Trick or treat: Chicago’s $1.3B sales tax securitization coming for Halloween

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Municipal bond supply takes a leap forward next week as Chicago’s Sales Tax Securitization Corp.’s $1.31 billion deal headlines the new issue calendar.

Ipreo forecasts weekly bond volume will increase to at least $6.5 billion from a revised total of $5.7 billion in the prior week, according to updated data from Thomson Reuters. Ipreo’s estimates were calculated before the Chicago deal was approved for sale. The calendar is composed of $5.8 billion of negotiated deals and $703.3 million of competitive sales.

Primary market
Loop Capital Markets, Ramirez & Co. and Stifel as lead managers are expected to price the STSC deal on Halloween, Oct. 31.

The offering is comprised of $917.64 million of Series 2018C sales tax securitization bonds and $388.56 million of Series 2018D taxables sales tax securitization bonds.

Co-managers include Citigroup, Academy Securities, Melvin & Co., Mesirow Financial, Morgan Stanley, Piper Jaffray, RBC Capital Markets, Stern Brothers and The Williams Capital Group.

The municipal advisors are Columbia Capital Municipal Advisors and PFM.

There will also be a bevy of deals coming from California issuers next week as JPMorgan Securities gets set to price the Los Angeles Department of Airports’ $714 million of subordinate revenue bonds, Siebert Cisneros Shank & Co. gets ready to price Los Angeles’ $362 million of wastewater subordinate revenue bonds, Morgan Stanley gets set to price the San Mateo Community College District’s $318 million of general obligation bonds and Barclays Capital gets set to price the San Mateo County Joint Powers Financing Authority’s $260 million of lease revenue bonds.

Bond Buyer 30-day visible supply at $8.11B
The Bond Buyer's 30-day visible supply calendar increased $3.56 billion to $8.11 billion for Friday. The total is comprised of $1.61 billion of competitive sales and $6.50 billion of negotiated deals.

Retail chasing bogey benchmarks
Individual investors are gaining a comfort level for higher rates as they have seen stability in municipal yields over the last two weeks — not to mention less volatility in the tax-exempt market overall, according to a Southeast trader in Atlanta.

“Retail has been more active in munis lately given all the volatility in the stock market — and we’ve seen the muni curve shift up in conjunction with Treasuries,” the trader said in an interview on Thursday.

He said the current availability of certain key “yield bogeys” has helped attract growing interest among the firm’s retail mom-and-pop constituents.

For instance, the trader said, investors are flocking to high-quality bonds, with 3% coupons in 10 years or 4% coupons in 20 years — at par or a discount — which are readily available in the market.

“It brought the sidelined investors back,” he said. “Those bonds are achievable benchmarks now when in August they weren’t.”

The trader said these structures have been especially abundant given all the volume in recent weeks.

“Last week there was lots of volume driving activity and names of interest came to market that haven’t been seen for a while,” he added.

He expects similar demand to follow through next week — as long as the market climate remains stable.

“We’ve had a fairly stable muni market for about two week now and with the volatility low, investors got used to the higher rate scenario, as opposed to when Treasury and muni rates were jumping up every day and every week,” he said.

The trader recalled that 10-year Treasuries were yielding a 2.95% in mid-August but have risen to 3.137% as of Thursday. Triple-A benchmark municipals in 10 years increased to 2.70% as of Thursday, from 2.43% on Aug. 15, according to Municipal Market Data.

“It’s been a one-way street with higher rates and retail was nervous about committing back then, and rates were not moving up enough for them,” he said of the sub-3% Treasury yield and lower muni rates.

For most of October, however, there has been relative flatness in Treasuries as well as in the muni market, he noted.

“If we maintain a trading range in this area of yields we’ll continue to see strong demand from retail,” he added.

Secondary market
Municipal bonds were stronger on Friday, according to a midday read of the MBIS benchmark scale. Benchmark muni yields fell as much as one basis point in the one- to 30-year maturities.

High-grade munis were stronger, with yields calculated on MBIS' AAA scale falling as much as a basis point 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 the yield on 30-year muni maturity falling as much as two basis points.

Treasury bonds were stronger as stocks traded lower.

On Thursday, the 10-year muni-to-Treasury ratio was calculated at 86.0% while the 30-year muni-to-Treasury ratio stood at 99.7%, 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.

Previous session's activity
The Municipal Securities Rulemaking Board reported 41,236 trades on Thursday on volume of $13.80 billion.

New York, California and Texas were the municipalities with the most trades, with the Empire State taking 17.256% of the market, the Golden State taking 13.66% and the Lone Star State taking 11.379%.

Week's actively traded issues
Some of the most actively traded munis by type in the week ended Oct. 26 were from Puerto Rico and Ohio issuers, according to Markit.

In the GO bond sector, the Puerto Rico 8s of 2035 traded 66 times. In the revenue bond sector, the Lucas County, Ohio, 4.125s of 2042 traded 49 times. And in the taxable bond sector, the Puerto Rico Sales Tax Financing Corp. 6.35s of 2029 traded nine times.

Week's actively quoted issues
Illinois, Kentucky and New Jersey names were among the most actively quoted bonds in the week ended Oct. 26, according to Markit.

On the bid side, the Illinois taxable 6.63s of 2035 were quoted by 89 unique dealers. On the ask side, the Paducah Independent School District Finance Corp. revenue 3.5s of 2035 were quoted by 296 dealers. And among two-sided quotes, the South Jersey Port Corp. taxable 7.365s of 2040 were quoted by 32 dealers.

Lipper: Muni bond funds saw outflows
Investors in municipal bond funds remained cautious and again pulled cash out of the funds during the latest reporting week, according to Lipper data released on Thursday.

The weekly reporters saw $494.914 million of outflows in the week ended Oct. 17 after outflows of $642.032 million in the previous week.
Exchange traded funds reported outflows of $25.091 million, after inflows of $155.595 million in the previous week. Ex-ETFs, muni funds saw $469.823 million of outflows, after outflows of $797.628 million in the previous week.

The four-week moving average remained negative at -$505.107 million, after being in the red at -$479.578 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 outflows of $368.134 million in the latest week after outflows of $659.499 million in the previous week. Intermediate-term funds had outflows of $143.005 million after outflows of $80.325 million in the prior week.

National funds had outflows of $370.522 million after outflows of $487.127 million in the previous week. High-yield muni funds reported outflows of $230.226 million in the latest week, after outflows of $604.919 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 Ziad Saba at 212-803-6079 for more information.

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Primary bond market Secondary bond market Municipal bond funds City of Chicago, IL Chicago Sales Tax Securitization Corp State of California Los Angeles Department of Airports City of Los Angeles, CA State of Texas State of New York South Jersey Port Corp., NJ Commonwealth of Puerto Rico Puerto Rico Sales Tax Financing Corp (COFINA)
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