The tax-exempt market ended the week busier than it started as the majority of the week’s largest deals priced in the primary and the European Central Bank’s new bond buying program spurred global fixed income markets.
Stocks soared and Treasuries took a hit, but munis held their ground. “I’m not noticing any change in munis one way or the other, at least with the stuff I’m seeing,” a New Jersey trader said.
But, the market was busier, especially compared to earlier in the week. “Inventory is slightly larger now. Early in the week it was beyond quiet,” the trader added.
Other traders agreed munis defied Treasuries and weren’t following yields higher. “We are not really following,” a New York trader said. “The market is a little off but I haven’t noticed much.”
He added munis continued to be impacted by supply and demand patterns. “We are still undersupplied this week so paper is moving well. We might be a little cheaper here and there but paper is moving well. The secondary is still well bid for and new issues are going fine. So we are range bound. We could be up a little or down a little but we are range bound.”
In the primary market, the biggest deals of the week priced. Ramirez & Co. priced and repriced $271 million of Chicago second-lien wastewater transmission revenue project bonds, rated Aa3 by Moody’s Investors Service, A-plus by Standard & Poor’s and AA by Fitch Ratings.
Yields ranged from 0.46% with a 3% coupon in 2014 to 4% priced at par and 3.59% with a 5% coupon in a split 2042 maturity. The bonds are callable at par in 2022. Yields were lowered as much as 10 basis points in repricing.
Barclays priced $180.2 million of Illinois Finance Authority revenue bonds for the OSF Healthcare System. The bonds are rated A3 by Moody’s and A by Standard & Poor’s and Fitch. Yields ranged from 0.81% with a 3% coupon in 2013 to 4.40% with a 4.25% coupon and 4.23% with a 5% coupon in a split 2041 maturity. The bonds are callable at par in 2022.
Bank of America Merrill Lynch sold $132.5 million of Tampa, Fla., refunding and capital improvement cigarette tax allocation bonds for the H. Lee Moffitt Cancer Center Project, rated A1 by Moody’s and A-plus by Standard & Poor’s. Yields ranged from 0.70% with a 2% coupon in 2013 to 3.98% with a 4% coupon in 2033. The bonds are callable at par in 2022.
In the competitive market, Raymond James | Morgan Keegan won the bid for $96.2 million of Orange County, Fla., sales tax revenue refunding bonds, rated Aa2 by Moody’s, AA by Standard & Poor’s and AA-plus by Fitch. The bonds had coupons ranging from 2% in 2014 to 5% in 2024. The bonds were not formally re-offered.
On Thursday, the 10-year Municipal Market Data yield rose five basis points to 1.78% while the 30-year yield increased four basis points to 2.92%. The two-year closed at 0.29% for the 30th consecutive session.
Treasuries were much weaker Thursday after the ECB announced a new bond buying program. ECB President Mario Draghi said the bank would buy one- to three-year bonds of distressed countries in the secondary market — called outright monetary transactions.
The bond buying program prompted many reactions. Guy LeBas, chief fixed-income strategist at Janney Capital Markets said the announcement fell short of its potential to support the Eurozone and reinforced the perception of the ECB doing as little as possible and hoping it works.
“The ECB’s OMT program provides a small measure of additional liquidity support to countries that request and receive a bailout,” LeBas wrote. “It is not, however, designed to rescue EU sovereigns, but rather to ensure that the deterioration of sovereign credit quality doesn’t result in a sharp drop in economic activity or deflation. Don’t depend on the OMT as a cure-all for what ails continental Europe.”
Other economists agreed the OMT program may not save Europe. “Today’s announcement should help contain the crisis, but the weak economic outlook looms, the ECB will need to ease policy further in the months ahead,” wrote Benjamin Reitzes, senior economist at BMO Capital Markets.
Subsequently, the benchmark 10-year Treasury yield jumped eight basis points to 1.67% while the 30-year yield spiked 10 basis points to 2.80%. The two-year yield rose two basis points to 0.27%.
In the secondary market, trades compiled by data provider Markit showed weakening. Yields on Massachusetts Development Finance Agency 5s of 2021 spiked up seven basis points to 1.55%. Yields on Pennsylvania State Turnpike Commission 5s of 2042 and Colorado Bridge Enterprise 6.078s of 2040 jumped four basis points each to 3.52% and 4.23%, respectively.
After several negative reports about pension obligation bonds, MMD’s Daniel Berger noted there is a narrow universe of issuers who have been pitched and used POBs. In the past 10 years, 355 issues of POBs have been sold from about 200 different obligors, representing $53.8 billion. Of that, 68.4% were issued by Illinois, California, and Oregon.
Illinois is the leading issuer, representing over 40% of POBs issued in the last 10 years. The state of Illinois has been the largest contributor, issuing $19.7 billion of POBs, or 36.5% of all POBs issued in the state. California holds the second largest market share of POBs, and is the most worrisome as both Stockton and San Bernardino have said they would not pay these bondholders in full. Lastly, Oregon has the third highest volume of POB issues, but Berger noted that they pose less of a credit concern as 16 of the 20 issues are rated double-A or higher.
