Clark County, Nevada, and Ohio were among issuers pricing into a stronger municipal market Tuesday as volatility in equities spurred a flight to quality.
“The muni market improved today out of the gates following Treasuries one to three basis points as traders searching for liquidity sold into it early,” said Jason Lisec, a municipal trader at Hilltop Securities in Florida. “As the morning progressed, the back end leadership improved to three to four basis points better as customers stepped in driving final demand.”
Lisec said volume has been moderate in the face of several large client bid lists and the release of several new issue pricings, while traders and customers were seeking further evidence that early gains would hold.
He also noted that last week’s loans continue to trade well, holding final quality spreads into the day’s session. “Overall float is light as customer followup demand has helped clear lingering balances,” Lisec said.
Primary market
In the competitive arena on Tuesday, Clark County sold nearly $450 million of general obligation bonds in two sales.
Morgan Stanley won the $273 million of Series 2018B limited tax transportation improvement bonds with a true interest cost of 3.6149%.
Bank of America Merrill Lynch won the $150 million of Series 2018 limited tax park improvement bonds, additionally secured by pledged revenues, with a TIC of 3.5405%.
The financial advisors are Hobbs, Ong & Associates and PFM Financial Advisors; the bond counsel is Sherman & Howard.
Proceeds of the 2018B bonds will be used to finance a portion of the costs of certain improvements to transportation facilities within the Strip Resort Corridor; proceeds of the 2018 bonds will be used to finance certain park projects.
The deals are rated Aa1 by Moody’s Investors Service and AA-plus by S&P Global Ratings.
Since 2008, the county has sold about $10.8 billion of bonds with the most issuance occurring in 2010 when it offered $2.2 billion. It sold the least in 2012 when it issued $207.8 million.
Ohio sold $160 million of Series 2018A GO infrastructure improvement bonds on Tuesday.
JPMorgan Securities won the bonds with a TIC of 3.4541%.
Proceeds will be used to finance the cost of public infrastructure capital improvement projects of local subdivisions in the state. The financial advisor is PFM Financial Advisors; the bond counsel are Roetzel & Andress and Squire Sanders.
The deal is rated Aa1 by Moody’s and AA-plus by S&P and Fitch.
In the negotiated sector, Citigroup priced the Hillsborough County Aviation Authority, Fla.’s $404.1 million of revenue bonds for the Tampa International Airport.
The deal consists of Series 2018E bonds subject to the alternative minimum tax and Series 2018F non-AMT bonds, rated Aa3 by Moody’s, AA-minus by S&P and Fitch and AA by Kroll Bond Rating Agency; and Series 2018 subordinate bonds, rated A1 by Moody’s, A-plus by S&P and Fitch and AA-minus by Kroll.
Loop Capital Markets priced Atlanta’s $291 million of Series 2018C water and wastewater revenue refunding bonds. The deal is rated Aa2 by Moody’s and AA-minus by S&P.
Morgan Stanley priced the Community Development Administration of the Maryland Department of Housing and Community Development’s $280 million of Residential revenue bonds consisting of Series 2018B bonds subject to the alternative minimum tax Series 2018A non-AMT bonds. The deal is rated Aa2 by Moody’s and AA by Fitch.
Morgan Stanley priced California’s $100 million of Series 2013E general obligation index floating rate bonds as a remarketing. The deal is rated Aa3 by Moody’s and AA-minus by S&P and Fitch.
Tuesday’s bond sales
Nevada
Ohio
Georgia
California
Bond Buyer 30-day visible supply at $8.01B
The Bond Buyer's 30-day visible supply calendar increased $309.1 million to $8.01 billion for Tuesday. The total is comprised of $2.86 billion of competitive sales and $5.15 billion of negotiated deals.
Lipton: Opportunity in underperformance
Some market experts say the recent market volatility could be an opportunity for investors.
“We continue to emphasize the value proposition of carefully and selectively acquiring assets on market weakness,” Jeffrey Lipton, managing director and head of municipal research and strategy and fixed income research at Oppenheimer & Co. Inc. wrote in an Oct. 22 weekly report. “Underperformance tends to produce more attractive entry points with cheaper relative value ratios.”
Though municipals are still in a pattern of tracking U.S. Treasury price movements, Lipton said, reactions may not necessarily be immediate and the municipal yield curve can be expected to be “not as flat as the Treasury curve.”
In terms of strategies, Lipton suggests investors should stay invested and try to improve credit quality and diversification where appropriate.
“Spreads on those weaker credits and structures will likely be the first to widen out as rates move higher and the economy enters a cyclical downturn,” he said in his report.
