Market Close: Traders Respond to Rating Changes on Atlantic City, Illinois

Rating agency announcements were the catalysts for a bulk of Thursday's secondary market trading, widening spreads on Illinois and Atlantic City debt.

Yields on Illinois state GOs 4.27s in 2022 expanded to 3.59% in round lot trading on Thursday, up from 3.44% the week prior. The movement followed Standard & Poor's decision to change its outlook on the state to A- negative Wednesday afternoon. The rating agency cited the state's budget and pension reform viability as causes for concern.

Though the state has yet to be downgraded to BBB territory, traders agreed that institutional buyers have already priced the expectation into yields. Once downgraded, an exodus of retail holders would be likely, creating a valuable buying opportunity for major funds, said a trader in New Jersey and a second trader in New York.

"It should never be a knee jerk response, but history shows that when a state gets into BBB and yields are wide, that's the buying opportunity," said the New Jersey trader. "That tends to be the bottom."

While holding the risky paper may be uncomfortable, the credit will undoubtedly straighten itself out, said the New Jersey trader. Traders pointed to the California state GO as an example of a successful state-level turnaround that the retail market abandoned.

"If you can deal with the pain, it's a great play," said the New York trader. "Obama's not going to let his home state, or any state, go completely underwater."

Other Illinois based credits saw their yields expand as well upon news of the outlook change, including the Chicago Board of Education. Yield on the board of education revenue bond 5s in 2042 expanded to 5.10% on Thursday, from 5.03% on Wednesday. Traders explained the movement as a contagion effect from the state GO.

Atlantic City, the once popular east coast gambling destination, saw a mass retail exit this morning as news of its downgrade to junk status spread on national news outlets. Moody's Investors Service on Wednesday cut Atlantic City's general obligation rating downgrade to Ba1 from Baa2, citing declines in casino revenue.

Trading volume on Atlantic City bonds was 126.2% above its 100-day average Thursday as retail investors scrambled to sell out of their positions. Yields jumped on the Atlantic City bonds that account for most of the city's trading volume. Yields on 5s in 2024 surged 43 basis points from Wednesday's level to 4.16%. The 5s in 2026 and 5s in 2025 also rose by seven basis points to 4.12% and by 33 basis points to 4.05%, respectively.

While retail trading was heavy, institutions were largely quiet on the credit, having already priced in the downgrade prior to the announcement, said a trader in Chicago.

"Trading on [Atlantic City] had become cheaper over the past few months and I didn't see an immediate reaction today [from institutional]," said the trader in New Jersey. "Atlantic City had started to join the typical list of cheaper credits this Spring, joining things like Puerto Rico and Chicago."

In the primary, trader saw more of what the market has deemed the "theme of the summer:" too much money chasing too little supply. Thursday's deals were received well and largely priced in favor of the issuer, traders said.

Bank of America priced a two-part deal totaling $485.2 million of New Jersey Transit Corp. grant anticipation notes. Yields on the $383.3 million tax-exempt portion ranged from 0.46% with a5% coupon in 2015 to 2.65% with a 5% coupon in 2021.

"The tax exempt bonds were priced a little aggressively, but it was received well," the second New York trader said. "There's a lot of money in the short end. It was similarly bought up aggressively like yesterday's Maryland deal."

Yields on the $101.9 million series ranged from 0.50% at par in 2014 to 1.00% at par in 2015. Neither part of the deal has a call option.

Raymond James priced $162.3 million of Louisiana Public Facilities Authority revenue bonds. Yields ranged from 1.00% with a 4% coupon in 2018 to 3.12% with a 3% coupon in 2027. The bonds are callable at par in 2024. The deal is rated Aa3 by Moody's and A by S&P.

RBC Capital Markets brought to market $141.4 million of Minnesota University Regents revenue bonds. Yields ranged from 0.43% with a 4% coupon in 2017 to 3.76% with a 4% coupon in 2044. The bonds are callable at par in 2024. The deal is rated Aa1 by Moody's.

Barclay's priced a two-part deal totaling $116 million of Washington Economic Development Finance Authority revenue bonds. Yields on $109.5 million ranged from 0.13% with a 2% coupon in 2015 to 3.95% with a 4% coupon in 2038.

Yields on $6.5 million ranged from 0.29% coupon in 2015 to 0.7% coupon in 2016. The call option was unavailable. The deal is rated Aa1 by Moody's and AA-plus by Standard and Poor's.

In the competitive market, Wells Fargo was awarded $200.6 million of Alabama general obligation bonds. Yields ranged from 0.55% with a 5% coupon in 2017 to 2.6% with a 3% coupon in 2026. The bonds are callable at par in 2024.The deal is rated Aa1 by Moody's and AA-plus by Fitch.

Citigroup Global Markets won the bid for the $107.5 million general obligation bonds the town of Oyster Bay, New York auctioned on Thursday.

The bonds came with yields ranging from 0.85% with a 3.25% coupon in 2015, to 3.90% with a 4% coupon in 2031. The bonds have an option call in 2022 at par. The deal is rated BBB by S&P.

Muni yields weakened Thursday, after the market rallied for seven straight days, according to Municipal Market Data's triple-A scale. Yields on bonds maturing beyond 2028 climbed two basis points and yields on bonds maturing in the intermediate part of the curve inched up one basis point. Short term yields were unchanged.

According to the Municipal Market Advisor's 5% triple-A scale, the 30-year yields inched up one basis point to 3.41%. The 10-year benchmark and the two-year note held steady at 2.19% and 0.31%.

Treasuries weakened Thursday, with the 10-year benchmark climbing four basis points to 2.51% and the 30-year yield jumping three basis points to 3.30%. The two-year note rose three basis points to 0.51%.

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