Municipal bond buyers were rewarded with a slew of supply on Tuesday, led by issuers in California, Seattle, Ohio and Connecticut.
As the first of the week's larger primary deals began pricing, investors showed little hesitation to participate in deals — even with municipal scales at relatively expensive levels, according to one California trader. Demand seemed strong in conjunction with the nearly $10 billion new-issue supply calendar this week, he said.
Even though the benchmark scales in California as well as New York are being considered "aggressive," the trader said deals like the $1.19 billion California Municipal Finance Authority for a project at Los Angeles International Airport and the $567 million Port of Seattle offering subject to the alternative minimum tax are attracting demand, thanks to their rare issuance and the timing of the sales amid Spring reinvestment season.
He said underwriters for Los Angeles' LAX airport deal were able to reprice at lower yields due to the overwhelming demand. "It's a good environment to do deals," he said. "The national stuff and the longer bonds are more difficult to sell, but we still see cash spending outweighing the supply."
"There is still retail demand for the one- to 12-year part of the curve — even given the aggressive ratios," the California trader added.
He noted that reinvestment season and the general lack of paper in 2018 so far is driving demand. "This is the first week of $10 billion in a while and it's giving the market a little test, but so far it still seems to be doing well with it," the trader said.
Bank of America Merrill Lynch priced the California Municipal Finance Authority’s $1.19 billion of Series 2018 A and B senior lien revenue bonds for the automated people mover project at the Los Angeles International Airport.
The bonds are rated BBB-plus by Fitch Ratings, except for the Series 2018A 2030, 2032, 2035 and 2047 maturities, which are insured by Assured Guaranty Municipal, and rated AA by S&P Global Ratings.
The payment obligations of Los Angeles International Airport that support the bonds received Fitch's A rating; the bonds will be repaid using availability payments made to the developer, but aren’t an obligation of the AA-rated Los Angeles airport authority.
Since 2008, the California Municipal Finance Authority has sold roughly $6.7 billion of securities, with the most issuance occurring in 2017 when it sold $1.66 billion and the least in 2012 when it sold $140 million.
BAML priced Connecticut’s $492.76 million of Series 2018 C and D general obligation bonds on Tuesday. The deal is rated A1 by Moody’s Investors Service, A by S&P and Fitch and AA-minus by Kroll Bond Rating Agency.
JPMorgan Securities priced the Port of Seattle’s $567.38 million of Series 2018 A and B intermediate lien revenue bonds subject to the alternative minimum tax. The deal is rated A1 by Moody’s, A-plus by S&P and AA-minus by Fitch.
Port of Seattle is operator of the Seattle-Tacoma International Airport.
“The airport, the ninth busiest in the U.S., has seen strong and sustained growth in passenger traffic, with enplanements up by 5.3% in the first four months of FY2018, per Moody’s,” according to Janney’s daily market commentary. “The Port’s aviation division contributes the majority of operating income (77%), with other income (21%) earned by the Port’s maritime operations, which have benefited from the 2015 formation of the Northwest Seaport Alliance with Port of Tacoma, making Puget Sound the fifth largest containerized cargo gateway in the U.S.”
Citigroup priced the Kentucky State Property and Building Commission’s $283.14 million of revenue bonds for Project No. 119 and agency fund revenue refunding bonds for Project No. 120.
The deal is rated A1 by Moody’s, A-minus by S&P and A-plus by Fitch expect for the Project No. 119’s 2031-2034 maturities, which are insured by Build America Mutual and rated AA by S&P.
BAML priced Lincoln. Neb.’s $121.775 million of Series 2018 Lincoln electric system revenue bonds. The deal is rated AA by S&P and Fitch.
On the competitive front, Ohio sold $300 million of Series 2018A common schools GOs. JPMorgan won the deal with a true interest cost of 3.5797%. The deal is rated AA-plus by Fitch.
Clark County School District, Nev., sold $200 million of Series 2018A limited tax GO building bonds. Citigroup won the bonds with a TIC of 3.4536%. The deal is rated A1 by Moody's and A-plus by S&P.
Seattle sold $263.76 million of Series 2018A municipal light and power improvement revenue bonds. BAML won the bonds with a TIC of 3.5286%. The deal is rated Aa2 by Moody’s and AA by S&P.
The Southern California Metropolitan Water District sold $164.7 million of subordinate water bonds.
Wells Fargo Securities won the $99.075 million of Series 2018A revenue refunding bonds with a TIC of 1.6295%. Morgan Stanley won the $65.625 million of revenue bonds with a TIC of 2.1688%. The deals are rated AA-plus by S&P and Fitch.
