Municipal bonds ended higher on Tuesday, according to traders, while the price of Puerto Rico general obligation bonds jumped in active trading.
The yield on the 10-year benchmark muni general obligation fell four basis points to 1.98% from 2.02% on Monday, while the 30-year yield dropped four basis points to 2.92% from 2.96%, according to the final read of Municipal Market Data's triple-A scale.
Treasury yields were also lower on Tuesday. The two-year Treasury yield dropped to 0.90% from 0.93% on Monday while the 10-year Treasury yield fell to 2.15% from 2.22% and the 30-year yield dropped to 2.92% from 2.99%.
The 10-year muni to Treasury ratio was calculated on Tuesday at 91.9% from 91.1% on Monday, while the 30-year muni to Treasury ratio stood at 100.1% compared to 99.0%, according to MMD.
Puerto Rico GOs Pop as Debt Payment Made, D.C. Hearing Held
Puerto Rico Commonwealth GOs were sharply higher in active trading on Tuesday, according to the Municipal Securities Rulemaking Board, as a hearing before Congress in Washington, D.C., focused in on the fiscal future of the island and the Commonwealth paid its debts.
Puerto Rico Gov. Alejandro García Padilla and Pedro Pierluisi, the Commonwealth's representative in Congress, testified before the Senate Judiciary Committee. Both officials said Puerto Rico is in a dire situation. But as the two testified, Puerto Rico announced that it had paid all of the $354 million in debt service due on its Government Development Bank notes.
The benchmark Commonwealth Series 2014A GO 8s of 2035 were trading at a high price of 75.725 cents on the dollar, a low yield of 11.053%, on volume of $49 million, according to the MSRB's EMMA website. In comparison, the 8s of 2035 traded on Monday at a high price of 72.375 cents on the dollar, or a low yield of 11.598%, on volume of $1.16 million.
The Commonwealth GO improvement Series 2012A 5s of 2041 were trading on Tuesday at a high price of 63.75 cents on the dollar, a low yield of 8.495%, on volume of $2.05 million, according to EMMA. In comparison, the bonds traded on Monday at a high price of 61.63 cents on the dollar, or a low yield of 8.793%, on volume of $655,000.
As news of the GDB's debt payment made its way around the market, analysts and experts reacted.
"I don't' think they could ask for something [from Congress] without putting something on the table first," Dick Larkin, senior vice president and director of credit analysis at Herbert J. Sims & Co., told The Bond Buyer shortly after it was announced that the Commonwealth made its Dec. 1 bond payment.
"If you pay your bills today, it looks a lot better," he added.
"But, if they made the payment, it's basically window dressing to make sure the elected official of Puerto Rico are going to Congress with at least a relatively clean slate and they are paying their bills," he continued.
However, some market participants took the news in stride.
"We're pleasantly surprised," Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management, said after hearing reports that Puerto Rico didn't default on the Dec. 1 payment.
Triet Nguyen, managing director of NewOak Fundamental Credit, told The Bond Buyer, that "while there was no default on the GDB bonds [on Tuesday], the Commonwealth also announced that it has started to claw back revenues pledged to other bond issues in order to pay for essential services.
"In effect, the default process has already started on the bonds that are secured by the revenues being diverted or clawed back," he said. "At the end of the day, the market should take some degree of comfort in the fact that the Commonwealth continues to respect the priority claim status of GOs and 'constitutional priority' debt, at least for the time being.
"We also note that COFINA bonds have been left out of the $7 billion that may be affected by the revenue claw backs," Nguyen added.
"Leading up to [Tuesday], I thought it was a coin toss as to whether the GDB would make the payment in full," said Stephen Winterstein, managing director of research and chief strategist at Wilmington Trust Investment Advisors, Inc. "Given a two-alternative forced choice, I said they would make the payment. Now that they have, it appears that the language that came from the GDB in the weeks leading up to [Dec. 1] was nothing more than posturing, which blemishes its credibility. Clearly, it's better that they made the payment, but the market will likely continue to struggle with a lack of transparency and candor."
Primary Market
In the primary, the first of the week's hefty new issuance began to hit the market, led off by two big competitive sales from the state of Massachusetts. The Bay State offered up two sales of GOs totaling $550 million.
