Chicago Led Tumultuous Week in MuniLand

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If municipal bond traders were asked to sum up the week in only one word, that word would have to be Chicago. And for Chicago, that word would have to be bittersweet.

The Windy City came to market with its first general obligation bond deals since being downgraded by three rating agencies in Mid May.

The good news -- the city got the deals in and done amid all the uncertainty and turbulence surrounding the credit after recent credit rating cuts. The bad news -- it paid a high price for getting them done.

The underwriting syndicate led by Bank of America Merrill Lynch was inundated with orders for the $670 million of GOs done in four separate issues, according to market participants.

But that may have been so because the spread on Chicago's 10-year GOs was a whopping 293 basis points over Municipal Market Data's triple-A benchmark scale. Last year, the spread on the city's 10-year GOs over the MMD benchmark was 145 basis points. It was 84 basis points in 2013.

"Execution was the primary risk and the city needed all these deals done," Matt Fabian, a partner at Municipal Market Analytics, told The Bond Buyer. "I think this shows that at these prices, Chicago has exceptional market access. They got their market access, but it came at a cost."

The sale came after the recent downgrade of Chicago by Moody's Investors Service to the junk rating of Ba1 because of challenges posed to the city's pension reforms after a state Supreme Court ruling said Illinois pension changes were unconstitutional.

Standard & Poor's and Fitch Ratings then also cut the city rating, but kept it within investment grade territory. Both agencies cited liquidity risks posed by the Moody's downgrade. Kroll Bond Rating Agency, however, affirmed the city's rating. The GOs were rated A-minus by S&P, BBB-plus by Fitch and A-minus by Kroll. Moody's was not asked to rate the GO deal.

The city sold the GOs to convert outstanding floating-rate securities to fixed-rate bonds. The city will also use its short-term borrowing program to complete the $800 million conversion, which cuts down on bank credit risk, which had threatened the city's liquidity.

And Chicago will return to the market in the upcoming week when it converts about $112 million of variable-rates to fixed-rate. RBC Capital Markets on Wednesday will price the sales tax revenue bonds, which were originally sold in 2002.

There was a lot of other action in the primary as well during the week with Pennsylvania competitively selling $1.24 billion of GOs. BAML won the bonds, which were rated Aa3 by Moody's and AA-minus by Fitch, with a true interest cost of 3.11%.

"The Pennsylvania deal clearly came in very attractive," said a New York trader, "and I would suspect that the deal did well."

Also in the competitive arena, Orange County, Fla., sold $154.2 million of Series 2015 tourist development tax refunding revenue bonds. JPMorgan won the issue with a TIC of 3.03%. The issue was rated Aa3 by Moody's, AA-minus by S&P and AA by Fitch.

And Atlantic City competitively sold $12 million of Series 2015B GOs under the state of New Jersey's Municipal Qualified Bond Act, which is intended to facilitate distressed municipal issuers' access to the capital markets. Bank of America Merrill Lynch won the bonds with a TIC of 6.06%. The issue was rated A-minus by S&P.

Secondary Market

Prices of top-rated municipal bonds finished stronger on Friday. The yield on the 10-year benchmark muni general obligation fell four basis points to 2.19% from 2.23% on Thursday, while the yield on the 30-year GO closed down four basis points to 3.16% from 3.20%, according to the final read of Municipal Market Data's triple-A scale.

On the week, the yield on the 10-year muni was 11 basis points lower from a week earlier, while the yield on the 30-year muni was down by 12 basis points.

Treasury prices were higher on Friday as the yield on the two-year Treasury note decreased to 0.61% from 0.63% on Thursday, while the 10-year yield dropped to 2.09% from 2.13% and the 30-year yield declined to 2.84% from 2.89%.

The 10-year muni to Treasury ratio was calculated on Friday at 102.0% versus 104.6% on Thursday, while the 30-year muni to Treasury ratio stood at 109.7% compared to 110.8%, according to MMD.

Tax-Exempt Bond Funds Saw Outflows

For the fourth straight week, municipal bond funds reported outflows, bringing to seven out of 22 weeks in 2015 the funds have suffered cash withdrawals.

The weekly reporting funds saw $205.255 million of outflows in the week ended May 27, after experiencing outflows of $91.046 million in the previous week, according to the latest Lipper data. So far this year, the funds have had outflows in seven weeks.

The four-week moving average turned negative at 134.944 million after being positive $36.683 million in the previous week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.

Long-term muni bond funds also experienced outflows, losing $120.475 million in the latest week, after outflows of $150.257 million in the previous week. High-yield muni funds recorded an outflow of $117.290 million in the latest reporting week, after outflows of $132.141 million the previous week. It was also the fourth straight week of outflows for both the long-term and high-yield funds.

However, intermediate-term funds recorded inflows of $20.142 million after inflows of $93.520 million in the prior week. And exchange-traded funds had inflows of $42.357 million, on top of inflows of $82.057 million in the previous week.

The Week's Most Actively Quoted Issues

Puerto Rico and California issues were among the most actively quoted in the week ended May 29, according to data released by Markit.

On the bid side, the Puerto Rico commonwealth GO 8s of 2035 were quoted by 14 unique dealers. On the ask side, the Riverside County Public Financing Authority revenue 4 1/8s of 2040 were quoted by 17 dealers. And among two-sided quotes, the Puerto Rico commonwealth GO 8s of 2035 were quoted by 11 dealers, Markit said.

 

The Week's Most Actively Traded Issues

Some of the most actively traded issues in the week ended May 29 were in Wisconsin, Puerto Rico, and Chicago names, according to Markit.

In the revenue bond sector, the Wisconsin Public Finance Authority 4 1/4s of 2041 were traded 68 times. In the GO bond sector, the Puerto Rico commonwealth 8s of 2035 were traded 73 times. And in the taxable bond sector, the Chicago Transportation Authority's sales and transfer tax receipt revenue 6.899s of 2040 were traded 23 times, according to Markit.

 

Bond Buyer Visible Supply

The Bond Buyer's 30-day visible supply calendar increased $2.50 billion to $13.99 billion on Friday. The total is comprised of $5.63 billion competitive sales and $8.36 billion of negotiated deals.

 

MSRB Previous Session's Activity

The Municipal Securities Rulemaking Board reported 44,134 trades on Thursday on volume of $12.970 billion.

The most active bond, based on the number of trades, was the Riverside County Public Financing Authority, Calif.'s Series 2015 capital facilities project lease revenue bonds 4 1/8s of 2040, which traded 177 times at an average price of 100.134 with an average yield of 4.094%. The bonds were initially priced at 97.308 to yield 4.30%.

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