Tuesday’s bond sales
Click here for the MFA repricing
Click here for the State repricing
Click here for the Lincoln pricing
NYC MWFA to sell $375M bonds
The New York City Municipal Water Finance Authority plans to sell $375 million of tax-exempt fixed-rate second general resolution revenue bonds on Tuesday, June 12. There will be a one-day retail order period on Monday, June 11.
The bonds will be sold via negotiated sale through the authority’s underwriting syndicate, led by book-running senior manager Raymond James, with Barclays Capital and Siebert Cisneros Shank & Co. serving as co-senior managers on the transaction.
Proceeds from the sale will be used to refund certain outstanding bonds.
Municipal bonds were mixed on Tuesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields rose as much as one basis point in the three- to eight, 11- and 12- and 22- to 30-year maturities, fell as much as one basis point in the one- and two-year and 14- to 20-year maturities and were unchanged in the nine-, 10-, 13- and 21-year maturities.
High-grade munis were also mixed, with yields calculated on MBIS’ AAA scale rising as much as one basis point in the three- to 13-year and 15- to 26-year maturities and remaining unchanged in the 14-year and 27- to 30-year maturities.
Municipals were unchanged Municipal Market Data’s AAA benchmark scale, which showed yields steady in the 10-year general obligation muni and flat in the 30-year muni maturity.
Treasury bonds were stronger as stock prices traded mixed.
On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 83.7% while the 30-year muni-to-Treasury ratio stood at 95.7%, 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.
Previous session's activity
The Municipal Securities Rulemaking Board reported 42,677 trades on Monday on volume of $9.38 billion.
California, Texas and New York were the states with the most trades, with the Golden State taking 14.169% of the market, the Lone Star State taking 9.949% and the Empire State taking 9.904%.
Reinvestment season underway
Spring reinvestment season is underscoring the declining issuance levels, noted Jeffrey Lipton, head of municipal research at strategy at Oppenheimer & Co. in his weekly report.
He notes that total calls and maturities over the next 30 days are approximately $42.87 billion, while total fixed-rate supply over the same time period is about $14.98 billion -- a net supply figure of negative $27.89 billion, according to Bloomberg data in his report.
There are heavier reinvestment needs in California, New Jersey, and New York, and over the next 30 days, net supply in these three states are projected at negative $5.68 billion, negative $3.16 billion, and negative $5.72 billion, respectively, Lipton noted.
"We suspect that spreads on in-state bonds from these states could tighten -- to the extent they can given spread compression -- in during this period with spread performance responding to various credit types," he wrote.
"Although the market has taken its time getting acclimated to the new supply dynamic, we are optimistic that issuance trends will continue to normalize moving forward," Lipton wrote. According to Thomson Reuters, municipal bond issuance rose for the third consecutive month in May, Lipton noted.
May volume was down 20% year-over-year with aggregate year to date volume 22% lower year over year -- considering monthly volume totals typically ebb during the summer months, Lipton pointed out. "While tax-exempt advance refundings have been removed from the supply mix, actual new-money transactions are up about 10% year over year," he added.
Overall, improvements in price discovery and easing liquidity challenges, as well as a compelling after-tax returns, strong credit quality, and portfolio diversification are driving demand elsewhere in the municipal market -- despite the potential for some turbulence.
"While we are not discounting the possibilities for episodic outflows, flows for the balance of the year could become disproportionately positive and help to be a key driver of market recovery and performance," Lipton explained. "Scarcity value may promote heavier inflows throughout the summer months," he wrote.
Going forward, Lipton believes municipal price movements will align with the U.S. Treasury market in response to Fed policy and geopolitical events. "Relative value ratios are likely to move in sync with muni market technicals and tax-exempt bond prices may become even more expensive relative to U.S. Treasuries," he wrote.
He advises investors to follow relative value relationships since he believes any appreciable underperformance by municipals can elevate ratios and provide more compelling entry points on an intermittent basis.
"Nevertheless, if our summer technical expectations materialize, we may see a meaningful drop in ratios. We further believe that munis can benefit from the episodic flight-to-quality bid that may be more prevalent through the balance of the year as geopolitical concerns, including global trade headwinds, evolve," Lipton added.
Treasury sells $35B 4-week bills
The Treasury Department Tuesday auctioned $35 billion of four-week bills at a 1.780% high yield, a price of 99.861556.
The coupon equivalent was 1.807%. The bid-to-cover ratio was 3.04.
Tenders at the high rate were allotted 38.65%. The median rate was 1.750%. The low rate was 1.700%.
Gary Siegel contributed to the 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.