California's upsized $1.4 billion deal seen as bellwether for munis

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The primary market was back in full force Thursday, led by California’s upsized $1.4 billion general obligation bond offering, while the secondary was mostly steady as investors digested the first day of a fully operational primary since the coronavirus-driven turmoil began.

Meanwhile, Refinitiv Lipper reported the first inflows since February 26 with $833.3 million of inflows into municipal bond mutual funds for the week ending April 15.

California led the primary market with $1.4 billion, increased from $1 billion, of new-money and refunding tax-exempt general obligation bond debt that saw yields fall slightly at repricing. California last priced $2 billion of GOs in early March, just days before the major sell-off began.

The deal was around four times oversubscribed, according to the State's Treasurer Office. The state said it saw good participation from separately managed accounts, mutual funds and individual retail investors. Yields came in higher Thursday but similar relative to benchmarks now as it did in March. Spreads were wider but mostly in line with expectations.

"We were anxious about the sale heading into this dreary market," said California Treasurer Fiona Ma. "We ended up getting sunshine with a pot of gold at the end and I think this is a good sign for the market and certainly the issuers."

The state was seen as a bellwether for the municipal market testing whether investors would welcome a billion-plus deal after weeks of severe volatility and mostly shuttered primary.

"I would not necessarily say it is a game changer for the market, but it certainly does prove there is an appetite for larger new-issue deals," said Brian Musielak, senior portfolio manager for Commerce Trust Co., "We expect the pace new-issue supply to pick up over the next few weeks."

"We felt this deal would be a good test for the market. Not only due to the size of the deal but also how investors view the credit," he said.

He added that given the cyclical nature of its economy, California is a good barometer for high-grade buyer demand.

"When the economy is in good shape and flows are strong, State of Cal can trade through national high-grade benchmark levels and interesting comparison of yields/spreads from their last deal March – no question the world has changed since," he said. "The deal was well-received. A typical repricing would involve lower yields. In this case, the yields moved only slightly lower on the reprice, however the deal was upsized by almost $500 million."

Robert Wimmel, head of municipal fixed income at BMO Capital Markets, did not participate in the California deal, but said it was oversubscribed, with some left in 3-handle coupons.

“I am also watching it to get a better feel for the market in general, as it’s the first deal of that size, but I would not call it a game changer — more like a good first step,” he said. “Now, if it had tanked, perhaps a game changer. The muni market has some hurdles to overcome still.”

Wimmel said there is a good deal of demand for municipal bonds that are prone to get beat up by headlines in times of economic stress.

“That’s why issuers in general built up sizable reserves,” he said.

In contrast to the primary market, however, a New York trader said the secondary market was weaker than the past week or so, with many traders hesitant to participate even though the market rallied back after the major sell-off in March.

Secondary trading did show some small concessions, but yields mostly hung onto levels of the past two trading sessions.

On the short end, Texas GOs, 5s of 2021, traded at 0.88%. Houston, Texas ISD, 4s of 2022, were at 0.88%-0.85%. Washington GOs, 5s of 2023, traded at 0.96%. Harvards in 2026, 5s, traded at 0.92%-0.91% at their original Tuesday level. Same with Harvards 5s of 2027 at 0.95%-0.94%.

Maryland GOs, 5s of 2028, landed at 1.15%-1.14%. Wake County, NC GOs, 5s of 2028, traded at 1.11%-0.99%. Delaware GOs in 10 years traded at 1.05%.

Out longer, there were some trades that showed yields rising more than benchmark resets.

Washington GOs, 5s of 2039, traded at 1.83% while yesterday they traded in blocks at 1.76%-1.75%.

New York City TFAs, 4s of 2043, traded at 2.57%-2.51%.

While Texas waters, 4s of 2049, traded at 2.20%-2.18% and yesterday they were at 2.14%-2.13%.

Primary market
"We are seeing the primary market come back this week with investor demand being strong,” said Karel Citroen, head of municipal research at investment advisor Conning. “Deals are many times oversubscribed, and as such, it seems like the [Fed’s Municipal Liquidity Facility] and CARES Act programs are doing what they intended to do."

Bank of America Securities priced California’s (Aa2/AA-/AA/ ) $1.48 billion of general obligation bonds on Thursday. California was the last issuer to come with a $2 billion deal before the COVID-19 crisis began in full force and they now are also the first to come as the market attempts stabilization. The deal was upsized from its original par amount of $1.002 billion and it was repriced by two to six basis points.