Above market coupon structures remain appropriate as a defensive vehicle against rising interest rates and spreads on such structures can be expected to exhibit greater stability, according to Lipton.
“We continue to recommend keeping maturities inside of 15 years where about 90% of the 30-year long-bond yield can still be captured,” he said in the report.
While municipal bond insurance can offer enhancement value, it should not be viewed as a credit substitution, Lipton said. “It is critically important to understand the underlying fundamentals of an insured security. The point is to recognize that bond insurers are held to much tighter capital requirement standards today. We believe that retail participation and of course higher interest rates will be key motivators of elevating insurance penetration rates.
“Institutional buyers often evaluate the economics of municipal bond insurance and are likely to wager that insured paper may outperform given a specific negative credit event or general market weakness,” Lipton continued. “As we enter a new credit cycle, there may be greater demand for bond insurance as these policies guaranty timely payment of principal and interest and offer investors with enhanced market liquidity.”
Secondary market
Municipal bonds were stronger on Tuesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell as much as two basis points in the one- to 30-year maturities.
High-grade munis were also stronger, with yields calculated on MBIS' AAA scale falling as much as two basis points across the curve.
Municipals were stronger on Municipal Market Data’s AAA benchmark scale, which showed the yield on the 10-year muni general obligation declining three basis points while the yield on 30-year muni maturity dropped four basis points.
Treasury bonds were stronger as stocks traded lower.
On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 85.3% while the 30-year muni-to-Treasury ratio stood at 99.6%, 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.
Puerto Rico munis move off highs
The Puerto Rico Oversight Board approved a revised five-year fiscal plan on Tuesday. Bonds slipped off highs reached on Monday after the initial release of the plan.
In active trading on Tuesday, the Puerto Rico benchmark Series 2014A 8% general obligation bonds of 2035 were trading at a high price of 60 cents on the dollar compared to 60.875 cents on Monday, according to the Municipal Securities Rulemaking Board’s EMMA website. Trading volume totaled $32.41 million in 17 trades compared to $90.795 million in 40 trades on Monday.
The Puerto Rico Sales Tax Financing Corp.’s first subordinate Series 2009A 6% revenue bonds traded at a high price of 47.875 cents on the dollar compared to 48 cents on Monday. Trading volume totaled $1.5 million in 20 trades compared to $1.435 million in six trades on Monday.
The Commonwealth’s Employees Retirement System’s Series 2008A senior pension funding 6.15% bonds were trading at 32.25 cents on the dollar compared to 31.5 cents last Wednesday. Trading volume totaled $6.12 million in 19 trades compared to $5.29 million in seven trades on Wednesday.
Previous session's activity
The Municipal Securities Rulemaking Board reported 38,461 trades on Monday on volume of $7.82 billion.
New York, California and Puerto Rico were the municipalities with the most trades, with the Empire State taking 13.904% of the market, the Golden State taking 12.554%, and the commonwealth taking 10.45%.
Block: Some deals may be attractive
With year-to-date volume down from last year, this week’s calendar includes some large deals that could attract investors’ attention.
The $262 billion total gross supply year-to-date is down 11% year-over-year, noted Peter Block, managing director of credit strategy at Ramirez & Co.
Block said Ramirez is maintaining its full-year 2018 supply projection of $317 billion — which is a decrease of 27% year-over-year.
“We think new-money will likely decelerate in 4Q18,” Block said in his Oct. 22 weekly municipal market strategy report.
Over the next 30 days, net municipal market supply — the difference between new money and redemptions — is negative $12.45 billion, according to Block. That number is comprised of $8.88 billion of new issues against a total of $22.3 billion in maturing bonds, he noted.
Treasury sells bills
The Treasury Department Tuesday auctioned $40 billion of four-week bills at a 2.180% high yield, a price of 99.824389. The coupon equivalent was 2.214%. The bid-to-cover ratio was 2.86.
Tenders at the high rate were allotted 12.25%. The median rate was 2.140%. The low rate was 2.110%.
Treasury also auctioned $25 billion of eight-week bills at a 2.180% high yield, a price of 99.673000. The coupon equivalent was 2.218%. The bid-to-cover ratio was 3.43.
Tenders at the high rate were allotted 21.38%. The median rate was 2.160%. The low rate was 2.130%.
Treasury auctions 2-year notes
Treasury also auctioned $38 billion of two-year notes with a 2 7/8% coupon at a 2.880% yield, a price of 99.990350. The bid-to-cover ratio was 2.67.
Tenders at the high yield were allotted 54.21%. The median yield was 2.859%. The low yield was 2.770%.
Gary 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.
