Houston takes market by storm; PIMCO sees muni opportunities

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With municipal bond yields near record lows, the market saw the week's first wave of volume hit the screens on Tuesday. Investors will be looking toward the Lone Star State for relief from the relative supply drought.

“The calendar this week is very manageable, so Houston is the bellwether deal of the week,” a New York trader said on Tuesday. “The market is waiting on the Houston transaction.”

He added that the identifiable supply demand imbalance is ongoing. Bond fund flows again demonstrated the heavy demand — as flows were were positive for the 32nd straight week, which he said “is crazy given the low rates of municipals — especially in the front end.”

Primary market
Citigroup priced Houston, Texas’ (Aa2/AA/NR) $770.175 million of combined utility system first lien revenue refunding bonds. The deal consists of $151.705 million of Series 2019B refunding bonds and $80.12 million of Series 2020A forward delivery bonds along with $538.35 million of Series 2019C taxable bonds.

Loop Capital Markets, Morgan Stanley, Goldman Sachs, Raymond James and UBS are co-managers. Masterson Advisors and TKG & Associates are the municipal advisors. Orrick is the bond counsel.

On Wednesday, Ramirez & Co. will price Houston’s (Aa3/AA/NR) $483.5 million of public improvement refunding bonds. This deal consists of $275 million of Series 2019A bonds, $185 million of Series 201BC taxables, $160 million of Series 2019B refunding bonds and $23.5 million of Series 2019C forward delivery bonds.

Since 2009, the city has sold about $16 billion of debt, with the most issuance coming in 2014 when it offered $2.5 billion. It sold the least amount in 2015 when it issued $485 million.
Morgan Stanley priced the SCL Health System’s $526.15 million deal, consisting of the Colorado Health Facilities Authority’s Series 2019A revenue refunding bonds and the Montana Facility Finance Authority’s Series 2019A revenue refunding bonds.

BofA Securities priced the West Harris County Regional Water Authority Water System’s (A1/AA-/A+) $142.55 million of Series 2019 revenue and revenue refunding bonds.

In the competitive arena, the Florida Board of Education (Aaa/AAA/AAA) sold $168.335 million of Series 2019D public education capital outlay refunding general obligation bonds.
BofA won the issue with a true interest cost of 2.1279%.

The state’s Division of Bond Finance acted as the financial advisor. Squire Patton was the bond counsel. Proceeds will be used to refund outstanding Series 2007G BOE capital outlay Build America Bonds.

On Wednesday, Texas (MIG1/SP1+/F1+/K1+) will competitively sell $8 billion of Series 2019 tax and revenue anticipation notes. George K. Baum is the financial advisor; Orrick Herrington is the bond counsel.

Goldman Sachs is set to price San Antonio, Texas’ (Aa1/AA/AA+) $115 million of New Series of 2019 electric and gas systems revenue refunding bonds on Wednesday. Raymond James and Siebert Cisneros Shank are co-managers. PFM and Estrada Hinojosa are the financial advisors. Norton Rose Fulbright and Kassahn and Ortiz are the bond counsel.

Tuesday’s bond sales
Click here for the Houston taxable pricing

Click here for the Houston repricing

Click here for the Houston pricing

Click here for the SCL pricing

Click here for the West Harris repricing

Click here for the West Harris pricing

Click here for the Florida sale

PIMCO sees areas of opportunity
The municipal bond team at Pacific Investment Management Co. see several areas of opportunity for muni investors in the second half of 2019.

David Hammer, Head of Municipal Bond Portfolio Management, Mathew Sinni, Municipal Credit Research Analyst and Aditi Gupta, Municipal Bond Strategist, believe that muni valuations remain attractive despite some richening. While yields have fallen in recent months, the PIMCO team remains constructive on munis and think valuations still look attractive on an after-tax basis relative to corporate bonds and other credit markets.

"Given the broadly accommodative environment since the financial crisis and the Fed’s pivot to a more dovish policy stance, we see the potential for excesses in corporate credit valuations and an environment that could give rise to liquidity concerns if sentiment shifts," they said in an Aug. 19 report. "Lower rate expectations underpin a broadly supportive macroeconomic backdrop for munis."

