A warm reception for a large California general obligation offering marked a strong start to the week for the municipal market.
Yields for California’s various-purpose and refunding GO bonds were adjusted lower by two basis points in the belly of the curve for institutional investors from Friday’s retail offering. Traders in California say that Friday’s first retail order period for the $1.5 billion deal began as the muni market
“The deal is in terrific shape,” a trader in San Francisco said. “The management group accelerated the order period; the institutions are now finishing it up, probably. I expect that the deal will be oversubscribed, re-priced to lower yields. And for a mega-deal like this in the beginning of the week, and at arguably the tightest spreads we’ve seen for Cal GOs, demand is impressive.”
Others in the Golden State agreed. “Cal seems to be going reasonably well; that helps a lot, sets the tone,” a trader in Los Angeles added. “It shows us that there’s good demand out there for Cals, making the market feel a little bit better, willing to take on some other bonds.”
Despite the momentum the California GOs created, muni yields mostly held their levels on the day. Treasuries, by comparison, rallied from the intermediate part of the curve on out.
Traders have mentioned how they’re trying to pace their business around the Jewish holiday of Yom Kippur, which envelops Wednesday’s session. Issuers and underwriters have staggered deals to arrive on Tuesday and Thursday.
“People are pushing into the first couple of days of the week,” the L.A. trader said. “We’ll get some business done today and tomorrow.”
The primary expects another reasonably solid week of volume. The market anticipates $7.70 billion to be issued this week, following last week’s revised $7.36 billion.
In the largest deal of the session, RBC Capital Markets pushed up by a day pricing for institutions for the California GOs. They are rated A1 by Moody’s Investors Service and A-minus by Standard & Poor’s and Fitch Ratings.
Yields on the first series, $1 billion of various-purpose GOs, ranged from 0.59% with 2% and 3% coupons in a split 2014 maturity to 3.75% with a 5% coupon in 2042. The bonds are callable at par in 2022. Bonds maturing in 2013 were offered in a sealed bid.
Yields on the second series, $540.3 million of various-purpose GO refunding bonds, ranged from 0.59% with a 4% coupon in 2014 to 2.82% with a 5% coupon in 2030. Those maturing in 2013 were offered in a sealed bid.
Bonds maturing between 2025 and 2030 are callable at par in 2018.
Yields on both series in Monday’s second retail offering were lowered by two basis points at the 10-year mark to 2.49%.
Institutions had their opportunity to participate in the deal later on Monday as California accelerated the pricing on strong demand, according to Tom Dresslar, spokesman for state Treasurer Bill Lockyer.
Yields for credits maturing in the second series in 2030 were lowered two basis points from the retail pricing.
Retail demand was strong. By Monday afternoon, the state had seen up to $1 billion of retail orders, or roughly 65% of the total offering of $1.55 billion.
Preliminary yields quoted Friday arrived lower than the yields California paid in April for its $1.35 billion GOs. In addition, the spreads between the preliminary yields and yields on triple-A-rated bonds in the Municipal Market Data index shrunk noticeably. The difference along the curve between the preliminary yield spreads to MMD of the April and September GO offerings ranged from 17 basis points to 24 basis points lower.
“California GOs continue to perform well because the market recognizes the substantial strides we have made toward greater fiscal stability,” Dresslar said in a statement.
In addition, JPMorgan moved up to Monday pricing on $281.6 million of the New York State Municipal Bond Bank Agency special school-purpose revenue bonds to refund outstanding New York City school debt. The pricing had been scheduled for Tuesday. The bonds were rated AA-minus by Standard and Poor’s and Fitch.
Yields range from 0.59% with a 2.00% coupon in 2015 to 2.31% with coupons of 4.00% and 5.00% in a split maturity in 2022.
Debt maturing in 2014 was offered in a sealed bid.
Sources close to the deal said Friday’s retail order period showed strong demand, encouraging the issuer to price for institutions Monday.
Of late, traders reported seeing demand further down the credit scale as spreads between higher and lower rated credits have shrunk. Investors are reaching for higher-yielding paper if they can find it, a trader in New York said. And with demand for tax-exempts still heavy, new issues continue to attract the most attention, she added.
“The new issues seemed to be priced for investors, and deals are oversubscribed,” she said. “Investors are just getting small allocations. That makes the secondary market a little more lackluster.”
In the secondary market, trades compiled by data provider Markit showed strengthening. Yields on Buckeye Ohio Settlement Financing Authority 5.125s of 2024 fell two basis points to 7.10%. So did those of Pennsylvania state 5s of 2021, to 1.82%.
Yields on New York Transportation Authority 5s of 2042 fell three basis points to 3.69%. And both Los Angeles Department of Water and Power 5s of 2022 and Chicago Board of Education 5s of 2042 fell one basis point to 1.98% and 3.93%, respectively.
Tax-exempt yields mostly held their levels Monday, according to MMD numbers. The exception: the benchmark 10-year triple-A yield slipped one basis point to 1.78%.
The 30-year yield ended Monday flat at 2.95%. The two-year held at 0.29% for the 42nd consecutive session.
Treasuries by early Monday afternoon continued to strengthen from the belly of the curve on out. The benchmark 10-year dropped four basis points to 1.72%.
The 30-year shed five basis points to 2.90%, while the two-year held steady at 0.27%.
