Doubling down: Chicago BoE increases sale to $561M

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The Chicago Board of Education more than doubled the size of its bond sale Thursday, taking advantage of improved credit and market demand.

Loop Capital Markets priced the BOE’s $561.165 million of Series 2018 A&B unlimited tax general obligation refunding bonds. The deal’s amount was originally set at $260.26 million.

“The deal was heavily oversubscribed, particularly the insured bonds,” said one market participant. “The credit has improved, as state revenues coming to CPS should be larger and more predictable. This has probably brought in more investors."

Robert Wimmel, head of the municipal fixed income team at BMO said that the Assured Guaranty Municipal Corp. insured bonds were six to 13 times oversubscribed depending on maturity, while the uninsured were from two to five times oversubscribed.

"We think the deal accelerated because they had good interest in the deal and also did not want to have muni yields move higher on them and reduce the cost savings of the refunding," Wimmel said in an email. "The yield rise on Tuesday probably spurred them to bring it sooner than later. The 2035 maturity was a +220 spread on original price thoughts and also when they priced the deal (5s at a 5.05% yield). They also added insured bonds in 2035 at +140 (5s at 4.25%) when they saw good demand for the insured portion. The deal was bumped, uninsured to +210 and insured to +120, so investors liked the insured bonds a lot more than uninsured when looking at oversubscription and bumps."

The Series 2018A GOs were priced with top yields of 4.95% in a split 2035 maturity and 4.05% in the second half of the 2035 maturity, which was insured by AGM. The Series 2018B GOs were priced to yield 3.82% in 202, 3.96% in 2021 and 4.13% in 2022.

The deal is rated B by S&P Global Ratings, BB-minus by Fitch Ratings and BBB by Kroll Bond Rating Agency, with the exceptions of the second half of a split maturity in 2022, the 2023 maturity and second halves of split maturities from 2025 through 2035 totaling $312.225 million– which are insured by AGM and rated AA by S&P and AA-plus by KBRA.

Click here for the Chicago BOE deal

Increasing yields in the Treasury market have given way to attractive muni yields and technical factors could signal an imminent flight to quality ahead, according to some municipal experts.

New volume will be met with “a reasonable amount of demand as municipal yields are quite attractive at the moment,” according to Michael Pietronico, chief executive officer at Miller Tabak Asset Management in New York. He cited Wednesday's Pennsylvania deal as an example, adding “clearly given its size, the deal needed to add some extra yield.”

On Wednesday, Pennsylvania competitively sold $1.25 billion of general obligation bonds. Bank of America Merrill Lynch won the GOs with a true interest cost of 3.6161% and priced them with top yields of 3.87% in the 2038 maturity and 3.75% in the 2039 maturity, which was insured by AGM.

“The Pennsylvania deal yesterday was all about yield,” said a New York trader. “There is a huge amount of cash around for California and New York credits 10-years and in.”

Going forward, continued rising yields in the Treasury market could funnel more assets into the tax-exempt market.

“The bigger issue for the municipal market to grapple with is the technical breakdown that is currently underway in the Treasury market which clearly points to higher yields in the short term," Pietronico said. “We are of the mindset that incremental moves higher in rates from here will be more detrimental to the economy, and as such investors should favor bonds over stocks in general -- and municipals over Treasuries in particular as the technicals for the tax-free bond market are more favorable than Federal debt.”

Secondary market
Municipal bonds were mostly weaker on Thursday, according to a late read of two MBIS scales.

MBIS’ benchmark muni yields rose as much as one basis point in the nine- to 30-year maturities and fell less than a basis point in the one- to eight-year maturities.

Yields calculated on MBIS’ AAA scale rose as much as one basis point in the one- to 30-year maturities.

According to Municipal Market Data’s AAA benchmark scale, municipals finished weaker. Yields rose three basis point in the 10-year general obligation muni maturity and gained three basis point in the 30-year muni maturity.

Treasury bonds were also weaker, with the 10-year yield moving past the 3.10% level.

“The 10-year Treasury yield has broken through 3.1%, its highest level since July 2011,” said Stifel Chief Economist Lindsey Piegza. “Some analysts suggest the additional rise comes as ‘upbeat’ economic data convinces market participants of an upcoming rate hike. But with a June and September rate increase already priced in at 100%, according to Bloomberg, the additional backup appears to be driven by stronger expectations for growth and inflation, and the potential for additional Fed action beyond September.”

