The tax-exempt market was mostly weaker Tuesday despite Illinois’ general obligation deal being very well-received in the primary.
Ramirez & Co. priced the largest deal for institutions, $575 million of Illinois GOs, rated A2 by Moody’s Investors Service, A-plus by Standard & Poor’s and A by Fitch Ratings.
Yields ranged from 0.73% with a 5% coupon in 2013 to 4.60% with a 5% coupon in 2037. The bonds are callable at par in 2022.
The deal was upsized from $500 million and yields were lowered 10 basis points on almost every maturity from preliminary pricing. Strong demand for the bonds backed by its full faith and credit — which officials like to stress has a priority claim on state revenues — drove the decision to increase the size by $75 million, said state capital markets director John Sinsheimer.
Illinois received $2.3 billion worth of orders from more than 70 institutional investors, including some new names Sinsheimer said the state has not seen before.
“There was no additional cost in adding the $75 million to the [true interest cost] and the state has plenty of places to put the proceeds to good use,” he said. “The institutional market continues to really understand the work done by [Gov. Pat Quinn] and the General Assembly in addressing the state’s fiscal challenges. We have a lot of work yet to do.”
The spread to Treasuries ranged from 55 to 168 basis points, depending on individual maturities, Sinsheimer said. Illinois continues to pay an interest-rate penalty for its fiscal challenges, which include mammoth unfunded pension liabilities, an $8 billion backlog in bills and rising Medicaid expenses, but it has narrowed since lawmakers approved an income tax increase last year.
Ahead of the sale, Moody’s affirmed the state’s $27 billion of GOs at A2 with a stable outlook after downgrading Illinois earlier this year to the lowest among its rated states. Fitch affirmed its A rating and stable outlook and Standard & Poor’s affirmed its A-plus and negative outlook.
Outside the large deal, the rest of the market was calm.
“Overall, Treasuries are off and the muni market feels like it wants to feel better, but it’s not showing up yet,” a Chicago trader said. “There was a focus on new deals but we have a light week on the calendar, relative to last week. And it’s still not constructive in terms of putting money to work in this marketplace.”
While the 10-year yield rose 14 basis points and the 20-year rose 10 basis points last week, market participants don’t believe munis are going to be stronger this week, he added.
“I don’t think participants believe that we’re going to reverse course,” he said. “The trend is higher rates — just, in what time frame?”
Other traders agreed the market was generally quiet. “Munis are doing better today, but it’s still quite slow,” a New York trader said.
Munis were steady to weaker Tuesday, according to the Municipal Market Data scale. Yields inside seven years were steady while the eight- and nine-year yields rose one basis points. Yields outside 10 years rose two basis points.
The two-year yield closed steady at 0.27% for its fourth consecutive trading session, remaining one basis point above its record low. The 10-year yield and 30-year yield jumped two basis points each to 2.04% and 3.31%.
Treasuries were much weaker on positive economic news, especially following the Federal Open Market Committee announcement. The FOMC maintained its zero to 0.25% target range for the federal funds and repeated that “economic conditions are likely to warrant exceptionally low levels for the federal funds rate, at least through late 2014.”
“The changes from the Jan. 25 FOMC statement are fairly minor and are nonexistent on the policy front,” economists at RDQ Economics wrote. “The statement was slightly less downbeat on the economy and there was some acknowledgment that global financial tensions have eased.”
Most market participants assumed there was no possibility of QE3, given that the general tone of the market has improved, and traders moved into riskier asset classes.
The benchmark 10-year yield and the 30-year yield jumped nine basis points each to 2.13% and 3.26%. The two-year yield rose two basis points to 0.35%.
In other primary market municipal news, Bank of America Merrill Lynch priced for retail $750 million of New York State Thruway Authority bonds, rated AA by Standard & Poor’s and Fitch. Pricing information was not available by press time.
B of A Merrill priced for retail $206 million of Dormitory Authority of the State of New York bonds for New York University, rated Aa3 by Moody’s and AA-minus by S&P. Pricing information was not yet available.
B of A Merrill priced $177 million of Apache County, Ariz., Industrial Development Authority pollution control revenue bonds for the Tucson Electric Power Co. project. The credit is rated Baa3 by Moody’s and BBB-minus by Standard & Poor’s and Fitch.
The bonds were priced a par to yield 4.50% in 2030 and are callable at par in 2022.
Bank of America Merrill also priced $148.3 million of Lee County, Fla., School Board certificates of participation after a retail order period Monday. The credit is rated Aa3 by Moody’s, A-plus by Standard & Poor’s, and AA-minus by Fitch.
Yields ranged from 0.93% with a 4% coupon in 2014 to 3.85% with a 3.75% coupon in 2027. The bonds are callable at par in 2022.