A tale of two markets: Negotiated deals continue to be 'blowouts' (competitives not so much)

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The muni market was weaker again on Wednesday with yields on the rise, yet that did not slow down the primary one bit. It did not matter if it was a traditional tax-exempt deal or a taxable deal — they were gone in a flash.

Primary market
Wednesday was the busiest day this week, as four of the top six biggest deals came to market.

“The recent retracement in rates has not slowed primary new-issue demand,” said Sean Carney, managing director and head of municipal strategy and primary markets team at BlackRock. “5% coupons (when/where available) are seeing great demand. Oversubscriptions today are in line with the year-to-date trend at roughly six times over.”

One southern trader compared the municipal market to one of the most volatile stocks there is — Tesla.

“Since the beginning of the year, the muni market has acted much like Tesla — going straight up,” he said. “We have only had four down days this year, but we have had two down days in a row (much like Tesla). “

He noted that he doesn’t think it has shaken conviction just yet, mainly because of the continued inflows and the continued uptick in taxable issuance.

“However, it feels like currently the primary market has become a tale of two markets. Negotiated sales structured with in-demand coupons seem to have robust subscriptions, while competitive underwriters need to use lower coupons on the long end to buy deals. “

He said a Texas example of this is the negotiated Arlington deal today, which seemed to do well with small bumps, while there are plenty of 2 handle balances on today’s competitive Bryan sale for $73 million.

Bank of America Securities priced the Trustees of the California State University’s (Aa2/AA-/ / ) $829.420 million of systemwide revenue taxable bonds.

“Both [big taxable deals today, Cal STU and Reedy Creek] were blowouts,” said one New York taxable trader.

He noted that the Cal State deal was tightened 8 to 12 basis points in the 2021 through 2037 part of the curve.

“Demand for taxables, while being hindered a bit in spots due to resistance to absolute yield levels, is still very strong, just maybe not as broad.”

Raymond James priced New York City Municipal Water Finance Authority’s (Aa1/AA+/AA+/NR) $528.290 million of water and sewer second general resolution revenue bonds.

“Due to great demand, the deal was upsized to nearly $530 million from the original par amount of $465 million," said one New York trader. “The deal was two to three times oversubscribed for.”

BofA Securities also ran the books on the Dormitory Authority of the State of New York’s (Baa3/BBB/ / ) $356.655 million of revenue bonds for the Montefiore Obligated Group. Assured Guaranty insured the 2050 maturity for $100 million, bringing a rating of AA from S&P Global Ratings.

Montefiore also sold $350 million of taxable corporate CUSIP bonds. Assured insured half of the split 2050 maturity for $50 million.

JP Morgan priced Reedy Creek Improvement District, Florida’s (Aa3/AA-/AA-/NR) $338.03 million of ad valorem tax refunding taxable bonds.

“The deal was 7 to 10 basis points tighter from start to finish and was as much as 10 times oversubscribed most of the curve,” the taxable trader said.

Morgan Stanley priced the Metropolitan Transit Authority of Harris County, Texas’ (NR/AAA/NR/AAA) $304.145 million of sales and use tax refunding taxable bonds.

Jefferies priced New York City Housing Development Corp.’s (Aa2/NR/NR/NR) $296.38 million of housing impact sustainable development bonds.

Raymond James also priced Arlington Independent School District’s (Aaa/AAA/ / ) $273.285 million of unlimited tax school building and refunding bonds.

Citi priced the City of Long Beach, Calif.’s (Aa2/NR/AA/NR) $131.04 million of harbor revenue refunding bonds, featuring private activity, alternative minimum tax and non-AMT.

JP Morgan priced Mississippi Hospital Equipment and Facilities Authority’s (NR/A+/AA/NR) $111.63 million of revenue bonds for North Mississippi Health Services.

Competitively, Las Vegas Valley Water District (Aa1/AA+/ ) sold $123.86 million of general obligation refunding limited tax bonds. JP Morgan won with a true interest cost of 1.5730%.

Secondary market
Munis were mixed Wednesday on the MBIS benchmark scale, with yields falling by five basis points in the 10-year maturity and rising by one basis point in the 30-year. High-grades were also mixed, with yields on MBIS AAA scale decreasing six basis points in the 10-year and increasing by two basis points in the 30-year.

On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on both the 10- and 30-year GO were three basis points higher to 1.21% and 1.86%, respectively.

The 10-year muni-to-Treasury ratio was calculated at 73.3% while the 30-year muni-to-Treasury ratio stood at 87.2%, according to MMD.

