Chicago upsizes deal; yields lowered 15-20 bps in repricing

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Municipal bond investors looking for yield turned their focus to the Midwest on Wednesday as deals coming out of Chicago looked likely to satisfy their appetite, for now.

Primary market
Chicago (NR/BBB+/BBB-/A) hit the market Wednesday with the general obligation bond piece of its planned refunding deal that totals about $1.5 billion.

JPMorgan Securities tentatively priced the city’s $366.4 million of Series 20201 GOs to yield from 1.66% with a 3% coupon in 2021 to 2.58% with a 5% coupon in 2030.

The deal was repriced and upsized in the afternoon to lower yields by 15 basis points in the 2021 to 2026 maturities and by 20 basis points in the 2027 to 2030 maturities. Underwriters added 2031 and 2032 maturities, increasing the deal to $466.77 million. The GOs were repriced to yield from 1.51% with a 3% coupon in 2021 to 2.49% with a 5% coupon in 2030.

Chicago's 10-year GO maturity landed at a 105-basis point spread to Refinitiv Municipal Market Data's top-rated benchmark after the repricing. That compares favorably to the 169 basis point spread on the 10-year in the city’s previous GO sale that priced last spring.

The city’s last taxable deal in 2019 only offered term bonds in 2040 and 2048 and they landed at spreads of 156 basis points and 171 basis points, respectively.
"I think the GO is tight and the sales tax securities are wide from a trading perspective," a Chicago trader said. "There's clearly a strong preference for yield, but just on a ratings basis, one would expect more spread volatility from the GOs than the STSC subs. I understand there's even BAM insurance available for the STSC. STSC with BAM seems like a no brainer to me compared to the GOs. One awful headline and the GOs could be back to +175."

On Thursday, Chicago’s Sales Tax Securitization Corp. (NR/AA-/AA-/AA+) will come to market with second lien sales tax securitization bonds to be priced by Goldman Sachs. Underwriters circulated an indications of interest wire for the $466.07 million taxable portion of the deal on Wednesday.

The Series 2020B taxables may be offered at par with yields ranging from 75 basis points over the comparable 2023 Treasury maturity to 140 basis points over the comparable 2035 Treasury; the $112.76 million 2043 maturity is being insured by Build America Mutual and was seen at 135 basis points over the comparable Treasury. While the final pricing on the taxables occurs Thursday, the rates offered put the spread on an 11-year bond to comparable Treasuries at 120 basis points and a 15-year maturity at a 140 basis point spread.

The market will be watching closely to see where the tax-exempt STSC yields settle after the Thursday pricing as it provides a fresh opportunity to assess the value of the higher-rated credit. The 10-year in the last tax-exempt STSC issue that sold in late 2018 settled at an 83 basis point spread to the AAA.

The second lien bonds lost the top rating from Fitch Ratings on Wednesday under the agency’s new tax-supported debt criteria, which caps ratings to six notches off a borrower’s GO credit.
Also Wednesday, BofA Securities priced San Antonio, Texas’ (Aa1/AA/AA+/NR) $135.73 million of New Series 2020 electric and gas systems revenue refunding bonds.

The deal was priced as 5s to yield from 1.11% in 2026 to 2.06% in 2042, 2.15% in 2045 and 2.20% in 2049.

Secondary market
There was a constructive tone in the market on Wednesday as the Chicago deal dominated market appetite from eager investors.

“Cash is being put to work in a bit of a frenzy today on the short end of the yield curve,” said Michael Pietronico, chief executive officer of Miller Tabak Asset Management. He said the five to six-year area of the municipal curve is seeing heavy inquiry.

That could be a result of sub 1% yields “rearing their ugly head” on bonds further on the yield curve, Pietronico said.

Munis were stronger on the MBIS benchmark scale, with yields falling by less than one basis point in the 10-year maturity and by four basis points in the 30-year maturity. High-grades were mixed, with yields on MBIS AAA scale falling less than one basis point in the 10-year maturity and rising by less than a basis point in the 30-year maturity.

On the MMD benchmark scale, the yield on the 10-year GO dropped two basis points to 1.31% as the 30-year declined two basis points to 1.94%.

“The ICE muni yield curve is down one to three basis points. Tobaccos and high-yield are down one basis point as well,” ICE Data Services said in a Wednesday market comment. “Taxables are two to three basis points lower.”

The 10-year muni-to-Treasury ratio was calculated at 73.3% while the 30-year muni-to-Treasury ratio stood at 86.5%, according to MMD.

Stocks were mostly higher as Treasuries strengthened.

The Dow Jones Industrial Average was up about 0.50%, the S&P 500 Index gained around 0.34% and the Nasdaq rose about 0.31%.

The Treasury three-month was yielding 1.567%, the two-year was yielding 1.564%, the five-year was yielding 1.602%, the 10-year was yielding 1.792% and the 30-year was yielding 2.246%.
Previous session's activity
The MSRB reported 32,730 trades Tuesday on volume of $11.06 billion. The 30-day average trade summary showed on a par amount basis of $11.01 million that customers bought $5.74 million, customers sold $3.38 million and interdealer trades totaled $1.89 million.

California, New York and Texas were most traded, with the Golden State taking 13.215% of the market, the Empire State taking 12.933% and the Lone Star State taking 11.568%.

The most actively traded security was the Puerto Rico Sales Sale Financing Corp. restructured A1 revenue zeros of 2046, which traded 76 times on volume of $176.05 million.

Muni CUSIP requests fall 24%
Requests for municipal CUSIPs declined 24.1% in December, according to report released Wednesday by CUSIP Global Services. The report tracks the issuance of new security identifiers as an early indicator of market activity over the next quarter.

The total CUSIP requests for new municipal securities, which includes municipal bonds, long-term and short-term notes, and commercial paper, dropped to 1,084 from 1,429 in November. By comparison, CUSIP requests for corporate debt dropped 14.1% in December.

On a year-to-date basis, total muni CUSIP request volume was up 14.7% to 14,839 from 12,941 in the same period in 2018, reflecting strong volumes throughout 2019. However, the 2019 total fell short of the record for full-year volume which was 16,683, set in 2009.

The number of requests for muni bonds fell to 935 in December from 1,263 in the previous month. Requests for long-term notes rose to 17 from 15 while those for short-term notes dropped to 89 from 105 in November.

Among top state issuers, New York, Texas, New Jersey and California were the most active in December.

ICI: Muni funds see $3.5B inflow
Long-term municipal bond funds and exchange-traded funds saw a combined inflow of $3.533 billion in the week ended Jan. 8, the Investment Company Institute reported on Wednesday.

It was the 53rd straight week of inflows into the tax-exempt mutual funds. The previous week ended Dec. 31 saw $1.505 billion of inflows into the funds.
Long-term muni funds alone had an inflow of $2.906 billion after an inflow of $1.268 billion in the previous week; ETF muni funds alone saw an inflow of $627 million after an inflow of $274 million in the prior week.

Taxable bond funds saw combined inflows of $21.211 billion in the latest reporting week after revised inflows of $7.782 billion in the previous week.

ICI said the total combined estimated inflows from all long-term mutual funds and ETFs were $10.983 billion after inflows of $7.740 billion in the prior week.

Equity funds declined, falling $12.882 billion for the week after losing $1.805 billion in the prior week.

Yvette Shields andChristine Albano 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.

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Primary bond market Secondary bond market Municipal bond funds City of Chicago, IL Chicago Sales Tax Securitization Corp State of New York State of California State of Texas Puerto Rico Sales Tax Financing Corp (COFINA)
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