The $337.3 million Los Angeles Harbor Department revenue and refunding bonds came priced aggressively as municipal bonds steadied on Thursday, leading market participants to believe municipal bonds' reaction to the spike in Treasuries' yields earlier this week may have been overblown.
Traders said the L.A. Harbor deal shows issuers are confident the sell-off will not impact investors' appetite for bonds this week. The $203.3 million tranche of the three-part deal was subject to the alternative minimum tax. A trader in Chicago said this means the bonds were marketed toward institutional investors, not the retail investors that typically boost California deals' success because tax-exempt investments are more attractive to protect against the state's high taxes.
Even though the biggest tranche was marketed to a limited portion of the market, bonds maturing in 2018 onward had 5% coupons. On Wednesday, the FirstSouthwest lowered the coupons on La Porte Independent School District's longer maturities to 4% from 5% because of the sell-off, a source close to the deal told The Bond Buyer.
"Here's the thing with the L.A. deal, the big tranche is AMT, that's obviously not going to go to retail," the trader in Chicago said. "I'm not seeing the weakness in the MMD reflected in this deal. I think the market's reaction to the MMD scale yesterday might have been overblown, and that California credits are as strong as ever. This deal was priced aggressively because [the deal team] is comfortable they will work out the balances."
Yields for the $203.3 million L.A. Harbor revenue and refunding revenue bonds part of the deal ranged from 0.16% with a 2% coupon in 2015 to 3.62% with a 5% coupon in 2044. There is a sinking fund on a 2044 term bond and an optional par call in 2024.
"3.26% is not a lot to grab," a trader in New York said. "But that means they are sure there will be buyers. Even without retail, even with the sell-off, they're confident investors will pay that premium."
The non-AMT $89.1 million refunding revenue bond portion of the deal had yields ranging from 0.12% with a 5% coupon in 2015 to 3.28% with a 5% coupon in 2044. This section has sinking funds on term bonds in 2039 and 2044, and also has an optional call at par in 2024.
The non-AMT $44.89 million revenue bonds' yields ranged from 0.12% with a 2% coupon in 2015 to 3.28% with a 5% coupon in 2044.
This section also had sinking funds on 2039 and 2044 term bonds, and the same optional par call in 2024.
Wells Fargo Securities priced the bonds, which carried ratings of Aa2 from Moody's Investors Service and AA from Standard & Poor's and Fitch Ratings.
Investors Want Variable Rate
Details were available for two sections of the three-part $226.6 million Metropolitan Transportation Authority transportation revenue variable rate bond deal.
Morgan Stanley won the bid for the $84.45 million section of the deal, and RBC Capital Markets won the bid for the $42.575 million section.
The trader in Chicago said the deal is attractive because variable rate issuance has remained low. The volume of both short and long variable rate issuance totaled $10.2 billion as of August 30, compared to $185.14 billion fixed rate issuance during the same period, according to data provided by The Bond Buyer and Ipreo.
"Variable rate deals do very strong due to a lack of issuance," he said.
Jobless Claims Steadies Market:
Municipal bonds steadied shortly after the jobless claims report showed claims came in at steady levels. Jobless claims rose by 4,000 for the last week of August to 302,000. This number falls in line with analysts' predictions, which estimated claims would total between 290,000 and 310,000.
This has made traders more confident the employment number will not come out strong enough to ignite another sell-off, but some investors are still concerned.
"Yes, a strong employment number could trigger another sell-off," the trader in Chicago said.
A second trader in New York said Treasuries' dramatic reaction to Tuesday's ISM manufacturing index report means if a strong employment situation number is shown, Treasuries will sell-off again and it will bleed into the municipal market.
"Now that there are not as many headlines about global crises coming out, the market is paying more attention to the economic data being reported," the trader said. "It was always strange, rates being so low when the economy is becoming stronger."
A third trader in New York agreed, saying even though Treasuries had strengthened by the end of the day on Wednesday after it was announced Russian President Vladimir Putin was outlining cease-fire plans with a Ukraine leader, Treasury yields were still notably higher than they were last week.
"If they hike up anymore, they will drag munis with them," he said. "Low supply has kept munis in check so far, but supply should pick up next week and more people will be back at their desks."
A trader in Virginia said a sell-off in munis is possible if a strong employment number is reported, but he doubts it will happen.
"I don't think it will happen unless supply starts to grow, it's hard to justify some kind of massive sell-off," he said.
The 30-year Treasury rose by five basis points to 3.20%, the 10-year by four basis points to 2.45%, and the two-year note by one basis point to 0.54%.
Municipal Market Funds
Tax-exempt money market funds pared back outflows from last week, but still reported the loss of $1.78 billion as total net assets settled at $255.25 billion in the week ended Sept. 1, according to The Money Fund Report, a service of iMoneyNet.com.
The decrease is down from the $2.22 billion the funds sacrificed in the prior week.
The average seven-day yield for the 418 weekly reporting tax-exempt funds held steady at 0.01%., while the average maturity increased to 38 days from 35 days.
The total net assets of the 1,008 weekly reporting taxable money market funds, meanwhile, decreased by $19.43 billion to $2.349 trillion in the week ended Sept. 2, which is more than the $15.87 billion of outflows the funds generated the previous week.
The average seven-day yield for the taxable funds held steady at 0.01%, while the average maturity was unchanged at 43 days.
The combined total net assets of the 1,426 weekly reporting money market funds settled at $2.605 trillion.
The exit of $21.21 billion in the week ended Sept. 2 compares to inflows of $13.65 billion last week.
