Market Close: Detroit Water/Sewer Sparks Muni Strength

Traders expect that today’s active primary and secondary markets will spur municipal market scales to follow closer in line with the strengthening Treasury market.

After days of limited supply, Wednesday's primary priced some large deals, including the highly anticipated the Detroit Water and Sewer Department deal, a School District of Detroit note, and a Virginia Public Building Authority issue, according to data provided by Ipreo. Even the market's secondary was active on Wednesday, with the State of Maryland's 3s of 2028 picking up $59 million in trades.

Market participants were hopeful that the flurry of activity would push municipal scales more in line with the Treasury market.

"There's been a larger than normal lag between Treasury and municipal movement this summer thanks to the supply environment," said a New York City based trader. "The size and variety of ratings and durations coming to market may be able to remedy it."

The Treasury market has rallied across the curve in recent months. Today's 30-year market close, 3.11%, is the lowest since May 2013, according to data provided by Bloomberg. The 10-year Treasury has also strengthened, closing at 2.36% on Wednesday, just five basis point shy of the 52-week low.

Municipals also have strengthened, but not to the same degree, the New York trader said. Today's two-year remained unchanged at 0.30% while the 10- and 30-year strengthened two basis points each to 2.09% and 3.24% respectively, according to Municipal Market Advisor's triple-A 5% scale.

The Municipal Market Data triple-A 5% scale echoed the muted strength, with bonds maturing between 2015 and 2022 unchanged and those maturing between 2023 through 2044 tightening one basis point, according to data provided by TM3.

POWERFUL PRIMARY

Wednesday's aggressive pricing in the primary may allow those scales to break out and chase the rally seen in Treasuries, said the New York trader and a New Jersey-based trader.

The $438.5 million Virginia Public Building Authority issue was well received. Its $129.17 million Series 2014A segment was priced to yield 0.13% on a 5% coupon in 2015 to 3.26% on a 4% coupon in 2035, according to Ipreo. The $309.38 million portion was priced to yield 0.13% on a 5% coupon in 2015 through 2.92% on a 3% coupon in 2027. Both portions were rated AA-plus by Standard & Poor's and Fitch Ratings and Aa1 by Moody's Investors Service.

Investors hunting for yield bought up the $37.39 million Dallas/Fort Worth International Airportjoint revenue refunding deal issued on Wednesday. Rated A-plus by S&P and A by Fitch, the bonds were priced to yield from 0.41% on a 4% coupon in 2016 to 2.85% on a 5% coupon in 2027. The bonds included an optional call feature in November 2022.

The School District of Detroit also tapped the negotiated market with a $106 million state aid revenue notes deal issued by the Michigan Finance Authority, according to Ipreo. The authority issued a one-year note with an August 2015 maturity priced to yield 2.85%.

The biggest transaction in the primary market was the headline Detroit Water Sewer Department deal, a key component of the Detroit bankruptcy recovery plan. Traders jumped at the $1.8 billion deal, which drew $7.6 billion in orders.

The deal comprised $855 million of senior and second lien water bonds and $937 million of senior and second lien sewage bonds, with most coupons set at 5%.

Insured tranches priced between 20 and 30 basis points cheaper.

On the water enterprise bonds, the final 2037 maturity on an insured senior lien series yielded 4.52% while a 2028 maturity on another insured senior lien series yielded 4.09%. Assured Guaranty wrapped both series. A senior lien uninsured series paid a high yield of 4.73% in 2034. A second lien series insured by National Public Finance Guarantee paid 4.87% on a 2036 maturity. A second lien uninsured series paid 2.17% on the final maturity in 2018.

On the sewer revenue bonds, a senior lien uninsured term bond in 2044 paid 4.85%. A senior lien uninsured term bond in 2044 subject to the alternative minimum tax paid a yield of 5.10%. A senior lien series insured by Assured paid 4.42% on a 2033 maturity. A senior lien uninsured series paid 4.68% on a 2033 maturity. A second lien series insured by National paid 4.87 % for a 2036 maturity. A second lien uninsured series paid 2.17% on its final maturity in 2018.

Though the deal was oversubscribed, some market participants were disappointed with the lack of yield, given the riskiness of the credit. Traders said the deal took advantage of the slow pre-holiday week to garner interest from the supply starved market.

STRONG SECONDARY

Strength from the primary spilled over into secondary markets, with the State of Maryland's 2014 general obligation deal picking the most trades since its issuance in July. Trading was most notable on the 3s in 2028, where yields ranged from 3.02% to 3.06% as the credit traded at a slight discount to its original offering yield of 3.0%, according to the Municipal Securities Rulemaking Board's disclosure website, EMMA.

"They're doing okay because the 2028s and 2029s are great pieces," said the New York trader. "They're retail oriented with a dollar price on the coupon. Ordinarily you have a lot of demand for the name like Maryland and you don't often get a discount like what you're seeing right now."

The interest in the intermediate part of the curve is noteworthy, as traders have been largely focused on the short end, attempting to hedge themselves against the threat of rising interest rates, the trader said. That interest was most evident during the aggressive pricing on Texas' $5.4 billion tax revenue anticipation notes deal Tuesday. The rate of 0.1326% was the lowest rate for the state's one-year notes since it began issuing TRANs in 1987, Comptroller Susan Combs said.

Maryland's GO deal made headlines in late July when it was issued because it was one of only a handful of "gold standard triple A" deals to hit the market in 2014, causing traders to speculate that its anticipated impact on the Municipal Market Data triple-A 5% scale would be large. The deal was bid on aggressively, but its impact on the MMD curve was less than anticipated: yields on the short end of the MMD curve were unchanged while the eight- to 10 year fell four basis points and the 12- to 29-year fell three.

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