The Dormitory Authority of the State of New York priced its $3.39 billion of bonds, most likely the last big sale of 2019. Although the deal got done and was repriced with lower yields, some buyers had a hard time justifying value in the marketplace with so few options to choose from in the primary.
Primary market
Morgan Stanley ran the books on the Dormitory Authority of the State of New York’s (Aa1/NR/AA+/NR) $1.999 billion of tax-exempt general purpose personal income tax revenue bonds on Wednesday.
The DASY deal found a home with many investors Wednesday after its official pricing — and will have an influential impact on the market going forward, according to a municipal market veteran who participated in the deal.
“A large deal like DASNY will pretty much set the benchmark,” Howard Mackey, managing director at NW Financial in Hoboken, N.J., said. “Underwriters will be pricing off of it for smaller deals where spreads will be comparably wider than DASNY because small deals have less liquidity and spreads are typically 30 to 40 basis points wider for smaller deals."
Although his firm was in the selling group, Mackey said he couldn’t comment on the final pricing or demand Wednesday afternoon after the pricing.
He did note that the 5- and 10-year maturities were priced 55 and 8 basis points above the generic triple-A general obligation scale at the time of pricing — which wasn’t much change from the preliminary scale on Tuesday.
“I suspect the issue probably got done — generally deals of this size price to clear the market and adjust spreads to build a book throughout the yield curve,” Mackey said.
Morgan Stanley also priced DASNY’s (Aa1/NR/AA+/NR) $1.394 billion of 2019F federally taxable PITs.
“New pricing is very fair — a lot of bonds, but good value,” said one New York trader. "[You] can’t buy anything out there at these prices.”
Another New York City trader added that the small calendar is the reason.
"It was much different to buy bonds at these prices when there were more deals and variety," he said. "But when the calendar is $5 billion, it is much easier to get value by going to the secondary."
He said next week likely will be more of the same.
"I would think the calendar will get back to normal during the first full week of January," the second trader said.
The Florida Water Pollution Center Finance Corp. (Aaa/AAA/AAA) sold $215.73 million of taxable revenue refunding bonds competitively. JP Morgan won the bonds with a true interest cost of 2.3204%.
One money manager echoed the sentiment of the traders sentiment of where the value is right now.
"We have not been paying attention to the primary lately," said Michael Pietronico, CEO, Miller Tabak Asset Management. "All of our interest is in the secondary market where we see better value."
For an inefficient market, munis have proven to be quite efficient with all of the complicated pieces fitting together quite nicely, according to Jeffrey Lipton, managing director and head of municipal research and strategy at Oppenheimer.
“The fourth quarter has been all about an awakening of supply, with the twist of heavy taxable issuance given the presence of compelling advance refunding conditions for outstanding tax-exempt debt,” Lipton said.
He added that if January proves to be a typical “January effect” month with smaller weekly calendars, there is the potential to book good performance.
“If the refunding math holds in — and we think it will — we can expect to see a continuation of outsized taxable issuance at least through the first quarter,” he said. “Our volume forecast for 2020 falls within the range of $420 and $440 billion and we are thinking that 20% to 22% of this total will come taxable.”
Secondary market
Munis were mixed on the MBIS benchmark scale, with yields unchanged in the 10-year maturity and rising by less than a basis point in the 30-year. High-grades were mixed, with yields on MBIS AAA scale increasing by less than one basis point in the 10-year and decreasing by four basis points in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year increased one basis point to 1.43% and the 30-year increased three basis points to 2.07%.
The 10-year muni-to-Treasury ratio was calculated at 74.5% while the 30-year muni-to-Treasury ratio stood at 88.1%, according to MMD.
Treasuries were higher and stocks were in the green.
The Dow Jones industrial average was up about 0.10% as the S&P 500 Index rose 0.11% while the Nasdaq gained 0.28%.
The Treasury three-month was yielding 1.546%, the two-year was yielding 1.631%, the five-year was yielding 1.735%, the 10-year was yielding 1.921% and the 30-year was yielding 2.350%.
ICI: Muni funds see $2.29B inflow
Long-term municipal bond funds and exchange-traded funds saw a combined inflow of $2.291 billion in the week ended Dec. 11, the Investment Company Institute reported on Wednesday.
It was the 49th straight week of inflows into the tax-exempt mutual funds and followed a revised inflow of $2.273 billion in the previous week.
Long-term muni funds alone saw an inflow of $2.076 billion after a revised inflow of $1.739 billion in the previous week; ETF muni funds alone saw an inflow of $215 million after a revised inflow of $534 million in the prior week.
Taxable bond funds saw combined inflows of $10.193 billion in the latest reporting week after revised inflows of $9.763 billion in the previous week.
ICI said the total combined estimated flows from all long-term mutual funds and ETFs were negative $855 million after inflows of $9.832 billion in the prior week. Equities accounted for the biggest plunge, with an outflow of 10.906 billion.
Previous session's activity
The MSRB reported 37,046 trades Tuesday on volume of $10.981 billion. The 30-day average trade summary showed on a par amount basis of $11.67 billion that customers bought $6.37 billion, customers sold $3.32 billion and interdealer trades totaled $2.08 billion.
California, New York and Texas were most traded, with the Golden State taking 14.743% of the market, the Empire State taking 11.976% and the Lone Star State taking 10.328%.
The most actively traded security was the Metropolitan Pier and Exposition Authority’s revenue bonds, 5s of 2050, which traded 19 times on volume of $42.13 million.
Treasury auctions floating-rate notes
The Treasury Department Wednesday auctioned $18 billion of one-year 10-month floating-rate notes with a high discount margin of 0.260%, at a 0.300% spread, a price of 100.072963.
The bid-to-cover ratio was 4.17.
Tenders at the high margin were allotted 88.64%.
The median discount margin was 0.255%. The low discount margin was 0.220%.
The index determination date is Dec. 16 and the index determination rate is 1.540%.
Gary E. Siegel contributed to this report.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
