Puerto Rico debt concerns have spurred a sell-off tobacco bonds as hedge funds that invest in riskier assets seek liquidity, market participants said.
The yield on Buckeye Tobacco Settlement Finance Authority's benchmark tobacco bond with a 5.875% coupon maturing in 2047 jumped to 8.14% on Wednesday, according to Bloomberg data, the highest level since their first displayed trade on Bloomberg on Jan. 1.
"Large holders of tobacco tend to be large holders of Puerto Rico, and they probably see pressures on their funds in terms of cash flow," a trader on the west coast said.
Crossover buyers such has hedge funds have become increasing attracted to low-credit, high-risk bonds in recent years. When Puerto Rico issued $3.5 billion general obligation bonds in March after all three major credit rating agencies downgraded the bonds to junk, a large portion of the buyers were hedge funds.
"Tobacco is held by a lot of crossover people, and think they've decided want to get out of way on this one and started selling," the trader said. "Tobacco is an extremely directional, big market."
Hedge funds can "easily wrap their arms around cash flow instruments such as tobacco bonds,"Triet Nguyen, managing partner at Axios Advisors, said in an article in April.
"They can model it out, devise some fancy hedges (perhaps involving the tobacco companies' own securities) and trade the volatility," he wrote. "In the process, they've also provided significant liquidity to the sector: large tobacco issues such as Ohio's Buckeyes regularly show up among the most actively traded bonds in the market."
A second trader on the west coast said hedge funds that hold Puerto Rico debt probably are selling tobacco bonds to pay their redemptions.
"There is more liquidity in tobacco then Puerto Rico," he said. "To pay the redemptions they are probably selling stuff that has higher credit that they can actually get a bid on."
Nguyen, said in an interview he is "not surprised" there is there is selling in tobacco bonds.
"The tobacco sector has out-performed year-to-date and hedge funds may have taken profit in order to re-invest in underperforming Puerto Rico bonds," he said.
The first west coast trader said in secondary trading no one is paying attention to anything but Puerto Rico.
"I wish there was something else to look at," he said.
In terms of new issuance the $250 million Massachusetts Port Authority revenue refunding bond's institutional order period has been accelerated to Wednesday.
"The transaction is going well and we accelerated the institutional order period (previously scheduled for tomorrow) to today," DJ Mehigan, managing director at Raymond James Public Finance, which served as the lead banker on the Massachusetts Port Authority deal, said in an emailed statement.
A trader in New York speculated the institutional order period was pushed up because the market continued to sell-off on Wednesday, with yields rising by one basis point for bonds maturing in five years and 11 to 22 years, according to Municipal Market Data's triple-A scale. Bonds maturing in six to eight years and 23 to 30 years yields grew by two basis points. Yields on the Municipal Market Advisors scale were mostly steady, with bonds maturing in eight to 25 years rising as much as 1 basis point.
"They are probably trying to get it in before the market goes down further," a second trader in New York said.
Raymond James priced the three-part issuance with yields on the deal's largest $156.8 million section ranging from 0.39% with a 2% coupon in 2016 to 3.46% with a 3.4% coupon in 2029. There was a sealed bid on the 2015 maturity and bonds maturing from 2025 to 2028 and 2029 to 2035 were not available for retail purchase.
The second largest part of the deal, $48.2 million, had yields ranging from 0.86% with a 4% coupon in 2017 to 3.01% with a 5% coupon in 2024. There was no retail order period for the series' bonds maturing from 2025 to 2044. The bonds are subject to an alternative minimum tax.
The final $45.4 million segment of the issuance was not available for retail purchase and no pricing was available.
The deal is rated Aa3 by Moody's Investors Service, AA-minus by Standards and Poor's and AA by Fitch Ratings.
The first trader in New York said the Port Authority probably wants to sell before another Puerto Rico scandal hits and muni yields hike further.
"[They're selling more because] it's a combination of absolute low rates and enough volatility, especially from our lovely Puerto Rico," a trader on the west coast said, who also mentioned that summer is seasonally a "cash-rich" time for munis.
The Indiana Finance Authority tax-exempt private activity deal was reduced to $243 million from $250 million. Citigroup Global Markets priced the deal with yields ranging from 0.60% with a 1.55% coupon in 2017 to 0.6% with a 5.50% coupon in 2046. The deal was then repriced with yields of 1.5% with a 4% coupon in 2017 to par with a 5% coupon in 2046.
The bonds have an optional call at par in 2024, except for the 2017 maturity which can be called in 2016 at par, and buyers can make a whole call at MMD plus 30 basis points at any time.
There are term bonds in 2017, 2034, 2039 and 2046. The deal is rated BBB-minus by S&P and BBB by Fitch Ratings.
The Walnut Energy Center Authority's $113.6 million energy center authority revenue refunding bonds were priced by Citigroup with yields from 0.17% with a 4% coupon in 2015 to 3.67% with a 5% coupon in 2034.
There is an optional call at par in 2024 and the deal was rated AA-minus by S&P and A-plus by Fitch.
Morgan Stanley won the bid for the $254.8 Wisconsin general obligation bonds. The bonds have yields ranging from 0.34% with a 5% coupon in 2016 to 3.07% with a 5% coupon in 2031.
The bonds can be called at par in 2020, except for bonds maturing in 2021 where there is no optional call, and bonds maturing from 2027 to 2031 which have an optional call in 2022.
$165 million Colorado tax revenue anticipation notes were auctioned on Wednesday, and JPMorgan Securities won the bid.
Treasuries strengthened from Wednesday morning with the two year notes' yields dropping by three basis points to 0.5%, the 10 year by two basis points to 2.56% and the 30-year by one basis point to 3.37%.
