Illinois issuance coming to market this week will be able to shake off Standard & Poor's lowering the outlook on the state's A-minus rating to negative last week, according to market participants.
Deals associated with the state such as the $285 million sale of Illinois Sports Facilities Authority state tax supported refunding bonds that Barclays Capital is expected to price this week will still receive heavy demand because issuance this week is low, according to investors.
Issuance is predicted to total $4.2 billion this week, down nearly a third from $6 billion last week, according to data provided by The Bond Buyer and Ipreo.
"There is probably good interest on the [Illinois] bonds based on the fact there's a limited supply of higher yielding paper in the market place, due to a dislocation of the Puerto Rico market, and what's going on there," a trader in Chicago said.
Just last week high-yield muni bond funds reported inflows of $307.7 million, compared with outflows of $59.5 million the previous week, according to Lipper FMI data.
"Illinois will be same situation [and trade at a tighter spread]," a trader in Texas said. "People are starved for yield, if the numbers makes sense the buy side will do their work and put their own rating on [the Illinois bonds] from a numbers perspective. I think folks will still be clamoring for yield."
The Illinois Sports Facilities Authority bonds received an A from S&P and a triple-B plus from Fitch Ratings.
A second trader in Chicago pointed out the bond could see some problems because they are funded by a state tax.
"It's a tax-supported sports facilities refunding," he said. "Because its tax supported there may be a spillover effect from the [Illinois] ratings [outlook] downgrade; this may be an interesting one to watch."
Investors also said that the low issuance will increase demand for the headline negotiated deal for the week, a $744.29 million California State University system wide revenue bond offering that Barclays Capital is scheduled to price on Thursday. California ranked second in issuance for the first half of 2014, behind Texas.
While the Golden State has been among the top issuers this year it's tapped the market for considerably less debt than in 2013. Volume totaled $19.62 billion as of June 30, down 27.8% from the same period in 2013, according to data provided by The Bond Buyer and Ipreo.
That reduction in supply probably means that the California State University deal will place easily and be bid on aggressively.
"The California State University deal will be an [expletive] show," the second trader in Chicago said. "Translation: that it will get good interest."
Traders also pointed to the large amount of Texas issuance scheduled this week as something that stands out on the week's sparse calendar. The trader in Texas estimated that total Texas issuance would reach a little over $1 billion for the week.
The largest Texas deal expected to come to market is the San Antonio general improvement refunding bonds Piper Jaffray is scheduled to price on Tuesday. The deal totals $230.65 million and is rated triple-A by Moody's Investors Service and S&P.
"San Antonio will do well," the trader in Texas said. "Its triple-A rated, and will set tone this week."
The first trader in Chicago said that while he thinks there will be high demand for high-yielding paper, the market will continue to have an appetite for high-grade bonds.
The market remained quiet on Monday. The trader in Texas said that even the secondary market was slow because most of the deals that have come to market were put away and "there has not been much float".
Investors attributed the hush that fell over the market on Monday to market participants preparing themselves for a bombardment of economic data scheduled for later in the week.
The heavyweight releases are expected to start Wednesday when the gross domestic product number is announced in the morning, followed by Federal Open Market Committee meeting minutes in the afternoon. Thursday's jobless claims data and the employment situation report on Friday will also hold the market's attention, according to investors.
"The thing to bear in mind is that we have a huge economic calendar this week. People are reluctant to do anything before they find out what the Fed is doing and before payrolls are announced," the first trader in Chicago said. "People are apprehensive to do anything before the numbers come out."
The trader in Texas said it was "a typical summer Monday," and agreed the economic numbers would be key factors in trading decisions this week.
"By far one of the bigger numbers is jobless claims on Thursday, and unemployment on Friday is the largest number people will focus on," he said. "They will drive [the market] and beat the tent on how deals will go into the market."
The competitive calendar next week is expected to remain light, with only one deal over $100 million scheduled to price. The city of Suffolk, Virginia, plans to sell $124.745 million of general obligation bonds on Wednesday.
The deal is serialized, with maturities ranging from 2015 to 2042. S&P has the deal rated AAA, while Fitch Ratings rated it AA+. Moody's Investors Service rated the deal Aa1.
Proceeds will go toward various capital improvement projects, as well as retire some of the issuer's outstanding debt. The issuance will raise the city's debt load to $361.4 million.
Municipal bond yields held steady across the curve on Monday, according to Municipal Market data's triple-A scale.
The two-year held steady at 0.31%, the 10-year at 2.19%, and the 30-year at 3.38%, according to Municipal Market Advisors' data.
Treasuries weakened Monday, as the 10-year benchmark climbed three basis points in yield to 2.50% and the 30-year yields jumped two basis points to 3.26%. The yield on two-year notes inched up one basis point to 0.51%.