The deal is expected to see gross savings north of $330 million, that will be spread throughout 20 years. The state also achieved roughly $275 million in present value savings. In the current risk-off environment the market is in, the front-end saw great demand but officials said there was also good demand in the longer-dated maturities as well.

The $618.110 million of various purpose GO bonds was priced as 5s to yield 1.42% in the 2030 maturity and as 3s to yield 2.85% and 4s to yield 2.60% in a split 2050 maturity.

It was then re-priced as 5s to yield 1.40% in 2030 and as 3s to yield 2.85% and as 4s to yield 2.54% in a split 2050 maturity.

The refunding bonds did not have a 10- or 30-year maturity, but the 2031 maturity was priced as 5s to yield 1.54% and the 2040 maturity was priced as 4s to yield 2.41%.

The refunding tranche was upsized to $863.705 million and was repriced as 4s to yield 2.36% in the 2040 maturity.

The state's last sale came on March 10, when it sold $2.095 billion. In that transaction, the $1.019 billion of GO bonds were priced as 4s to yield 1.19% and as 5s to yield 1.19% in a split 2030 maturity, as well as 2.5s to yield 2.58% and 3s to yield 2.42% in a split 2050 maturity.

The refunding portion for $1.076 billion was priced as 4s to yield 1.19% in 2030.

In the competitive arena, Lancaster County, Lincoln public school district No. 1, Nebraska, (Aa1) sold $200 million of GO school bonds. The bonds were won by Wells Fargo with a true interest cost of 2.4235%.

The 10-year maturity was priced as 5s to yield 1.24% while its long bond, 3s of 2046 yielded 2.51%.

Also, Klein Independent School District, Texas, (Aa1/AAA/ ) sold $136.6 million of unlimited tax schoolhouse and refunding bonds. It was won by Jefferies with a TIC of 2.2765%.

The 2030 maturity was priced as 5s to yield 1.29% and the 2049 maturity was priced as 3s to yield 2.60%.

Goldman Sachs received the written award on the Illinois Finance Authority’s (Aa3/AA-/ / ) $380.410 million of revenue bonds for NorthShore University HealthSystem.

The 2030 was priced as 5s to yield 2.14% and the long-bond (2049) maturity was priced as 3.25s to yield 3.50%.

Secondary market data
Munis were mixed on the MBIS benchmark scale Thursday, with yields holding steady in the 10-year maturity and rising by two basis points in the 30-year maturities.

On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on both the 10-year muni and 30-year were unchanged at 1.07% and 1.90%, respectively.

The MMD muni to taxable ratio was 175.1% on the 10-year and 156.6% on the 30-year.

On the ICE muni yield curve late in the day, the 10-year yield was down one basis point to 1.11% while the 30-year slipped less than a basis point to 1.90%.

The ICE muni to taxable ratio on the 10-year was 192% and the 30-year was 152%.

BVAL saw the 10-year was higher by one basis point to 1.14% and the 30-year increased two basis points to 1.99%.

The IHS muni curve saw the 10-year inched up one basis point to 1.14% and the 30-year as well, nudging up to 1.89%.

Stocks were mixed as Treasury yields were declining.

The Dow Jones Industrial Average fell 0.44%, the S&P 500 index decreased 0.03% and the Nasdaq was up 0.87%.

The three-month Treasury was yielding 0.145%, the Treasury two-year was yielding 0.195%, the five-year was yielding 0.336%, the 10-year was yielding 0.606% and the 30-year was yielding 1.213%.

Muni money market funds reverse into positive territory
Tax-exempt municipal money market fund assets increased by $3.77 billion, raising their total net assets to $137.63 billion in the week ended April 13, according to the Money Fund Report, a publication of Informa Financial Intelligence.

The average seven-day simple yield for the 187 tax-free and municipal money-market funds declined to 0.53% from 1.47% in the previous week.

Taxable money-fund assets were up $51.53 billion in the week ended April 14, bringing total net assets to $4.311 trillion.

The average, seven-day simple yield for the 797 taxable reporting funds fell to 0.24% from 0.28% the prior week.

Overall, the combined total net assets of the 984 reporting money funds grew by $55.30 billion to $4.449 trillion in the week ended April 14.

The asset total is the largest-ever since iMoneyNet began tracking money-fund assets, replacing the record that was set the previous week.

Christine Albano contributed to this report.

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Coronavirus Secondary bond market Primary bond market California Volatility State of California California Public Finance 2020