Municipal bond prices were mixed to lower in a hesitant market Tuesday, but at least one bond seller came out on top.
With 10 underwriters vying for $750 million of tax-exempt and taxable bonds, the state of California propped up the municipal market with a competitive sale that came in at yields below the state's issuance in March.
In tight bidding between the competing institutions, Wells Fargo Bank won $175 million of taxable California general obligations with a true interest cost of 2.144%.
The bank also won the larger $575 million tax-exempt portion, which received eight bids, with a true interest cost of 3.715%.
"It was really aggressively priced," one trader in New Jersey said in an interview. "They had a couple of bidders right in there for that issue and it came pretty aggressive."
Yields on the tax-exempt bonds ranged from 2.55% with a 5% coupon maturing in 2024 to 3.90% with a 5% coupon in 2044. In the state's $1.8 billion negotiated deal in March, bonds with a 5% coupon maturing in 2043 were sold with a 4.22% yield.
The municipal market was tepid overall Tuesday, with losses on bonds maturing in the intermediate range and some firming on long-term bonds, according to Municipal Market Advisors.
"There were a few people buying on the long end but we didn't see a lot of firmness today," the trader said. "It seemed pretty sideways."
Municipal Market Data reported short and long-term muni bonds as unchanged, with the intermediate part of the curve weakening by as much as two basis points.
"This is an excellent result for taxpayers, and it shows California's bonds continue to gain strength in the market," state Treasurer Bill Lockyer said in an emailed statement.
"The prices are better than we expected, and the yields we received beat secondary market prices," he wrote. " Now, our GO program can take a little breather while the governor and legislature work to craft the State's FY 2014-15 budget."
The yield on 10-year California bonds sold in the tax-exempt deal was 2.55%, compared with MMD's California scale at 2.63% on Monday. Nevertheless, the state still paid a penalty of 28 basis points compared with the MMD triple-A scale.
The California deal presented an opportunity for buyers looking to get yield without taking on too much risk, traders said. With issuance touching the lowest in more than a month during the Good Friday holiday week, investors were eager to scoop up the competitive bonds.
"I think the bond rating is a little bit in between and I think that's sort of why it sees a lot of interest like that," the New Jersey-based trader said. "There's a lot of money that's been on the sidelines and you get a nice big deal like that with some yield."
In August, Citi and JPMorgan each won bids for a portion of a $764 million California competitive deal. JPMorgan also won the competitive bid for $540 million of refunding bonds in the state's previous competitive issue in October 2012.
"The sale comes on the heels of positive revenue reports that have beat budgeted estimates in recent months and consistent improvements in economic indicators throughout the state," Elizabeth Foos, a municipal credit analyst at Morningstar, said in a report Monday.
With just $2.05 billion of new bonds offered in holiday shortened trading last week, buyers are hungry for fresh paper.
"I think there are still a lot of people out there that will reach for a little bit of yield," a New York-based trader said in an interview. "I want to see how California and Illinois do."
Illinois is scheduled to come to market Thursday with a $750 million general obligation sale.
The California deal is the state's second GO issuance this year. In March, the state issued $1.79 billion of GOs that were predominately taken by retail buyers.
Retail orders that took up at least 66% of the offering enabled the state to reprice bonds and sell 5% coupons in 2043 with a yield of 4.22%.
"As the economy has recovered and revenue has exceeded expectations, California spreads have narrowed, with some analysts anticipating an upgrade in coming month," Alan Schankel, managing director at Janney Capital Markets, wrote Tuesday morning.
Total municipal volume this week could reach $7.48 billion, according to data from Ipreo and The Bond Buyer. Issuance in the prior week was just $2.05 billion.
"I think the market could use some issuance," the trader in New York said. "It was very slow again yesterday but today it feels like there's a little bit more going on."
Bond yields were weaker Tuesday morning, according to Municipal Market Data's AAA scale, with maturities between 2019 and 2024 weakening by as much as three basis points.
Treasuries were mostly unchanged, with the 10-year benchmark yield steady at 2.72%, and the 30-year bond down one basis point to 3.50%. Two-year yields were up two basis points at 0.42%.
In the negotiated market, the Ohio Water Development Authority held $334.5 million of revenue bonds for a retail order period. Yields on the bonds ranged from 0.99% with a 4% coupon in 2018 to 2.50% with a 5% coupon in 2024.
The bonds, sold by Morgan Stanley, are rated Aaa by Moody's Investors Service and AAA by Standard & Poor's, and do not feature an optional call.
Pennsylvania's turnpike commission also held a retail order period for $208 million of subordinate revenue and motor license bonds.
Yields on the deal ranged from 0.36% with a 2% coupon in 2014 to 4.4% with a 5% coupon in 2043.
The bonds, rated A3 by Moody's and A-minus by S&P and Fitch Ratings, were also led by Morgan Stanley. They feature an optional par call in 2024.
