As Big Deals Price, Attention Turns to Primary

The tax-exempt market turned its attention to new deals as pricing on the year’s largest week of new issuance kicked off Monday.

Traders noted almost all the action was in the primary as the biggest deal of the week was priced for retail. The Michigan Finance Authority issued $2.69 billion of unemployment obligatory assessment revenue bonds in two series. The bonds in both are rated triple-A by the major rating agencies.

Citi priced the first series of $1.46 billion for retail, with an institutional order period Tuesday.

Yields ranged from 0.40% with 2%, 3% and 5% coupons in a split 2014 maturity to 1.63% with 3%, 4% and 5% coupons in a split 2019 maturity. Credits maturing in 2013 were offered via sealed bid. Portions of bonds maturing between 2013 and 2019 were not offered for retail.

Bank of America Merrill Lynch priced the second series of $1.23 billion for retail, to be followed by an institutional order period Wednesday.

The bonds yielded 1.92% with a 5% coupon in 2020, 2.09% with a 5% coupon in 2021, 2.07% with a 5% coupon in 2022, and 1.77% with a 5% coupon in 2023. Portions of bonds maturities between 2020 and 2023 were not offered for retail.

Credits maturing in 2020 are callable at par in 2019, bonds maturing in 2021 are callable at par in 2018 and 2019, credits maturing in 2022 are callable at par in 2016 and 2018, and bonds maturing in 2023 are callable at par in 2014 and 2016.

Wells Fargo Securities priced for retail $519.9 million of Connecticut general obligation bonds, rated Aa3 by Moody’s Investors Service and AA by Standard & Poor’s, Fitch Ratings and Kroll Bond Ratings.

Yields ranged from 0.25% with a 3% coupon in 2013 to 2.67% with 2.5% and 5% coupons in a split 2025 maturity. The bonds are callable at par in 2022.

Morgan Keegan priced and repriced $129.4 million of Texas’ Socorro Independent School District unlimited-tax school building bonds, rated triple-A with insurance from the Texas Permanent School Fund guarantee program.

Yields ranged from 2.28% with a 5% coupon in 2022 to 3.44% with a 5% coupon in 2037. The bonds are callable at par in 2021. Yields were increased one to five basis points from preliminary pricing.

A trader located in the Southwest noted this deal came in cheaper than past deals. “I’m hearing it’s kind of spotty in serial ranges. It’s 12 basis points cheaper than the last deal that came. And that’s kind of the trend in the market right now.”

Generally speaking, most deals coming to market this week are expected to come in cheaper than in past issues, the trader said.

“On a $12 billion calendar, everyone is expecting the same this week. It will be tough sledding. There are open syndicates that people are going to have to deal with and have all partners take their share and say 'wish you well.’ We are going to see significant adjustments to get through this week.”

He added munis are not following Treasuries and are taking direction from supply and demand factors this week.

Outside the primary, the market was quiet. “People are trying to adjust to new levels,” the trader said. “Retail looks like they aren’t involved too much at this point.”

“Munis are quiet as there is monster supply coming,” a New York trader said, adding that activity will remain slow until the new deals in the primary market provide direction.

Munis were unchanged for the second session in a row, according to the Municipal Market Data scale. The 10-year yield closed steady at 1.90% for the third consecutive trading session while the 30-year closed flat at 3.18% for the second session. The two-year was steady at 0.32% for the seventh straight session.

Treasuries were stronger Monday. The benchmark 10-year yield dropped four basis points to 1.60% while the 30-year yield fell five basis points to 2.72%. The two-year was steady at 0.28%.

The secondary market was quiet and trades compiled by data provider Markit showed both firming and weakening.

Yields on Los Angeles 5s of 2021 and Oklahoma Development Finance Authority 4.25s of 2042 each rose one basis point to 2.20% and 4.34%, respectively. Yields on Sallisaw, Okla., Municipal Authority 4s of 2035 fell seven basis points to 4.17%.

Elsewhere in the secondary market, trades reported by the Municipal Securities Rulemaking Board showed strengthening over the past few trading sessions.

A dealer sold to a customer Connecticut Health and Educational Facilities Authority 4.25s of 2031 at 4.25%, 20 basis points lower than where they traded Friday.

Bonds from an interdealer trade of Massachusetts Educational Financing Authority 4.7s of 2027 yielded 4.34%, 11 basis points lower than where they traded Thursday.

A dealer bought from a customer Louisville, Ky., Regional Airport Authority 4s of 2013 at 0.77%, seven basis points lower than where they traded Thursday.

Bonds from an interdealer trade of Illinois Metropolitan Pier and Exposition Authority 0s of 2051 yielded 5.68%, five basis points lower than where they traded Friday.

So far in June, muni-to-Treasury ratios have fallen as munis outperformed Treasuries and became relatively more expensive. Munis have weakened, but not as much as their taxable counterparts.

The two-year muni-to-Treasury ratio plunged to 114.3% on Monday from 123.1% on June 1.

The 10-year ratio dropped to 118.8% from 119.9% at the beginning of June. The 30-year ratio fell to 116.9% on Monday from 120.6% on June 1.

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