Municipal bond investors are looking ahead with anticipation at the new week’s calendar and the arrival of a big California tobacco bond deal.
The tobacco deal is expected to be highly sought after, based on the growing demand for both California and tobacco paper, as many deals in the sector have been called lately. Their allure is enhanced by attractively priced absolute yield levels for a triple-B security, two municipals sources said on Friday.
“Demand for Cal paper is still pretty high, so I suspect there will be a lot of attention paid to that credit,” said Howard Mackey, managing director at NW Capital Markets in Hoboken, New Jersey.
He predicted some of the maturities could be priced 100 basis points above the Municipal Market Data curve on the long end of the deal, but richer than where the recent New Jersey tobacco deal was priced. “The Cal deal would probably trade through that just because of the demand for Cal paper — and have lower spreads than New Jersey,” depending on the MMD scale in California on the day of the pricing, Mackay said.
Jim Colby, senior municipal strategist and portfolio manager at Van Eck Associates, said the strong demand expected for the California tobacco deal underscores the overall value in the municipal high yield market of late compared with the high-quality market.
“The performance of investment grade paper has not stimulated great attention from any sources but cash flow buyers lately,” Colby told The Bond Buyer on Friday afternoon.
Considered richly priced due to the ratios of investment grade paper to Treasuries up and down the yield curve, “it’s hard to find a place where they look attractive,” he said.
However, the Cal deal should benefit from the supply pressure in the high yield space due to refinancings in the tobacco market, as high yield fund managers seek to find replacement paper, according to Colby.
“It’s a difficult time to find opportunities because of the credit spread compression, and managers are put on the defensive,” he said.
The California tobacco deal should help remedy that situation as the “managers losing a big chunk of tobacco securitization paper from California should be over the moon” with its arrival and availability, Colby said.
He predicted 3% yield handles, which he said “straddles between investment grade and high yield,” but shows strong demand nonetheless. “Spreads have contracted but spreads are wide enough to elicit demand.”
Managers “will all try to buy into this deal if it fits their parameters,” he said. “This is triple-B rated which is the bottom of the investment grade pot, so there should be a lot of demand from individuals and institutions and be very well received.”
In addition, it should serve as a benchmark deal in next week’s market.
“As more supply arrives it generates more activity in the marketplace,” and will have special appeal hailing from the Golden State, Colby said. “I expect it to send a strong signal to begin the week.”
Outside of California, Colby said tax-free bonds are in a “good place and have decent performance behind the mini Treasury rallies” in recent weeks, despite some hesitancy regarding some equity volatility and a hawkish Fed outlook.
Last week’s New York City Municipal Water Authority’s offering did well with some of the shorter maturities priced lower, though the long end was difficult, according to Mackey.
There was only a five basis point spread on the longer maturities in final institutional pricing, not much of a price improvement from the original retail scale, he said.
He said given all the New York City paper that has come so far this year, and more on deck, the spreads will serve as a standard benchmark for double-A New York paper.
“People are full on the name, so unless it’s really very attractive you’re not going to really be able to move these spreads much past where they have been,” Mackey said.
For instance, in the 2034 2034 maturity the 5% coupon was priced 22 basis points over the generic triple-A general obligation scale published by MMD — a typical spread.
The 2038 to 2040 maturities were priced between 26 and 27 basis points over the MMD at the time of pricing.
“Twenty-seven basis points over is more toward the wide end of the range than we have seen in the past -- that’s more reflective of there having been other city issues in the market in recent months,” Mackey said.
Municipal bond buyers will see a moderately sized new issue calendar next week with a few big deals heading their way, topped by a big negotiated offering coming out of the Golden State and four large competitive sales from Georgia.
Ipreo estimates weekly volume at $7 billion, up from a revised total of $6.76 billion in the prior week, according to updated data from Thomson Reuters. The calendar is composed of $4.77 billion of negotiated deals and $2.23 billion of competitive sales.
Leading off the week’s slate, Citigroup is set to price the Golden State Tobacco Securitization Corp.’s $1.7 billion of Series 2018A-1 tobacco settlement asset-backed bonds on Wednesday.
The deal consists of $1.699 million of Series 2018A-1 serial bonds running from 2030 to 2035 and $1.25 billion of turbo term bonds, which are made up of $250 million of bonds due June 1, 2036, with an expected average life of 3.97 years and $1 billion of bonds due June 1, 2047, with an expected average life of 21.02 years.
S&P Global Ratings assigned the bonds structured finance preliminary ratings as follows: BBB to the 2030 to 2035 serial maturities and a BBB-minus rating to the 2036 turbo term bonds. S&P did not rate the turbo term bonds due June 1, 2047.
