Muni Yields Lower as Issuance Commences

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Top-shelf municipal bonds were mostly stronger on Tuesday after midday, as yields on some maturities fell as many as four basis points, according to traders. The first of the week's issuance started to trickle in.

Secondary Market

The 10-year benchmark muni general obligation yield was as many as two basis points lower from 2.16% on Friday, while the yield on the 30-year GO slipped between one and three basis points from 2.91%, according to a read of Municipal Market Data's triple-A scale.

U.S. Treasuries were stronger on Tuesday afternoon. The yield on the two-year Treasury dropped to 1.16% from 1.19% on Friday, while the 10-year Treasury yield decreased to 2.34% from 2.38%, and the yield on the 30-year Treasury bond declined to 2.95% from 2.98%.

On Friday, the 10-year muni to Treasury ratio was calculated at 90.4%, compared with 91.2% on Thursday, while the 30-year muni to Treasury ratio stood at 97.4%, versus 97.5%, according to MMD.

Primary Market

Municipal bond traders on Tuesday will be looking at a holiday-shortened week of sales jammed into a three-day window. Almost $9 billion of new issues are slated for sale in the new week, which is starting after the market was closed on Monday for the Rev. Martin Luther King, Jr. holiday.

Ipreo estimates volume for the week at $8.9 billion, up from a revised $8.2 billion of supply in the prior week, according to updated figures from Thomson Reuters. The calendar is composed of about $7.4 billion of negotiated deals and around $1.5 billion of competitive sales.

The issuance started to flow on Tuesday, as Bank of America Merrill Lynch priced the Philadelphia Authority for Industrial Development's $268.995 million of fixed rate revenue bonds for Thomas Jefferson University. The bonds were priced to yield 3.44% with a 5% coupon in 2032 and to yield from 3.56% with a 5% coupon in 2034 to 3.68% with a 5% coupon and 4.05% with a 4% coupon in a split 2037 maturity. A term bond in 2040 was priced at par to yield 2.875%. A term bond in 2042 was priced at par to yield 3.00% and to yield 4.13% with a 4% coupon and 3.76% with a 5% coupon in a triple split maturity. A term bond in 2047 was priced to yield 4.18% with a 4% coupon and 3.81% with a 5% coupon in a split maturity. The deal is rated A-plus by Moody's Investors Service.

The State of Florida Board of Education sold $150.2 million of public education capital outlay refunding bonds, which were won by JPMorgan with a true interest cost of 3.03%. No pricing information was immediately available.

The New Jersey Environmental Infrastructure Trust sold two deals totaling $107.82 million on Tuesday. The $73.875 million of environmental infrastructure refunding bonds, Series 2017A-R1, 2010A financing program green bonds were won by Citi with a TIC of 2.23%.

The $33.945 million of Environmental Infrastructure Refunding Bonds, Series 2017A-R1, 2009A financing program green bonds were won by Raymond James with a TIC of 2.21%.

Goldman Sachs is expected to price the city of Chicago's $1.16 billion of taxable and tax-exempt general obligation bonds. This is the deal of the week and one that everyone will be keeping their eyes on.

The underwriter said the sale will be on Wednesday or Thursday, as the taxable part and tax-exempts will come on separate days.

The deal is rated BBB-plus by S&P Global Ratings and Kroll Bond Rating Agency and BBB-minus by Fitch Ratings.

Institutional players will be looking at yield and balancing it with risk. Retail investors may shy away from the deal due to publicity over the city's financial difficulties, said Michael Pietronico of Miller Tabak Asset Management. "The demand will be adequate to get the Chicago GO deal done as we suspect institutional demand will be the main driver," he said.

It's rare that broker-dealers have approval for distribution of a high-yield credit like Chicago to retail investors.

"For anyone looking for yield, absolutely, I can see a variety of buyers," a Chicago trader said, "but at the end of the day Illinois is not a good retail state to begin with."

Prior Week's Actively Traded Issues

Revenue bonds comprised 58.64% of new issuance in the week ended Jan. 13, down from 58.8703% in the previous week, according to Markit. General obligation bonds comprised 36.07% of total issuance, down from 36.15%, while taxable bonds made up 5.29%, up from 4.98%.

Some of the most actively traded issues by type in the week were from Texas, California and Pennsylvania.

In the GO bond sector, the Ysleta ISD, Texas, 5s of 2046 were traded 30 times. In the revenue bond sector, the Los Angeles Department of Airport 5s of 2041 were traded 55 times. And in the taxable bond sector, the University of Pittsburgh 3.646s of 2036 were traded 32 times.

Previous Week's Top Underwriters

The top negotiated and competitive underwriters of last week included Goldman Sachs, Bank of America Merrill Lynch, Citigroup, RBC Capital Markets and Jefferies, according to Thomson Reuters data.

In the week of Jan. 8 to Jan. 14, Goldman underwrote $1.78 billion, BAML $1.47 billion, Citi $1.40 billion, RBC $1.06 billion and Jefferies $706.8 million.

Christine Albano contributed to this report.

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