Municipal bonds finished stronger with Treasurys on Tuesday as the big Chicago O’Hare airport deal came to market and Detroit sold general obligation bonds.
Primary market
JPMorgan Securities priced Chicago’s $1.189 billion of general airport senior lien revenue and refunding bonds on Tuesday for O’Hare International Airport.
The issue was divided into $599.08 million of Series 2018B tax-exempt senior lien general airport revenue bonds not subject to the alternative minimum tax and Series 2018A senior lien general airport revenue and refunding bonds subject to the AMT. There was also a Series 2018C taxable GARB series.
The deal is rated A by S&P Global Ratings and Fitch Ratings and A-plus by Kroll Bond Rating Agency except for the Series 2018B $300 million 2053 maturity which is insured by Assured Guaranty Municipal and rated AA by S&P and the Series 2018A $116.595 million 2043 maturity which is insured by Build America Mutual and rated AA by S&P.
Frasca & Associates and Swap Financial Group are financial advisors while Mayer Brown and Neal & Leroy are bond counsel.
Goldman Sachs priced Detroit’s $135 million of Series 2018 general obligation unlimited tax bonds. The deal is rated Ba3 by Moody’s and B-plus by S&P.
In Detroit’s first post-bankruptcy stand-alone GO sale that carried speculative grade ratings, the 10-year landed at a yield of 4.45% with a 5% coupon, 194 basis points over the MMD triple-A benchmark, and 111 basis points over the BBB. The longer 20-year landed at 4.95% with 5% coupon, 190 basis points over the AAA and 103 basis points over the BBB. The spreads are based on benchmarks at market close Monday.
JPMorgan Securities priced the New York City Housing Development Corp.’s $300.93 million of Series 2018K multi-family (Sustainable Neighborhood) housing revenue bonds. The deal is rated Aa2 by Moody’s and AA-plus by S&P.
Bank of America priced San Antonio’s $130.81 million of New Series 2018A electric and gas systems revenue refunding bonds. The deal is rated Aa1 by Moody’s, AA by S&P and AA-plus by Fitch.
Hilltop Securities priced San Antonio’s $135.92 million of Series 2018 electric and gas systems variable-rate junior lien revenue refunding bonds. The deal is rated Aa2 by Moody’s, AA-minus by S&P and AA-plus by Fitch.
Since 2008, the city has sold about $13 billion of bonds, with the most issuance occurring in 2012 when it offered $2.1 billion. It sold the least amount of bonds in 2011 when it issued $411 million.
Citigroup priced the California Municipal Finance Authority’s $186.67 million of Series 2018A lease revenue bonds for the Orange County Civic Center infrastructure improvement program’s Phase II.The deal is rated AA by S&P and AA-plus by Fitch.
Bond sale results
Illinois
Michigan
New York
Texas
California
Bond Buyer 30-day visible supply at $12.56B
The Bond Buyer's 30-day visible supply calendar decreased $98.2 million to $12.56 billion for Tuesday. The total is comprised of $1.81 billion of competitive sales and $10.74 billion of negotiated deals.
Secondary market
Municipal bonds were stronger, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell as much as four basis points in the one- to 30-year maturities.
High-grade munis were stronger, with yields calculated on MBIS' AAA scale decreasing as much as four basis points across the curve.
Municipals were stronger on Municipal Market Data’s AAA benchmark scale, which showed the yield on both the 10-year muni general obligation and on the 30-year muni maturity falling eight basis points.
“The muni curve is three to five basis points lower with the greater movement in the longer end,” ICE Data Services said in a late market comment. “High-yield is also following with 2019 to 2029 one basis point lower and the longer end two basis points lower. The taxable side of the market is also following suit with yields one basis point lower in the two-year increasing to 7.9 basis points lower in the 30-year. The tobacco market is two basis points lower as well.”
Treasury bonds were stronger as stocks plunged.
The spread on the three-year and five-year Treasury bills inverted by about 1½ basis points Monday, the first time it was negative in 11 years, and the two- to five-year yield curve followed. The two- to 10-year spread, which is considered the most important curve, was at 10 basis points, also the flattest in more than a decade.