S&P said its ratings reflect “The likelihood that timely interest and scheduled principal payments will be made at each bond's maturity under the appropriate rating stress level; the credit quality of the two largest participating tobacco manufacturers: Altria Group Inc., parent of Philip Morris USA Inc., and British American Tobacco PLC, parent of Reynolds American Inc.; the transaction's legal and payment structures; and the senior liquidity reserve account of $253 million, which will be fully funded at closing and only available to the senior bonds (2007A-1, 2007A-2, 2017A-1, and 2018A-1). The account will comprise $126.5 million in cash and short-term eligible investments and $126.5 million in a bank deposit account backed by a letter of credit.”
Jefferies is joint senior manager and Public Resources Advisory Group and Lamont Financial Services Corp. are financial advisors.
Also coming on Wednesday, Bank of America Merrill Lynch is set to price the Pennsylvania Turnpike Commission’s $490 million of Series 2018A-2 turnpike revenue bonds.
The deal is rated A1 by Moody’s Investors Service, A-plus by Fitch Ratings and AA-minus by Kroll Bond Ratings Agency.
In the competitive arena, Georgia is coming to market with about $1.23 billion of general obligation bonds in four sales on Tuesday.
The deals consist of $428.95 million of Series 2018A Tranche 2 GOs, $411.655 million of Series 2018A Tranche 1 GOs, $210.445 million of Series 2018B Tranche 1 taxable GOs and $178.65 million of Series 2018B Tranche 2 taxable GOs.
The deals are rated triple-A by Moody’s, S&P and Fitch. The financial advisor is Public Resources Advisory Group with Terminus Municipal Advisors; bond counsel is Gray Pannell.
In the short-term competitive sector, Idaho is selling $550 million of Series 2018 tax anticipation notes on Wednesday.
The deal is rated MIG1 by Moody’s, SP1-plus by S&P and F1-plus by Fitch. Piper Jaffray is financial advisor and MSBT Law is bond counsel.
Bond Buyer 30-day visible supply at $8.73B
The Bond Buyer's 30-day visible supply calendar increased $128.0 million to $8.73 billion on Monday. The total is comprised of $3.398 billion of competitive sales and $5.329 billion of negotiated deals.
Week's actively quoted issues
Puerto Rico, Pennsylvania and New Jersey names were among the most actively quoted bonds in the week ended June 8, according to Markit.
On the bid side, the Puerto Rico Sales Tax Financing Corp.’s taxable 6.05s of 2036 were quoted by 84 unique dealers. On the ask side, the Pennsylvania GO 4s of 2036 were quoted by 186 dealers. And among two-sided quotes, the New Jersey Transportation Trust Fund 6.561s of 2040 were quoted by 18 dealers.
Municipal bonds were mixed on Friday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell as much as one basis point in the 10- to 30-year maturities and rose less than a basis point in the one- to none-year maturities.
High-grade munis were also mixed, with yields calculated on MBIS’ AAA scale falling less than one basis point in the eight- to 30-year maturities and rising less than a basis point in the one- to six-year maturities while remaining unchanged in the seven-year maturity.
Municipals were stronger on Municipal Market Data’s AAA benchmark scale, which showed yields falling one basis point in the 10-year muni general obligation and dropping two basis points in the 30-year muni maturity.
Treasury bonds were stronger as stock prices were lower.
On Friday, the 10-year muni-to-Treasury ratio was calculated at 84.8% while the 30-year muni-to-Treasury ratio stood at 98.1%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.
Previous session's activity
The Municipal Securities Rulemaking Board reported 37,851 trades on Thursday on volume of $13.18 billion.
California, New York and Texas were the states with the most trades, with the Golden State taking 16.044% of the market, the Empire State taking 13.77% and the Lone Star State taking 9.619%.
Week's actively traded issues
Some of the most actively traded bonds by type in the week ended June 15 were from Puerto Rico and Nevada issuers, according to Markit.
In the GO bond sector, the Puerto Rico 8s of 2035 traded 55 times. In the revenue bond sector, the Reno, Nev. 4s of 2058 traded 45 times. And in the taxable bond sector, the Puerto Rico Sales Tax Financing Corp.6.05s of 2036 traded 84 times
Lipper: Muni bond funds saw inflows
Investors in municipal bond funds showed confidence and once again put cash into the funds in the latest reporting week, according to Lipper data released on Thursday.
The weekly reporters saw $449.614 million of inflows in the week ended June 13, after inflows of $189.487 million in the previous week.
Exchange traded funds reported inflows of $172.711 million, after inflows of $115.358 million in the previous week. Ex-ETFs, muni funds saw $276.903 million of inflows, after inflows of $74.129 million in the previous week.
The four-week moving average remained positive at $237.288 million, after being in the green at $176.621 million in the previous week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.
Long-term muni bond funds had inflows of $394.458 million in the latest week after inflows of $113.984 million in the previous week. Intermediate-term funds had inflows of $208.625 million after inflows of $153.045 million in the prior week.
National funds had inflows of $420.991 million after inflows of $183.181 million in the previous week. High-yield muni funds reported inflows of $322.355 million in the latest week, after inflows of $147.159 million the previous week.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Vanessa Kim at 212-803-8474 for more information.