Municipal bond buyers saw the last of the week’s new issues come to market on Thursday with action dominated by several large California water issuers and a Michigan hospital deal, while chatter continues on the University of Connecticut's high demand. While overall stronger, municipals on the long-end of the curve continue to see yields fall, with AAA benchmarks two to three basis points firmer on Thursday.
Primary market
Goldman Sachs priced the Los Angeles Department of Water and Power’s (NR/AA/AA) $309.15 million of Series 2019B power system revenue bonds.
LA DWP last came to market in mid-January when it priced $345 million of power system revenue bonds. The 10-year with a 5% coupon originally yielded 2.12%. That bond traded in blocks last on February 4 at 2.01%. The 11-year, 5s of 2030 with a 10-year call, traded in blocks on March 1 at 2.24%. Today's pricing had the 10-year at 1.81% and the 11-year at 1.92%.
Piper Jaffray priced the California Infrastructure and Economic Development Bank’s (Aaa/AAA/AAA) $83.92 million of clean water and drinking water state revolving fund revenue green bonds.
IBank said the green bonds will be delivered to the State Water Resources Control Board to fund major projects that affect Californians’ access to safe and affordable drinking water. The California State Treasurer’s office was the agent of sale of the revenue bonds on behalf of the Water Board.
This is the fourth year that IBank has issued green bonds and since 2016, it has issued more than $2 billion of green bonds.
IBank Acting Executive Director Nancee Robles said the sale shows how water projects have become an urgent necessity throughout the state. The Water Board has pledged millions of dollars to eight recipients for projects, including the cities of Fresno and Los Angeles.
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Also in California, RBC Capital Markets priced the California Municipal Finance Authority’s (NR/NR/NR) $74.17 million of Series 2019 refunding revenue bonds for the William Jessup University.
JPMorgan Securities priced the Michigan Finance Authority’s (A2/A/NR) $229.79 million of Series 2019A hospital revenue bonds for the Henry Ford Health System.
Thursday’s bond sales
Yield hungry
The stretch for yield continues to impact investor behavior, spreads on new issues, and overall ratios in the tax-exempt market, sources said this week.
Many individual investors are willing to extend duration to pick up incremental yield in the backdrop of strong demand and limited supply, according to Alan Schankel, managing director at Janney Capital Markets.
“I believe many retail investors are becoming increasingly comfortable with interest rate risk, especially in light of recent Fed indications of a halt — for now — to rate hikes,” he said on Thursday. The behavior is being reflected in lower municipal to Treasury ratios, with the tax free-market outperforming Treasuries so far this year.
Schankel said he found it interesting that, despite a recent S&P downgrade, the spreads on the 10-year yield on the University of Connecticut deal priced on Wednesday tightened by more than 30 basis points compared to a year ago.
The 10-year maturity priced at 53 basis points over triple-A benchmarks compared to the May 2018 sale, in which the 10-year was 84 bps over the triple-A scale.
Near-record results on UConn deal
The University of Connecticut’s (A1/A+/A) $240 million GO sale saw near-record results, State Treasurer Shawn T. Wooden and UConn Chief Financial Officer Scott Jordan said on Thursday.
Total orders received during the retail order period were $175.1 million, the second-highest level of retail orders on any UConn 2000 Bond sale in the 23-year history of the program, they said in a press release. Institutional investors placed orders for $1.1 billion of bonds, bringing total orders to $1.3 billion, more than five times oversubscribed.
“This UConn bond sale builds on the progress and positive momentum made with our recent record-setting General Obligation bond sale,” Wooden said. “The increasing attractiveness of Connecticut bonds is further proof that our long-term fiscal stability is strengthening and that in investors’ eyes, it’s a new day in Connecticut. It also underscores the importance of staying the course with fiscally responsible policies.”
Proceeds will fund a range of projects at UConn and follows a sale of state GOs last month that drew a historically high order of $5.5 billion.
“With tremendous excitement surrounding UConn and its future, this bond sale is perfectly timed,” Jordan said. “The enthusiasm investors have shown will support investments in the University’s campuses at very favorable terms, and will help further UConn’s mission to prepare our students to facilitate Connecticut’s future economic growth.”
Of the total issued, $175 million are new-money bonds, and along with associated bond premium that will provide $200 million of funds for UConn infrastructure investments. The remaining $65 million of bonds issued are refunding bonds that will refund $72 million of higher-interest bonds for debt service savings of about $9.6 million over the next 10 years.
The refunding bonds’ overall interest cost was 2.23%, one of the lowest in the history of the program, they said.
“By refunding existing debt for savings, we were able to take advantage of market demand and attractive low interest rates. By doing so, we’ve reduced the state’s fixed costs for years to come, which is positive for our credit ratings,” Wooden said.
Officials said the success of the sale was driven in part by retail investors looking to lessen the impact of the limitation of SALT deductions following federal tax reform. Bond pricing spreads were further improved by 8 to 20 basis points from the last GO bond sale. The UConn bond sale saw a spread of 42 basis points to the benchmark MMD index on the longest maturity offered with a 5% coupon, lower than the 62 basis point spread on the state’s recent GO bond sale, they said.
The overall interest cost on the 20-year new-money portion of the sale was 3.03%, the second lowest cost on any UConn 2000 bond sale on record — down from the 3.12% interest cost on the state’s March GO sale.
The 10-year with a 5% coupon yielded 2.48%. The 29-year with a 4% coupon priced at 3.13%.
Muni money market funds see outflows
Tax-exempt municipal money market fund assets fell $1.43 billion, with total net assets falling to $132.41 billion in the week ended April 22, according to the Money Fund Report, a publication of Informa Financial Intelligence.
The average seven-day simple yield for the 186 tax-free and municipal money-market funds surged to 1.49% from 1.16% last week.
Taxable money-fund assets fell $5.32 billion in the week ended April 23, bringing total net assets to $2.887 trillion.
The average, seven-day simple yield for the 808 taxable reporting funds increased to 2.07% from 2.06% last week.
Overall, the combined total net assets of the 994 reporting money funds decreased $6.75 billion to $3.010 trillion in the week ended April 23.
Secondary market
Munis were stronger on the
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year muni GO dipped one basis point while the 30-year muni yield fell three basis points.
"Muni participants continue to seek yield by extending further out on the curve," Peter Franks, senior market analyst at Refinitive MMD, said in a market comment. "Activity in the front end, although firm, is significantly slower than long-term action. Into midday, that activity in the long end continues with strong trades as well as some more credit spread compression."
Treasuries were higher as stocks traded mixed.
The 10-year muni-to-Treasury ratio was calculated at 75.1% while the 30-year muni-to-Treasury ratio stood at 88.0%, according to MMD.
Previous session's activity
The MSRB reported 41,364 trades on Wednesday on volume of $16.63 billion. The 30-day average trade summary showed on a par amount basis of $11.87 million that customers bought $5.67 million, customers sold $4.03 million and inter-dealer trades totaled $2.17 million.
California, Texas and New York were most traded, with the Golden State taking 14.732% of the market, the Empire State taking 11.044% and the Lone Star State taking 8.774%. The most actively traded security was the California Series 2018 GO 5s of 2048 which traded 11 times on volume of $39 million.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
