Top quality municipal bonds finished stronger on Tuesday, traders said, as yields on long-dated maturities fell to record low levels amid rising investor demand.
The 30-year muni general obligation yield dropped four basis points to 2.18% from its record low level of 2.22% set last Friday, according to the final read of Municipal Market Data's triple-A scale.
The yield on 10-year benchmark muni declined three basis points to 1.48% from 1.51% on Monday, according to MMD. The yield on 10-year muni now stands only one basis point above its all-time low of 1.47% set back in 2012.
U.S. Treasuries were mixed on Tuesday. The yield on the two-year Treasury rose to 0.72% from 0.71% on Monday, while the 10-year Treasury yield was unchanged from 1.61% and the yield on the 30-year Treasury bond decreased to 2.42% from 2.43%.
The 10-year muni to Treasury ratio was calculated at 91.9% on Tuesday compared to 93.5% on Monday, while the 30-year muni to Treasury ratio stood at 90.0% versus 91.3%, according to MMD.
The market is on "Fed Watch" as Federal Open Market Committee gathers in Washington to decide the course of monetary policy.
Most observers think the Federal Reserve will announce on Wednesday afternoon that it is leaving interest rates unchanged. Market participants will be watching the Fed Chair Janet Yellen's press conference for any hints of future central bank moves.
Citi Looks at Foreign Buyers of Munis
Foreign demand for U.S. securities is rising, as overseas investors flee negative yielding debt in Europe and Japan and head for American shores, according to market report released on Tuesday.
"Our recent conversations with overseas clients indicate that foreign demand for municipals is on the rise," analysts at Citi Research wrote, adding that "this view is also supported by the recent Fed flow of funds data, which show that as of Q1 2016, foreign investors have added $6.7 billion to their municipal holdings over the last year and $2.0 billion over the last quarter. At present, foreign investors account for 2.4% of all municipal holdings."
However, Citi don't see a huge surge in foreign demand coming in the future.
"Despite recent trends, we believe net direct foreign holdings are unlikely to increase by more than $10 billion over the next year," Citi wrote. "This is because of two reasons: 1) Municipals are nowhere as ubiquitous as Treasuries and remain an exotic asset class for most foreign investors. 2) Hedging [foreign exchange] exposure remains costly especially in light of recent FX volatility, and this reduces the attractiveness of tax-exempt municipals, which are currently trading almost as rich as or richer than USTs."
Despite this, Citi says it believes that the yield differential between most high-grade municipals and Japanese and Eurozone bonds will keep munis attractive despite the high cost of hedging foreign exchange exposure.
Primary Market
The New York State Environmental Facilities Corp. came to market on Tuesday with $493.32 million of Series 2016A state clean water and drinking water revolving funds revenue bonds.
Goldman Sachs priced and repriced the NYS EFC's issue, New York City Municipal Water Finance Authority Projects Second Resolution bonds, for institutions after a one-day retail order period.
The bonds were repriced to yield from 0.58% with 3% coupon in 2017 to 2.38% with a 4% coupon in 2036; a 2041 term bond was priced as 5s to yield 2.24%. A split 2046 term bond was repriced as 2 5/8s to yield 2.70% and as 4s to yield 2.55%.
The deal is rated triple-A by Moody's Investors Service and S&P Global Ratings and AA-plus by Fitch Ratings.
Since 2006, the NYS EFC has issued about $7.4 billion of debt, with the largest issuance occurring in 2012 when it sold roughly $1.1 billion of securities. The corporation has only sold more than $1 billion a year twice since 2006 and saw a low year of issuance in 2010 when they came with $505 million.
JPMorgan Securities priced and repriced the Metropolitan Washington Airports Authority's $376.42 million of Series 2016A and Series 2016B airport system revenue refunding bonds.
The $352.88 million of Series 2016 bonds, subject to the alternative minimum tax, were priced as 5s to yield from 2.44% in 2030 to 2.55% in 2032 and to yield from 2.59% with a 5% coupon in 2034 to 2.95% with a 4% coupon in 2036. The $23.54 million of Series 2016B non-AMT bonds were priced as 5s to yield from 1.05% in 2020 to 2.23% in 2032. The deal is rated A1 by Moody's and AA-minus by S&P and Fitch.
JPMorgan also priced and repriced the California Infrastructure and Economic Development Bank's $140.22 million of Series 2016A infrastructure state revolving fund revenue bonds.
The bonds were priced to yield from 0.60% with a 2% coupon in 2017 to 2.38% with a 4% coupon in 2036. A 2041 term bond was priced as 5s to yield 2.19% and a 2045 term was priced as 4s to yield 2.48%. The deal is rated triple-A by Moody's, S&P and Fitch.
Barclays Capital priced and repriced Cook County, Ill.'s $286.18 million of Series 2016A GO refunding bonds, which were priced to yield from 0.70% with a 3% coupon in 2016 to 2.82% with a 5% coupon in 2031. The deal is rated A2 by Moody's, AA-minus by S&P and A-plus by Fitch, with the exception of the first half of a split maturity in 2026, totaling $25 million, which is insured by Assured Guarantee Municipal and gets a rating of AA from S&P.
In the competitive arena on Tuesday, the Florida State Board of Education sold $147.64 million of Series 2016C public education capital outlay refunding bonds.
JPMorgan won the issue with a true interest cost of 2.48%. The issue was priced to yield from 0.70% with a 5% coupon in 2018 to approximately 2.82% with a 2.625% coupon in 2037. The deal is rated Aa1 by Moody's and triple-A by S&P and Fitch.
Huntsville, Ala., sold almost $140 million of GO warrants in four competitive sales.
PNC Capital Markets won three of the deals: the $40.75 million of GO refunding bonds with a TIC of 1.73%, the $34.5 million of GO school refunding warrants with a TIC of 1.89%, and the $28.35 million of GO school warrants with a TIC of 2.76%. Citi won the $36.4 million of GO warrants with a TIC of 2.64%. All four sales are rated triple-A by Moody's and S&P.
On Wednesday, Citigroup is set to price the Peralta Community College District of Alameda County, Calif.'s $155 million of GOs. The deal is rated Aa3 by Moody's and triple-A by S&P.
Janney is expected to price the South Central Connecticut Regional Water Authority's Series A and B water system revenue bonds.
In the competitive arena on Wednesday, Frederick County, Md., is selling almost $125 million of GOs in two separate sales consisting of $90 million of Series 2016A GO public facilities bonds and $34.82 million of Series 2016B taxable GO public facilities refunding bonds. Both deals are rated triple-A by Moody's, S&P and Fitch.
