The municipal bond market kicked off the week with the pricing of the state of Connecticut's $500 million of general obligation bonds for retail investors, the first leg of an almost $1 billion issuance for the month of May. The Nutmeg State is planning a sale of $480 million SIFMA-indexed bonds next week.
Meanwhile, prices of top-shelf municipal bonds finished lower in secondary trading on Monday, traders said, with yields on some maturities rising by as much as five basis points.
Secondary Market
The yield on the 10-year benchmark muni general obligation increased four basis points to 2.22% from 2.18% on Friday, while the yield on the 30-year GO rose by five basis points to 3.18%, according to the final read of Municipal Market Data's triple-A scale. Trading was light, according to Interactive Data.
Treasury prices ended lower as the yield on the two-year Treasury note increased to 0.60% from 0.58% on Friday, while the 10-year yield rose to 2.24% from 2.15% and the 30-year yield increased to 3.01% from 2.90%.
The 10-year muni to Treasury ratio was calculated on Monday at 97.8% versus 101.7% on Friday, while the 30-year muni to Treasury ratio stood at 104.8% compared to 108.0%, according to MMD.
Primary Market
There are $7 billion of negotiated deals set for this week while bonds scheduled for competitive sale total $1.4 billion.
For May, the month-to-date issuance totals $7.2 billion, up 35.1% from the same period ended May 7 in 2014, according to Bank of America Merrill Lynch Global Research. Muni issuance for the year to date is at $153.4 billion, up 59.1% versus the same time period last year, BAML said in its weekly research report. Of the total year-to-date issuance, 69.8% is related to refundings, compared to 50.3% in the same period last year, according to BAML.
For April, BlackRock estimated about $37.8 billion of munis were issued, above the five- and 10-year historical averages of $31 billion and $33 billion, respectively. "Notably, we saw a meaningful uptick in new-money issuance in April -- 42% of April's issuance was new money rather than refundings, which had represented the preponderance of supply in the first three months," BlackRock said in its monthly Municipal Market Update.
On Monday, Siebert Brandford Shank held a one-day retail order period on Connecticut's $500 million of Series 2015B GOs. The institutional pricing is scheduled for Tuesday.
Of the $500 million fixed-rate bond issue, "almost $300 million will be used for grants for the state's local school construction program and other educational facilities," said Sarah K. Sanders, assistant treasurer for debt management in the Connecticut State Treasurer's office. "Economic development and urban action programs will receive $85 million, and $108 million will be used for grant in aid purposes (including $15 million for the state's Town Road Aid program). The remaining funds will be used for housing programs."
The GOs were priced for retail to yield from 1.11% with 2% and 4% coupons in a split 2018 maturity to 3.74% with a 4% coupon in 2035. The 2016 and 2017 maturities were offered as sealed bids. The GOs are rated Aa3 by Moody's Investors Service and AA by Standard & Poor's and Fitch Ratings. Moody's has a stable outlook on the bonds while S&P and Fitch assign negative outlooks.
The Constitution State will be back in the market next week, coming with $480 million of Series 2015C SIFMA-indexed bonds, giving the state a total issuance of $980 million in a two-week span.
"We are expecting a strong response to these offerings. The state is offering two bond structures to diversify a relatively large $980 million total bond offering and to maximize investor demand," said Sanders. "The offering is also designed to appeal to both individual and institutional investors. The state has used this approach successfully in the past. The structures of the two sales were designed together to provide choices to investors as well as flexibility for the state."
Puerto Rico Pain
Puerto Rico is bringing more pain to the municipal bond market as the S&P Municipal Bond Puerto Rico Bond Index is returning a negative 2.7% year-to-date, according to J.R. Rieger, Global Head of Fixed Income at S&P Dow Jones Indices. This translates to a negative 0.33% for the month to date in May.
As bond prices continue to decline, the average yield of bonds in the S&P Municipal Bond Puerto Rico Index rose to record highs last week -- at 8.19% compared to a yield of 7.57% at the end of 2014, Rieger writes in a new research report.
"It gets worse when looking at Puerto Rico general obligation bonds, as the S&P Municipal Bond Puerto Rico General Obligation Index has also seen its yield hit highs of 8.84% (the 2014 year end yield was 7.94%)," he says. "The average price of bonds in the S&P Municipal Bond Puerto Rico Index has sunk to just over 48 cents on the dollar."
He said factors driving the decline are the unknowns around a possible restructuring of PREPA bonds; tax collections have not impressed market participants; no imminent federal intervention; and the credibility of achieving a balanced budget in the next fiscal year
Some Actively Traded Issues
Some of the most actively traded issues in the week ended May 8 were from Maryland, Massachusetts, and Chicago, according to Markit.
Broken down by market sector, revenue bonds comprised 54.83% of new issuance, down from 54.84% in the prior week. General obligation bonds comprised 36.70% of total issuance, down from 37.46%, while taxable bonds made up 8.47%, up from 7.70%.
In the revenue bond sector, the Maryland Health and Higher Educational Facilities Authority 4s of 2041 were traded 185 times. In the GO bond sector, the Massachusetts 4s of 2038 were traded 188 times. And in the taxable bond sector, the Chicago Board of Education 6.519s of 2040 were traded 37 times, according to Markit.
