Why Retail Will Take a Big Bite of Big Apple GOs

litvack-david-ustrust-357.jpg

Just as the Big Apple is starting to cool off from its late July swelter, demand for a New York City general obligation deal is heating up among supply-starved retail investors, according to municipal traders and analysts.

"We believe it will be oversubscribed and sell well across the curve," David T. Litvack, managing director and head of tax-exempt research at U.S. Trust, Bank of America Private Wealth Management Litvack said last week. The deal will have a two-day retail order period starting on Friday, with the institutional pricing set for Tuesday.

Although he couldn't predict what maturities would see the most interest, Litvack said demand will be heavy based on the current "extremely positive" technical environment for municipals.

Others predict that the most retail demand will fall on the short end of the curve – 10 years and under to mirror recent buying patterns.

A decline in volume year to date, and the overall strength of the municipal market should be the catalysts of demand for the largest of the city's planned offerings – an $800 million sale of tax-exempt fixed-rate GOs.

The supply of NYC GO bonds pales in comparison to the "relatively steady flow" of both Metropolitan Transportation Authority and Transitional Finance Authority revenue bonds recently in the market, a New York trader said on Monday.

The last time New York City sold GOs in the primary market was May 18 when Bank of America Merrill Lynch priced $800.45 million of Fiscal 2016 Series E and F for institutions after a two-day retail order period.

At the time of the pricing, the $775.46 million of Series E GOs were priced to yield from 0.58% with a 5% coupon in 2017 to 2.88% with a 3% coupon in 2036. The $24.99 million of Series F GOs were priced to yield from 0.45% with a 2% coupon in 2016 to 2.77% with a 3% coupon in 2034.

New York City GOs are rated Aa2 by Moody's Investors Service and AA by S&P Global Ratings and Fitch Ratings.

Now, strong market technicals should be a key driver of demand and help offset the overall supply shortage, historically low yields, and seasonal factors when the city makes a return to market, municipal professionals agreed.

"Demand has been high, with 42 consecutive weeks of inflows into municipal bond mutual funds, while supply was down 3.6% for the first of this year," Litvack said. "With an otherwise modest calendar during the last week in July and a manageable 30-day visible supply, we would expect a high-quality and liquid credit like New York City will sell well across the curve."

The Bond Buyer's 30-day visible supply calendar increased $641.7 million to $12.44 billion on Tuesday. The total is comprised of $4.37 billion of competitive sales and $8.07 billion of negotiated deals.

Other experts used last week's MTA deal as a gauge for demand ahead of the latest GO sale.

When that deal was repriced and restructured by Wells Fargo Securities on July 20, it was increased to $863.86 million to take advantage of the strong demand for New York paper.

The MTA bonds are rated A1 by Moody's, AA-minus by S&P, A by Fitch, and AA-plus by Kroll Bond Rating Agency.

The deal ranged in yield from 0.60% with a 3% in 2017 to a split maturity in 2056 that offered a 2.71% yield with a 5 ¼% coupon and 2.79% yield with a 5% coupon.

"A large portion was structured as a put in 2020 tailored to where demand is the strongest – seven years and shorter," Peter Delahunt, managing director of the municipal bond department at Raymond James & Associates said on Monday.

The $273.54 million of Series 2016C-2b transportation revenue refunding tender option bonds were priced as 5s to yield 1.16% in 2034 with a mandatory put in 2020.

Delahunt expects demand to chase similar coupons and maturity structures on the NYC GO deal, which should also satisfy some of the summer reinvestment needs among cash-laden retail investors.

"June, July and August are the largest redemption months for the [principle and interest] rollover on New York muni bonds, so there should be a decent amount of money to be put to work this summer in New York, even if only 75% finds its way back to the muni market," Delahunt said.

Traders agreed that summer reinvestment needs, as well as strong demand year to date due to the outperformance of municipals over Treasuries will prompt retail investors to take a large bite out of the Big Apple's newest deal.

"Given the amount of money in the market, and that the recent bellwether deals were well received, I suspect the deal should do very well," the New York trader said on Monday.

"There's a lot of money in the market and clearly now that percentages have backed up a little bit, we are more attractive than Treasuries compared to a few weeks ago," the trader added on Monday, when the yields on 10-year and 30-year triple-A municipals were 92.1% and 93.8% of the comparable U.S. Treasury yields, respectively, according to Municipal Market Data.

The traded cited strong demand for 4% coupons from recent New York City deals now trading in the secondary market.

"There is some retail demand for the 3% handles depending on where on the curve you are," said. Still, "that's not going to be easy" with the upcoming NYC sale due to the historically-low yields on generic high-grade paper.

For example, the 30-year triple-A GO scale in 2046 closed at a 2.15% yield on Monday, unchanged from last Friday, July 22, according to MMD.

Goldman, Sachs & Co. will lead manage the city's new tax-exempt, fixed-rate GO deal, which also includes a $60 million series of tax-exempt bonds, which will be converted from variable-rate demand bonds to fixed-rate bonds. That, and the $800 million tax-exempt fixed-rate portion, will price for institutions on Tuesday.

Serving as co-senior managers with Goldman will be Bank of America Merrill Lynch, Citigroup, Jefferies, JPMorgan, Loop Capital Markets, Ramirez & Co., RBC Capital Markets, Siebert Brandford Shank & Co. and Wells Fargo Securities.

Also on Tuesday, the city will competitively sell $250 million of taxable fixed-rate new money bonds.

The city also intends to price about $380 million of tax-exempt VRDBs on Aug. 17, bringing the total sale of GOs this month to $1.49 billion.

"Using a broad brush, the other market deals have been well-received and I don't see any reason this [NYC GO deal] should not be well received given that the market is kind of slow and the summer doldrums have finally taken hold," the New York trader said.

For reprint and licensing requests for this article, click here.
Buy side
MORE FROM BOND BUYER