Late Tuesday, the Treasury 30-year was at 3.178%, the 10-year stood at 2.917%, the five-year was at 2.802%, the two-year was at 2.819% while the Treasury three-month bill stood at 2.420%.
In late trading, the Dow Jones Industrial Average was off 2.56%, the Nasdaq Composite Index was down 2.80% and the S&P 500 Index dropped 2.50%.
On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 83.2% while the 30-year muni-to-Treasury ratio stood at 98.7%, 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.
The fixed-income markets will be closed on Wednesday for the national day of mourning honoring former President George H.W. Bush.
Previous session's activity
The Municipal Securities Rulemaking Board reported 44,616 trades on Monday on volume of $11.27 billion.
California, Texas and New York were the municipalities with the most trades, with the Golden State taking 13.757% of the market, the Lone Star State taking 10.701% and the Empire State taking 10.561%.
Scarcity and demand
Demand may ebb and flow heading into year end, but municipal analysts believe it will end 2018 steady and sound overall.
“December will be a pivotal month for munis and we will be looking for any factors that could unlock some incremental performance,” Lipton wrote in Monday’s report.
“For starters, we will focus on market technicals as a way to gauge demand during the closing weeks of 2018,” Lipton wrote. “With stronger technicals, we can see a level of demand that is needed to catalyze a better performance trajectory,” Volume is a chief point of consideration, as Bloomberg data shows a 30-day net supply of negative $11.84 billion, while the heaviest reinvestment needs in New Jersey, Ohio and Washington, according to Lipton.
“While bid-wanted activity could continue to weigh on the market and further outflows may occur, we do believe that demand for the asset class remains fundamentally sound with supportive liquidity — and reinvestment needs should amplify this observation,” he said.
Meanwhile, Lipton noted that a split legislative branch is not a bad scenario for municipals, and there is a fairly good chance that the market could see an extended bid, which could “unlock some much needed performance.”
“As 2019 unfolds, we do not see any material risk of further tax cuts which would weaken demand for munis even more,” he added.
One potential initiative Lipton hopes to see a renewed effort behind is the large-scale infrastructure program. “We think that although chances are better with Democrats now in control of the House, consideration must be given to potential deficit implications and this is one likely area to advance political rancor,” he wrote.
“We continue to believe that our nation’s infrastructure crisis not only dilutes our global competitive standing, it also threatens our national security,” he added.
Lipton said as the Christmas holiday approaches, weekly volume will likely flat-line, with no hope in his outlook for any December supply surprises.
While the presence of two holiday shortened weeks and the mid-term elections in November of this year may rationalize the heavy volume decline last month, Lipton doesn’t expect December’s volume to “even appear in the same zip code of last December’s new issue supply figures.”
“Perhaps fiscal austerity has returned more visibly as many municipal issuers are still carefully balancing their debt requirements against a number of other budgetary needs competing for limited resources, not the least of which are pension and OPEB liabilities,” Lipton added.
Overall, he expects municipals to outperform U.S. Treasuries for the year — just as they did last month in the midst of “constructively-interpreted election results and a quality bid.”
“While munis bucked the conventional trend and outperformed during the bond rally, we suspect that this can be explained by so much of the under-performance munis displayed ahead of the election as the threat of further tax cuts took hold,” Lipton explained.
Treasury announces auctions
The Treasury Department Tuesday auctioned $26 billion of 364-day bills at a 2.635% high yield, a price of 97.335722.
The coupon equivalent was 2.726%. The bid-to-cover ratio was 3.05. Tenders at the high rate were allotted 24.07%. The median yield was 2.600%. The low yield was 2.570%.
Treasury also auctioned $40 billion of four-week bills at a 2.320% high yield, a price of 99.826000.
The coupon equivalent was 2.356%. The bid-to-cover ratio was 3.07. Tenders at the high rate were allotted 13.45%. The median rate was 2.290%. The low rate was 2.250%.
Treasury also auctioned $30 billion of eight-week bills at a 2.360% high yield, a price of 99.646000.
The coupon equivalent was 2.401%. The bid-to-cover ratio was 3.24. Tenders at the high rate were allotted 23.13%. The median rate was 2.335%. The low rate was 2.300%.
Gary E. Siegel contributed to this report.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
