Chicago's $1.16B Deal Prices as Munis Weaken

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Top-rated municipal bonds finished weaker on Thursday, traders said, as the market interpreted comments made by Federal Reserve Board Chair Janet Yellen on interest rates as being particularly hawkish. Muni yields rose by as much 10 basis points in spots.

In the primary, the last of the week's big offerings hit the market, topped by the city of Chicago's $1.16 billion bond deal.

"It was a tough day to price deals, with the yields jumping up," said a New York trader, "But Chicago is one of those names that trades on its own, regardless of what the Municipal Market Data scale is."

Goldman Sachs priced the week's biggest deal – Chicago's tax-exempt and taxable general obligation bonds.

"At the beginning of the day, there was some talk that if the deal got any cheaper, than that might scare some people off, but that didn't prove to be true," said the New York trader. "There was fair value in the taxable portion, of course with that you have a different audience, because on the taxable side they understand credit risk as they are used to dealing with corporates."

The $888.76 million of Series 2017A tax-exempt GO project and refunding bonds were priced to yield 5.80% with a 5.625% coupon in 2029, 5.88% with a 5.625% coupon in 2030, 5.96% with a 5.625% coupon in 2031, 6.08% with a 5.75% coupon in 2033, 6.14% with a 5.75% coupon in 2034 and 6.20% with a 6% coupon in 2038.

The city's tax-exempt spreads hit a new high, landing at 339 to 347 basis points over the MMD triple-A benchmark. That compares to 229 to 253 basis points on its sale a year ago this month. The city's primary spreads hit 293 basis points in a July 2015 issue with its May fall to junk fresh on investor minds.

The deal was nearly three times oversubscribed with 145 investors participating, city financial department spokeswoman Molly Poppe said.

A New York trader said that the final pricing was not too far off from the pre-marketing scale that was put out on Wednesday. "So people had a pretty good idea of where it would come in it and what they would be getting into," the trader said.

The $274.26 million of Series 2017B taxable GOs were priced as a 2029 bullet maturity at par to yield 7.47%, about 457.5 basis points over the comparable Treasury security.

"For an investment-grade deal, it was a tremendous spread to benchmark," said a Midwest trader. "The taxables were bumped twice and still finished at or cheaper than a 12-year Greek bond – now that is interesting."

The deal is rated BBB-plus by S&P Global Ratings and Kroll Bond Rating Agency and BBB-minus by Fitch Ratings.

Barclays Capital priced the Texas Transportation Commission's $760.51 million of Series 2017 A and B general obligation mobility fund refunding bonds.

The $292.24 million of Series 2017A GOs were priced as 5s to yield from 2.68% in 2030 to 2.92% in 2034. The $468.27 million of Series 2017B GOs were priced as 5s to yield from 2.62% in 2029 to 3.01% in 2036. The deal is rated triple-A by Moody's Investors Service, S&P and Fitch.

Since 2007, the TTC has issued about $20.59 billion of debt, with the largest issuance occurring in 2014 when it sold roughly $5.52 billion of debt. The commission did not come to market at all in 2011 or 2013. The TTC has issued more than $2 billion four times and more than $1 billion eight times since 2007.

RBC Capital Markets priced the Los Angeles Department of Water and Power's $500 million of Series 2017A power system revenue bonds for institutions after holding a one-day retail order period.

The issue was priced as 5s to yield from 1.57% in 2022 to 2.98% in 2037, 3.05% in 2042 and 3.10% in 2047. The deal is rated Aa2 by Moody's and AA-minus by S&P and Fitch.

Citigroup priced the University of Massachusetts Building Authority's $352.81 million of tax-exempt and taxable project revenue bonds.

The $165.13 million of senior Series 2017-1 tax-exempt project revenue bonds were priced as 5 1/4s to yield 3.25% in 2042, as 4s to yield 3.77% in 2044 and as 5 1/4s to yield 3.30% in 2047. The $187.68 million of senior Series 2017-3 refunding revenue bonds were priced to yield 0.90% with a 3% coupon in 2017 to 3.28% with a 5% coupon in 2038. The deal is rated Aa2 by Moody's and AA-minus by S&P and Fitch.

