Munis Strengthen as Conn., San Jose Deals Price

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Top-quality municipal bonds ended stronger on Tuesday, traders said, as more supply hit the market, topped by the institutional pricings of Connecticut and San Jose deals.

Citigroup priced and repriced Connecticut's $743.4 million of general obligation and GO refunding bonds for institutions after holding a one-day retail order period.

The $550 million of Series 2017A GOs were priced to yield from 1.09% with a 4% coupon in 2018 to 3.67% with a 5% coupon in 2035; a 2037 maturity was priced at par to yield 4%.

The $193.4 million of Series 2017B refunding GOs were priced as 3s to yield 1.15% in 2018 and as 5s to yield from 1.39% in 2019 to 3.16% in 2028.

The deal is rated Aa3 by Moody's Investors Service and AA-minus by S&P Global Ratings, Fitch Ratings and Kroll Bond Rating Agency.

Some traders reported the deal received a warm reception, allowing yields to be cut in a number of maturities.

Citi also priced San Jose, Calif.'s $628.89 million of airport revenue refunding bonds for institutions on Tuesday after a one-day retail order period on Monday.

The $477.67 million of Series 2017A bonds subject to the alternative minimum tax were priced as 5s to yield from 1.03% in 2018 to 3.70% in 2037; a 2041 maturity was priced as 5s to yield 3.72%, a 2042 maturity was priced as 4s to yield 4.05% and a 2047 maturity was priced as 5s to yield 3.78%.

The $151.22 million of Series 2017B non-AMT bonds were priced to yield from 0.90% with a 2% coupon in 2018 to 3.40% with a 5% coupon in 2037; a split 2042 maturity was priced at par to yield 4% and as 5s to yield 3.43% and a 2047 maturity was priced as 5s to yield 3.48%.

The deal is rated A2 by Moody's and A-minus by S&P and Fitch except for the Series 2017A $29.1 million 2042 maturity which is insured by Build America Mutual and rated AA by S&P.

Since 2007, San Jose has sold about $2.4 billion of bonds, with the most issuance occurring in 2007 when it offered $815 million of debt. The city did not come to market in 2012, 2013 or 2016. Tuesday's sale marks the second highest yearly issuance in the past 10 years.

In the competitive arena on Tuesday, Guilford County, N.C., sold $196.27 million of bonds in two separate sales.

Citi won the $169.07 million of Series 2017B public improvement GOs with a true interest cost of 2.79%. The issue was priced to yield from 0.88% with a 5% coupon in 2018 to 3.38% with a 3.25% coupon in 2037.

Robert W. Baird won the $27.2 million of Series 2017A public improvement GOs with a TIC of 2.74%. Both deals are rated triple-A by Moody's, S&P and Fitch.

The Puyallup School District No. 3, Wash., competitively sold $181.23 million of Series 2017 GOs under the Washington state school district credit enhancement program.

JPMorgan Securities won the bonds with a TIC of 3.36%. The issue was priced as 5s to yield from 1% in 2018 to 3.11% in 2036. The deal is rated Aa1 by Moody's and AA-plus by S&P.

Secondary Market

The yield on the 10-year benchmark muni general obligation fell two basis points to 2.23% from 2.25% on Monday, while the 30-year GO yield dropped two basis points to 3.01% from 3.03%, according to the final read of Municipal Market Data's triple-A scale.

U.S. Treasuries were weaker on Tuesday. The yield on the two-year rose to 1.30% from 1.25% on Monday, while the 10-year Treasury yield gained to 2.42% from 2.37%, and the yield on the 30-year Treasury bond increased to 3.02% from 2.98%.

MSRB: Previous Session's Activity

The Municipal Securities Rulemaking Board reported 38,198 trades on Monday on volume of $7.8 billion.

Foreign Investors Warm to U.S. Munis

Overseas investors have been showing a greater interest in U.S. municipal bonds, according to J.R. Rieger, global head of fixed income indices at S&P Dow Jones Indices.

Foreign investor holdings of munis jumped to $106 billion as of year-end 2016, according to the Federal Reserve, Rieger said in a Monday market comment.

Rieger listed several reasons why foreign investors may find munis attractive, such as the belief in the potential of a stronger U.S. dollar.

"U.S. municipal bonds, whether tax-free or taxable, offer incremental yield relative to the negative or near zero yield environments seen in the Eurozone and Japan," he wrote. Investors like "the relatively high quality of investment-grade municipal bonds to other asset classes such as U.S. corporate bonds and, in some cases, sovereign bonds," he said.

He also cited the historically low default rate of investment-grade municipal bonds and shorter duration compared with U.S. investment-grade corporate bonds.

He said the investment-grade munis tracked in the S&P National AMT-Free Municipal Bond Index have more than a two-year shorter duration than those tracked in the S&P 500/MarketAxess Investment Grade Corporate Bond Index. Both indexes are designed to reflect more liquid segments of their respective markets.

And he noted the relatively lower volatility of muni bonds as compared to U.S. corporates.

"Due to the large number of U.S. municipal bond issuers and the sheer number of municipal bonds outstanding, the depth of liquidity for U.S. municipal bonds has been a factor impacting the market for decades," Rieger wrote. "The lower depth of liquidity for U.S. municipal bonds helps keep yields higher, as a liquidity 'premium' is demanded by the market in return for this risk."

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