Stocks surged for the third day in a row and Treasuries yields rose sharply as positive reports on effort to counter the coronavirus and a strong private-sector jobs report. It was reported that a Chinese University team found a drug to treat virus victims and United Kingdom researchers said they made a “significant breakthrough” in finding a vaccine. The Dow Jones Industrial Average was up about 1.59%, the S&P 500 Index gained around 1.17% and the Nasdaq was rose about 0.55%.

The Treasury three-month was yielding 1.567%, the two-year was yielding 1.447%, the five-year was yielding 1.460%, the 10-year was yielding 1.649% and the 30-year was yielding 2.134%.

ICI: Muni funds see $3.2B inflow
Long-term municipal bond funds and exchange-traded funds saw a combined inflow of $3.250 billion in the week ended Jan. 29, the Investment Company Institute reported on Wednesday.

It was the 56th straight week of inflows into the tax-exempt mutual funds reported by ICI. The previous week ended Jan. 22 saw $3.099 billion of inflows into the funds.

Long-term muni funds alone had an inflow of $2.994 billion after an inflow of $2.934 billion in the previous week; ETF muni funds alone saw an inflow of $255 million after an inflow of $165 million in the prior week.

Taxable bond funds saw combined inflows of $10.171 billion in the latest reporting week after revised inflows of $12.965 billion in the previous week.

ICI said the total combined estimated inflows from all long-term mutual funds and ETFs were $4.939 billion after inflows of $20.200 billion in the prior week.

Domestic Equity funds declined the most, falling $12.580 billion for the week after losing $3.451 billion in the prior week.

Previous session's activity
The MSRB reported 33,635 trades Tuesday on volume of $11.33 billion. The 30-day average trade summary showed on a par amount basis of $10.53 million that customers bought $5.29 million, customers sold $3.51 million and interdealer trades totaled $1.73 million.

California, Texas and New York were most traded, with the Golden State taking 14.964% of the market, the Lone Star State taking 12.193% and the Empire State taking 11.235%.

The most actively traded security was the Texas Private Activity Board Surface Transportation Corp., revenue, 3.922s of 2049, which traded 13 times on volume of $49.115 million.

Treasury announces details of its quarterly refunding
The Treasury Department will sell $84 billion of securities to refund about $70.5 billion of notes and bonds due Feb. 15. The sale will raise about $13.5 billion of new cash.

Treasury will auction around $38 billion of three year notes on Tuesday, Feb. 11, $27 billion of 10-year notes on Wednesday, Feb. 12 and $19 billion of 30-year bonds on Thursday, Feb. 13.

Because of the President’s Day holiday, all auctions will settle on Feb. 18.

Treasury said the balance of its financing requirements over the quarter will be met with the weekly bill auctions, cash management bills, monthly note, bond, Treasury Inflation-Protected Securities auctions, and two-year floating rate note sales.

Treasury recently said it will issue a 20-year bond in the first half of the year 2020, which aims to increase U.S. financing capacity over the long-term.

“Treasury intends to make the 20-year bond a benchmark issue through regular and predictable monthly issuance in sizes sufficient to maintain benchmark liquidity,” Treasury said. “Consistent with feedback from market participants, the 20-year bond will have maturity, coupon, and dated dates aligned with the 15th of the mid-quarter refunding months (i.e. February, May, August, and November of each year), with a new issue in the refunding months and two reopenings in subsequent months. This structure will align coupon and maturity dates with the 10-year note and 30-year bond in order to ensure STRIPS fungibility. However, the 20-year bond auction will settle at month-end or the first business day thereafter along with the other month-end nominal coupons, and will auction the same week as TIPS, in order to spread the auction supply of duration more evenly across the month.”

More details about the 20-year, including the timing of the first auction and issue size, will be announced in May.

Treasury also said it will continue to explore the possibility of issuing a floating rate note indexed to the Secured Overnight Financing Rate.

“In an effort to further our understanding of potential demand for such a security and how it might fit into Treasury’s goal of financing the government at the least cost over time, Treasury intends to issue an RFI in the first half of calendar year 2020,” Treasury said. “Market participants and the public are encouraged to respond to the RFI when it is released.”

Chip Barnett contributed to this report.

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Primary bond market Secondary bond market Taxable bonds Municipal bond funds California State University Trustees New York City Municipal Water Finance Authority New York State Dormitory Authority Reedy Creek Improvement District, FL Harris County, TX MTA State of California State of Texas State of New York