher, higher education A2/A or better, not-for-profit hospitals at or above Aa3/AA- and airports A2/A and higher."
In an emailed report Friday, U.S. Bank's Wealth Management Group's head of fixed income Jennifer Vail, and senior fixed income strategist Dan Heckman, said they continue to prefer muni bonds of higher credit quality in the four- to eight-year maturity range, where they see better rolldown opportunities.
"Strategists are trying to talk people into buying higher credits, but at the same time spreads are very compressed at the upper end of the credit scale," the first trader in New York said. The second trader from New York said he finds value in the single A, single B range.
"I think if you do your research you can find value in some overlooked bonds," he said. "I'm mainly looking in the secondary at the healthcare sector, hospitals, certain colleges and universities, and certain local credits."
Investors are looking at the slightly lower-rated State of Illinois' $750 million GO scheduled for sale on Thursday.
Investors expect the sale to offer higher yields than other issuers coming to market, even after the value of the GOs stabilized with the approval an overhaul of two of the state's four pension plans.
The second trader in New York called the Illinois GO the "big deal" for the week and said that it certainly would be cheaper than other state GOs.
"Illinois is one of the lower rated states," he said. "There is still an issue about their pensions, and what they are going to do. The state of Illinois is one of the cheaper names."
Illinois has been plagued with pension-related problems largely stemming from Chicago's four pension plans. Moody's estimated on April 10 that net pension liability for Chicago's four plans was $32 billion, or eight times operating revenue, in 2012.
Illinois approved the reform of two of these pension systems in early April, which put the municipal and laborer plans on a path to reach a 90% funded ratio by 2055. Moody's described this event as "modestly credit positive" in the report.
Though the Illinois GO offers an opportunity to add yield to portfolios, investors are concerned that the spreads for Thursday's issuance may be tight.
When Illinois issued $1 billion GO bonds on Feb. 6 the spread for bonds maturing in 2024 over the triple-A benchmark were narrower than the spread for the state's $1.3 billion sale in June 2013. Yields for the Feb. issuance were 129 basis points above the benchmark compared to 165 basis points in June.
Muni yields rose on the long end on Monday jumping up two basis points for bonds maturing in 18-to 30-years. The rest of the curve held steady, according to MMD. Municipal Market Advisors reported mixed yields, with the two-year holding steady at 0.38%, the 10-year increasing by one basis point to 2.31%, and the 30-year falling by one to 3.68%.
Treasuries strengthened, with the 30-year yields falling three basis points to 3.53% and the 10-year benchmark sliding one basis point to 2.72%. Two-year notes were unchanged at 0.40%.