Bank of America Merrill Lynch won the $400 million of consolidated loan of 2015 Series E bonds with a true interest cost of 3.69%. The issue was priced to yield from 3.27% with a 4% coupon in 2036 to 3.50% with a 4% coupon in 2045. The state said there were eight bidders for the deal and JPMorgan Securities had the cover, or next highest bid.
Morgan Stanley won the $150 million of consolidated loan of 2015 Series D bonds with a TIC of 3.09%. The bonds were priced to yield from 2.25% with a 5% coupon in 2026 to 3.36% with a 3% coupon in 2035. Massachusetts said there were a total of eight bidders for this series.
Both sales were rated Aa1 by Moody's Investors Service and AA-plus by Standard & Poor's and Fitch Ratings.
Morgan Stanley priced the Regents of the University of Michigan's $306.7 million of Series 2015 general revenue bonds. The issue was priced to yield from 0.51% with a 5% coupon in 2017 to 2.87% with a 5% coupon in 2036. Term bonds in 2040 and 2046 were priced as 5s to yield 2.97% and 3.04%, respectively. The deal was rated triple-A by Moody's and S&P.
Proceeds will finance the university's ongoing capital program and refinance $204 million of variable-rate debt and refinance additional commercial paper notes. General revenues are pledged to debt repayment.
Since 2005, the Regents of the University of Michigan have issued about $2.53 billion of debt. The most issuance took place in 2010 and 2012 when the university sold $567 million and $560 million, respectively. The Ann Arbor-based school did not come to market in 2011 or 2006 and has issued roughly 1.9 bonds per year since 2007.
RBC Capital Markets priced the Pennsylvania Turnpike Commission's $300 million of Series 2015B turnpike revenue bonds. The bonds were priced to yield 0.56% with a 2% coupon in 2016 and to yield from 1.19% with a 4% coupon in 2018 to 3.45% with a 5% coupon in 2036. Term bonds in 2040 and 2045 were priced as 5s to yield 3.57% and 3.64%, respectively. The deal was rated A1 by Moody's and A-plus by Fitch.
Bank of America Merrill Lynch priced the Dormitory Authority of the State of New York's $252 million of Series 2015B dormitory facilities revenue bonds. The issue was priced to yield from 0.95% with a 3% coupon in 2018 to 3.22% with a 5% coupon in 2037; a 2040 maturity was priced as 5s to yield 3.29% and a 2045 maturity was priced as 5s to yield 3.36%. The 2016 and 2017 maturities were offered as sealed bids. The DASNY bond were rated Aa3 by Moody's and A-plus by Fitch.
Wells Fargo Securities priced the Regents of the University of Texas' $118 million of Series 2016A tax-exempt permanent university fund bonds. The issue was priced to yield from 0.62% with a 4% coupon in 2017 to 3.33% with a 3.25% coupon in 2035. Wells Fargo also priced the University's Series 2015C taxable permanent university fund bonds at par to yield 3.78% in 2045 or about 85 basis points above the comparable Treasury security. Both series were rated triple-A by Moody's, S&P and Fitch.
Wells Fargo also priced the Metropolitan St. Louis Sewer District, Mo.'s $224million of Series 2015B improvement and refunding revenue bonds. The issue was priced to yield from 0.56% with a 3% coupon in 2017 to 2.99% with a 5% coupon and 3.50% at par in a split 2038 maturity; a 2045 term bond was priced as 5s to yield 3.09%. The issue was rated Aa1 by Moody's, triple-A by S&P and AA-plus by Fitch.
On Wednesday, Morgan Stanley is expected to price the Kansas Department of Transportation's $400 million of Series 2015B highway revenue bonds. The deal is rated Aa2 by Moody's, triple-A by Standard & Poor's and AA-plus by Fitch.
Since 2007, the Kansas DOT has issued about $2.2 billion of debt. The most issuance took place in 2012 and 2014 when the department sold $496 million and $463 million, respectively. The DOT did not come to market in 2011 and 2013. During the same time period, they have issued bonds roughly 1.4 times per year.