To tap opportunities in the second half, they feel as though an informed active approach is key.

"We’re seeing structural opportunities arising from steep muni yield curves and market mispricing of callable bonds, along with growth in private placements and unrated issues," the report said. "Active credit selection and avoidance of economically sensitive assets, as well as the potential to exploit market confusion related to 'special revenue' bonds, also present opportunities."

The group continued to say that while investing in these areas may be challenging for individual investors, they can be tapped by managers who meet the qualified investment buyer standard (often required for private placements) and with the analytics capabilities to price call options and seek attractive bonds across the curve. A rigorous credit approach is crucial to discern attractive investments from potential pitfalls.

They also noted that tight supply is a performance tailwind, but rising unfunded pension liabilities bear watching.

"Net muni supply remains negative as issuance continues to lag bond maturities and calls, and with no major infrastructure plan on the horizon, new issuance will likely remain constrained," they said. "Factors including the Tax Cuts and Jobs Act’s elimination of advance refundings, which had represented roughly 20% of annual muni issuance, have contributed to recent tightening."

However, budgetary pressure from growth in unfunded pension liabilities has also been a key factor constraining supply, according to PIMCO. The wide dispersion in pension concerns across the country highlights the need for a thoughtful framework for assessing appropriate credit risk premiums.

They believe municipal bonds may offer investors advantages late in this economic expansion, including attractive tax-efficient income, low correlations to riskier asset classes, and default rates that have been low historically.

"However, credit selection will become more critical as economies cool," the report said. "PIMCO is positioning out of asset classes, sectors, and credits we view as most susceptible to declines in consumer spending, located in less economically resilient regions, or exhibiting high sensitivity to declining macro fundamentals, including commodity prices. We continue to emphasize credits backed by dedicated revenue streams less subject to politics and pension stress."

Secondary market
Munis were stronger in late trade on the MBIS benchmark scale, with yields falling less than one basis point in the 10- and 30-year maturities. High-grades were mixed, with MBIS’ AAA scale showing yields falling one basis point in the 10-year maturity and rising one basis point in the 30-year maturity.

Yields were unchanged on Refinitiv Municipal Market Data’s AAA benchmark scale, with the 10- and 30-year GO yields remaining at 1.23% and 1.90%, respectively.

“Municipal bond yields are holding steady today, sitting out the Treasury rally, as the market settles into a consolidation phase,” ICE Data Services said in a Tuesday market comment. “High-yield credits are slightly better; Puerto Rico bonds remain quiet.”

The 10-year muni-to-Treasury ratio was calculated at 79.0% while the 30-year muni-to-Treasury ratio stood at 93.1%, according to MMD.

Treasuries were stronger as stocks traded down. The Treasury three-month was yielding 1.936%, the two-year was yielding 1.512%, the five-year was yielding 1.430%, the 10-year was yielding 1.556% and the 30-year was yielding 2.042%.
Previous session's activity
The MSRB reported 28,846 trades Monday on volume of $5.50 billion. The 30-day average trade summary showed on a par amount basis of $11.22 million that customers bought $5.71 million, customers sold $3.40 million and interdealer trades totaled $2.11 million.

California, Texas and New York were most traded, with the Golden State taking 14.334% of the market, the Lone Star State taking 12.472%and the Empire State taking 9.938%.

The most actively traded security was the Puerto Rico Sales Tax Financing Corp. 4.329s of 2040, which traded 21 times on volume of $49.20 million.

Treasury to sell $55B 4-week bills
The Treasury Department said it will sell $55 billion of four-week discount bills Thursday. There are currently $34.997 billion of four-week bills outstanding.

Treasury also said it will sell $40 billion of eight-week bills Thursday.

Gary E. 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 Ziad Saba at 212-803-6079 for more information.

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Primary bond market Secondary bond market City of Houston, TX State of Texas State of Florida Florida State Board of Education State of New York State of California Puerto Rico Sales Tax Financing Corp (COFINA)