Municipal bonds were stronger at mid-session according to traders, even as the prices of Puerto Rico general obligation bonds rose sharply as the U.S. Congress held a hearing on the commonwealth's financial woes.
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.
Secondary Market
The yield on the 10-year benchmark muni general obligation was one to three basis points weaker from 2.02% on Monday, while the 30-year yield was weaker by one to three basis points from 2.96%, according to a read of Municipal Market Data's triple-A scale.
Treasury yields were lower on Tuesday. The two-year Treasury yield dropped to 0.91% from 0.93% on Monday while the 10-year Treasury yield was off to 2.17% from 2.22% and the 30-year yield fell to 2.93% from 2.99%.
The 10-year muni to Treasury ratio was calculated on Monday at 91.1% from 91.2% on Friday, while the 30-year muni to Treasury ratio stood at 99.0% compared to 99.0%, according to MMD.
Puerto Rico GOs Pop Higher as D.C. Hearing Held
Puerto Rico commonwealth bonds were trading decidedly higher 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.
Puerto Rico Gov. Alejandro García Padilla and Pedro Pierluisi, the commonwealth's representative in Congress, testified in the first of two panels before the Senate Judiciary Committee. Both officials said Puerto Rico is in a dire financial situation.
The benchmark commonwealth 8s of 2035 were trading on Tuesday at a high price of 75 cents on the dollar, a low yield of 11.168%, on volume of $2.8 million. In comparison, the 8s of 2035 on Monday traded at a high price of 72.375 cents on the dollar, or a low yield on 11.598%, on volume of $1.16 million.
With a Dec. 1 deadline for $354 million in bond payments facing the Government Development Bank of Puerto Rico, the decision on whether to make the payments or default on the debt is something that members of the buy side community say will have many negative impacts -- from further tarnishing its reputation to selling pressure on commonwealth general obligation and guaranteed debt to overall market anxiety over future debt payments.
The debt in question consists of notes directly guaranteed by the island, and on the eve of the deadline, market experts said they wouldn't want to be in the GDB's position.
On Monday, Moody's Investors Service said it expected the GDB to default on the payments -- which consists of $273.3 million backed by the commonwealth's general obligation guarantee, with the remaining $81.4 million not backed with the same GO protections.
The rating agency said Puerto Rico is more likely to default on the non-GO portion of the debt, but given the island's severe liquidity challenges, the commonwealth could default on the entire payment.
Given the fiscal turmoil for Puerto Rico and the GDB in recent months, members of the buy side community were unable to gauge the fate of the debt payments as of Nov. 30.
"I think it's a coin toss as to whether the payment is made," Stephen Winterstein, managing director of research and chief strategist at Wilmington Trust Investment Advisors, Inc., said in an interview on Monday.
"Given a two-alternative forced choice, I would say they will make the payment. But either way, they have severely marred their credibility," he said.
"The rhetoric that came from the GDB in the weeks leading up to this date was that they could not afford to make the payment. If they make it, then those statements will appear to be nothing other than posturing," he continued. "If they don't make the payment, then the authority's standing will be further tarnished. Regardless, the GDB is in a position that no issuer wants to find itself."
In the worst case scenario, if the GDB defaults, municipal sources said the municipal market could take that in stride – but there would be some pain along the way.
"I don't think the actual default will have much of an impact on the general market, since it must be widely anticipated by now," said Triet Nguyen, managing director at NewOak Fundamental Credit.
"However, there would be a negative reaction and more selling pressure on the commonwealth's GO and guaranteed debt, since many of the GO holders are still counting on receiving the very substantial January coupon," Nguyen said in a Nov. 30 interview.
A default on any guaranteed debt in December would obviously lead to a much lower probability of getting the January coupon on the GOs, he said.
But, if the GDB makes the scheduled Dec. 1 payment, that will put pressure on Jan. 1 as "the next critical date," Nguyen said.
"The market's anxiety is more related to how different classes of creditors will be handled within the commonwealth's overall debt structure," he added.
Meanwhile, David Litvack, managing director head of tax-exempt research U.S. Trust, Bank of America Private Wealth Management, believes a large portion of Puerto Rico's debt will ultimately be restructured -- despite any uncertainty over Dec. 1 debt payments by the GDB.
"While this will trigger headlines, muni investors appear to have effectively compartmentalized Puerto Rico, and we do not believe it will have a contagion effect on the broader municipal market," Litvack said on Nov. 30.
Primary Market
Massachusetts offered two competitive sales of general obligation bonds 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%. Pricing information was not immediately available. However, the state said there were eight bidders for the Series D bonds.
Both issues are 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 $305.27 million of Series 2015 general revenue bonds. The issue was priced to yield from 0.83% with a 4% coupon in 2018 to 2.92% with a 5% coupon in 2036. Term bonds in 2040 and 2046 were priced as 5s to yield 3.04% and 3.11%, respectively. The 2016 maturity was offered as a sealed bid. The deal is rated triple-A by Moody's and S&P.
Since 2005, the Regents of the University of Michigan has 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 have issued roughly 1.9 bonds per year since 2007.
RBC Capital Markets is expected to price the Pennsylvania Turnpike Commission's $302 million of Series 2015B turnpike revenue bonds on Tuesday. The deal is rated A1 by Moody's and A-plus by Fitch.
And Bank of America Merrill Lynch is slated to price the Dormitory Authority of the State of New York's $292 million of Series 2015B dormitory facilities revenue bonds for retail investors on Tuesday ahead of the institutional pricing on Wednesday. The DASNY bond are rated Aa3 by Moody's and A-plus by Fitch.
Wells Fargo Securities is set to price on Tuesday the Board of Regents of the University of Texas System's $241.89 million of bonds, consisting of $126 million of Series 2015C taxable permanent university fund bonds and $115.89 million of Series 2016A permanent university fund bonds. The issue is rated triple-A by Moody's, S&P and Fitch.
Wells Fargo is also expected to price the Metropolitan St. Louis Sewer District, Mo.'s $233.62 million of Series 2015B improvement and refunding revenue bonds. The issue is 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.
Bond Buyer Visible Supply
The Bond Buyer's 30-day visible supply calendar rose $843.6 million to $11.43 billion on Tuesday. The total is comprised of $4.67 billion competitive sales and $6.76 billion of negotiated deals.
MSRB Previous Session's Activity
The Municipal Securities Rulemaking Board reported 36,903 trades on Monday on volume of $5.91 million.
