Market Close: Maryland GO Yields May Move MMD Triple-A Scale

Municipal bonds continued to gain Monday as traders looked ahead to Wednesday's State of Maryland general obligation deal to push yields on the Municipal Market Data triple-A scale still lower.

Maryland's $759.6 million general obligation deal is one of just a handful of "triple-A gold standard" issuances with the potential to move MMD, a trader in Virginia said. The municipal supply drought of 2014 has reached all sectors, including the high grade issuances that would dictate MMD movement, he said.

"If it's aggressively bid on, which my guess is that it will be, then it could push MMD yields lower," said a Chicago trader. "The supply is manageable this week and there are other good technicals out there. There's money to put [in the Maryland deal] most definitely."

Given the deal's large size and likely healthy subscription, both traders were confident that the deal would "set the tone for the week." They were confident that the deal will place in its entirety and is likely be oversubscribed.

"There's a lot of bonds there, it'll be a good test as to how much appetite there really is out there," said the first trader.

Also in Maryland, Citigroup Global Markets held a retail order period for $100 million for the state's general obligation bonds. Yields ranged from 0.56% with a 2% coupon in 2017 to 1.49% with a 5% coupon in 2020. This issuance will open up to institutional investors tomorrow, but because of its small size, it won't impact the triple-A scale, said the first trader.

"It's be difficult to get a good read on MMD's movement until larger competitive deal is place on Wednesday," he said. "Right now, we don't have a good sense of the subscription on the negotiated retail piece."

Wednesday' deal is rated Aaa by Moody's, and AAA by both S&P and Fitch.

Movement on the MMD scale will reach far beyond triple-A credits and permeate to revenue bonds and lower rated deals, said the first trader. Hospital and higher education deals often speak to the demand for yield and, because of their rating quality and fundamentals, don't impact MMD. However, the yield on those deals is directly affected by the spreads created off of the triple-A scale, making Maryland's deal essential to follow, for high grade and high yield buyers alike.

In trading Monday, Puerto Rico credits opened light and strong, signaling that the island may be out of the spotlight, at least for the week. Puerto Rico general obligation bonds continued to firm on Monday, as yields on the island's GO 8s in 2035 fell to 8.81% in Monday trading, down from a high of 9.13% recorded on July 18.

"Funds are reporting that they're feeling better about the situation [in Puerto Rico]," said the trader in Chicago. "We're interested to see if those prices stabilize."

Mondays soft declines in Puerto Rico yields follow a rally for the island's paper that began in mid-July. Since then, yields have fallen from a high of 9.87% on July 8. The yield contraction largely followed the rally felt across all fixed-income markets that lifted municipal debt. However, the reaction was delayed, due to investor's concerns surrounding the island's recently passed restructuring legislation.

With no Puerto Rico news anticipated for the week, GO's yields are expected to "hold in" as the island stays largely out of headlines, a trader based in Virginia said.

If the Maryland deal places as expected and drives MMD triple-A yield further down, it will extend a rally in the market.

Municipals continued to firm on Monday, with yields on bonds maturing in eight to 10-years falling one basis point and bonds maturing in 11- to 29-years shedding two basis points. Yields on bonds maturing in one to seven-years were unchanged, according to the Municipal Market Data's triple-A scale.

According to the Municipal Market Advisor's 5% triple-A scale, the 30-year yield fell two basis points to 3.42% and the 10-year benchmark slipped three basis points to 2.24%. The two-year note was unchanged at 0.31%.

Treasuries mostly strengthened Monday, with the 30-year yield dropping six basis points to 3.26% and the 10-year benchmark slipping one basis point to 2.48%. The two-year note inched up one basis point to 0.50%.

Other smaller issues priced today included JPMorgan Securities' $182.5 million sale of King County, Wash., sewer revenue bonds. Yields ranged from 0.96% with a 3% coupon maturing in 2018 to 3.63% with a 4% coupon in 2035. There is a sealed bid in 2015. The bonds are callable at par in 2024.The deal is rated Aa2 by Moody's Investors Service and AA-plus by Standard and Poor's.

Meanwhile, the market largely ignored Moody's downgrade of the State of Pennsylvania's general obligation credit. Yields for 4s of 2033, the maturity with the largest trading volume, rose marginally to 4.76%. They were 4.89% last week.

"I haven't seen any Pennsylvania bonds trading today. When a state GO goes from single A to double AA it's not a significant impact," a New York trader said. "Bonds are hard to find right now and things are tight so I don't think it will make much of a difference."

In the secondary, yields strengthened slightly for New York's Metropolitan transit Authority revenue bonds. Yields on the 5s in 2023 dropped today to 2.77% from 2.78% in interdealer trading.

New York's Triborough Bridge and Tunnel Authority also saw its bonds strengthen marginally. Yields on the 5s in 2044 fell slightly to 3.67% from 3.68%.

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