Loop Capital priced the Pennsylvania Turnpike Commission's $284.28 million of Series 2017A turnpike subordinate revenue bonds. The issue was priced to yield from 2.11% with a 5% coupon in 2021 to 4.15% with a 4% coupon in 2035; a 2037 maturity was priced as 4s to yield 3.97%, a 2042 maturity was priced as 5 1/2s to yield 3.82% and a 2046 maturity was priced as 5 1/2s to yield 3.86%.

The deal is rated A3 by Moody's and A-minus by Fitch except for the 2037 maturity which is insured by Assured Guaranty Municipal and rated A2 by Moody's and AA by S&P.

JPMorgan Securities priced Denton, Texas' $214.89 million of Series 2017 utility system revenue bonds. The issue was priced as 5s to yield from 1.48% in 2019 to 3.46% in 2036. The deal is rated Aa-minus by S&P and A-plus by Fitch.

In the competitive arena, the University of Houston System Board of Regents sold two separate deals totaling $391.09 million.

Bank of America Merrill Lynch won the $379.45 million of Series 2017A consolidated revenue and refunding bonds with a true interest cost of 3.41%. The issue was priced as 5s to yield from 1.05% in 2018 to 3.21% in 2038.

Robert W. Baird won the $11.64 million of Series 2017B taxable consolidated revenue and refunding bonds with a TIC of 3.62%. Both sales are rated Aa2 by Moody's and AA by S&P.

 

Secondary Market

The 10-year benchmark muni general obligation yield rose nine basis points to 2.26% from 2.17% on Wednesday, while the yield on the 30-year GO increased nine basis points to 3.01% from 2.92%, according to the final read of Municipal Market Data's triple-A scale. Some intermediate maturities rose as much as 10 basis points.

On Wednesday, the Fed's Yellen said she wasn't able to predict when rates will be raised or how high they will go, but suggested a "few" increases each year until the fed funds rate target nears 3% by the end of 2019. She added the U.S. economy is "close" to the Fed's dual mandate of price stability and full employment.

"Fed Chair Yellen used to be the dove that kept Fed governors in line," MMD Senior Market Analyst Randy Smolik wrote in a Thursday market comment. "Now, she looks to hasten the process of rate normalization as inflation and economic activity have met Fed targets. Her words of a few rate hikes a year through 2019 resonated in weaker Treasury trading."

The yield on the two-year Treasury rose to 1.22% from 1.19% on Wednesday, while the 10-year Treasury yield gained to 2.46% from 2.39%, and the yield on the 30-year Treasury bond increased to 3.03% from 2.99%.

The 10-year muni to Treasury ratio was calculated at 91.9% on Thursday compared to 90.8% on Wednesday, while the 30-year muni to Treasury ratio stood at 99.2%, versus 97.8%, according to MMD.

 

Tax-Exempt Money Market Fund Outflows

Tax-exempt money market funds experienced outflows of $829.3 million, bringing total net assets to $130.81 billion in the week ended Jan. 16, according to The Money Fund Report, a service of iMoneyNet.com. This followed an inflow of $1.37 million to $131.64 billion in the previous week.

The average, seven-day simple yield for the 236 weekly reporting tax-exempt funds decreased to 0.23% from 0.24% in the previous week.

The total net assets of the 863 weekly reporting taxable money funds decreased $26.25 billion to $2.506 trillion in the week ended Jan. 17, after an outflow of $14.38 billion to $2.532 trillion the week before.

The average, seven-day simple yield for the taxable money funds increased to 0.26% from 0.25% in the previous week.

Overall, the combined total net assets of the 1,099 weekly reporting money funds fell $27.08 billion to $2.637 trillion in the week ended Jan. 17 after outflows of $13.01 billion to $2.664 trillion in the prior week.

 

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