Piegza said this is often what happens “when market psychology shifts to the notion of nowhere to go but up. Instead of throwing the baby out with the bathwater as investors tend to do when things begin to turn sour, at this point investors appear to be drinking the bathwater, convinced it is a bottle of Château Lafite Rothschild.”

On Thursday, the 10-year muni-to-Treasury ratio was calculated at 81.5% while the 30-year muni-to-Treasury ratio stood at 94.6%, according to MMD.

Previous session's activity
The Municipal Securities Rulemaking Board reported 43,463 trades on Wednesday on volume of $10.92 billion.

California, New York and Texas were the states with the most trades, with the Golden State taking 16.896% of the market, the Empire State taking 14.462% and the Lone Star State taking 8.66%.

Primary market
The primary continued to steal all of the attention this week with its $10 billion bounty — the largest supply week so far this year — but it is also creating a lackluster and inactive secondary market, according a New York trader.

“It’s been extremely quiet in the secondary market,” the trader lamented on Thursday afternoon as he said he observed dealers holding onto bonds, or “cutting prices in an effort to move bonds.”

“Everyone is looking at new issues -- that’s where the action is,” he said.

Most of the demand for new issues, according to the trader, stems from institutional investors, while it has been extremely quiet on the retail front.

He said individual investors are still getting comfortable with the new market climate in the municipal market, as yields have been following Treasuries cheaper and are being propped up by the lack of supply.

“We are waiting for retail to get involved,” he said. “They have been hearing about rising rates all year so far, but have been very reluctant to get involved.”

He said the first large volume week of the year has investors salivating for more.

“If you get more supply, you will see municipals get even cheaper,” he explained. “But, it’s not happening to the extent we wanted.”

The realization of noticeable higher rates would boost demand — especially among retail investors, he noted.

“Munis have not taken the hit that Govies have taken due to the lack of supply,” he said. “Our prices have been propped up a little bit due to the lack of supply, but that would be rectified quickly and there would be more pressure on prices if there were more new issues.”

On Thursday, Bank of America Merrill Lynch priced the Dubois Hospital Authority, Pa.’s $156.16 million of Series 2018 hospital revenue bonds for Penn Highlands Healthcare.

RBC Capital Markets priced the North Carolina Housing Finance Agency’s $150 million of home ownership revenue bonds.

Tax-exempt money market funds saw inflows
Tax-exempt money market funds experienced inflows of $2.09 billion, raising their total net assets to $136.70 billion in the week ended May 15, according to The Money Fund Report, a service of This followed an inflow of $2.89 billion on to $134.61 billion in the previous week.
The average, seven-day simple yield for the 202 weekly reporting tax-exempt funds fell to 1.02% from 1.11% the previous week.

The total net assets of the 833 weekly reporting taxable money funds grew to $15.51 billion to $2.655 trillion in the week ended May 14, after an inflow of $2.68 billion to $2.640 trillion the week before.

The average, seven-day simple yield for the taxable money funds increased to 1.37% from 1.36% from the prior week.

Overall, the combined total net assets of the 1,035 weekly reporting money funds increased $17.6 billion to $2.792 trillion in the week ended May 14, after inflows of $5.57 billion to $2.775 trillion in the prior week.

Treasury sells $11B re-opened 10-year TIPs
The Treasury Department sold $11 billion of inflation-indexed 9-year 8-month TIPs at a 0.934% high yield, an adjusted price of 97.131469, with a 1/2% coupon. The bid-to-cover ratio was 2.42.

Tenders at the market-clearing yield were allotted 22.90%. Among competitive tenders, the median yield was 0.870% and the low yield 0.820%, Treasury said.

Treasury details next week’s auctions
The Treasury Department on Thursday announced these auctions:

  • $30 billion of seven-year notes selling on May 24;
  • $36 billion of five-year notes selling on May 23;
  • $33 billion of two-year notes selling on May 22;
  • $15 billion of one-year 11-month floating rate notes selling May 23;
  • $26 billion of 364-day bills selling on May 22;
  • $42 billion of 183-day bills selling on May 21; and
  • $48 billion of 91-day bills selling on May 21.

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. Click here for a brief tour of the Workstation, or contact Vanessa Kim at 212-803-8474 for more information.

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