In a sharp reversal, buyers took advantage of cheap municipal bond prices and met issuers in the primary market with ample demand.
Following a massive selloff that left municipal bond yields more than 60 basis points higher in four trading sessions and led borrowers to postpone deals earlier in the week, the primary market was flooded with new issues and buyers gobbled them up, pushing yields down as much as 20 basis points.
“Munis have gotten so cheap relative to Treasuries since May 1,” a Los Angeles trader said. “The long end of munis are up 134 basis points versus 77 basis points in Treasuries. Ratios are around 115% and that’s the high end. Our buy signal is 120%.”
Wells Fargo priced $1.3 billion of Illinois general obligation bonds, rated A3 by Moody’s Investors Service and A-minus by Standard & Poor’s and Fitch Ratings. Traders said the deal was six-and-a-half times oversubscribed.
Yields ranged from 0.47% with a 4% coupon in 2014 to 5.65% with a 5.50% coupon in 2038. The bonds are callable at par in 2023. Bonds maturing in 2014, 2023, 2028, and 2033 are insured by Assured Guaranty Municipal Corp.
A total of $104 million of the Illinois paper was insured, including $50 million that went to retail buyers in years 10, 15, and 20, and another $52 million in the first maturity that sold to an institutional buyer. Market participants familiar with the sale said the state had a number of buyers interested in all the bonds in multiple tranches of the serial maturities. In repricing, yields were tightened as much as 14 basis points. Bonds maturing between 2019 and 2029 had the biggest drop in yields, mostly 10 to 14 basis points. Yields on bonds maturing before 2018 were lowered six and eight basis points. That compares with yields on the Municipal Market Data scale that were lowered between 18 and 22 basis points on bonds maturing beyond 2017 early Wednesday afternoon.
Yields had already been lowered 10 basis points from pre-marketing levels released Tuesday evening on bonds maturing after 2019.
“The market is feeling a lot better,” a Chicago trader said. “It feels stronger. Illinois spreads are still very wide but it has plenty of demand.”
The state received more than $9 billion in bids from 145 investors on the bonds which captured a true interest cost of 5.042 %, according to statement issued by Illinois Gov. Pat Quinn’s administration.
“The problem with munis is you can’t short or hedge them," the Los Angeles trader said. “So when you have forced selling and fund redemptions, rates start adjusting more and more and you have a typical shake out. But today it feels like we found some footing.”
Other traders said rationality started to return to the market Wednesday. The iShares S&P National AMT-Free Municipal Bond Fund – ticker MUB – dropped from about $110 to $102 in the selloff. Wednesday afternoon it improved to $105. “We are getting yields that look attractive again,” said Wayne Schmidt, chief investment officer at Minnesota-based Gradient Investments. “When we were buying a muni and tying it up for 10 years around 1.50% it’s not that exciting. But all of a sudden at 2.50% it looks attractive.”
The market is looking for a new trading range after the selloff. “We entered 2013 and watched the 10-year in a 1.50% to 2.00% range and now we are finding it in the 2.00% to 2.50% range,” Schmidt said. “It’s not a bad thing. We work with a lot of investors across the country and everyone is always in search for yield. We bring some yield back to the muni market and it looks attractive.”
In other primary market deals Wednesday, De La Rosa & Co. priced $1.324 billion of tax and revenue anticipation notes for Los Angeles. The notes are rated MIG-1 by Moody’s, SP-1-plus by Standard & Poor’s, and F-1-plus by Fitch.
The first series of $266 million yielded 0.16% with a 2% coupon in 2014. The second series of $530.2 million yielded 0.17% with a 2% coupon in 2014. The third series of $528.6 million yielded 0.18% with a 2% coupon in 2014. Yields were lowered two basis points from preliminary pricing.
Goldman, Sachs & Co. priced $471.5 million of California’s Riverside County Transportation Commission sales tax revenue bonds, rated Aa2 by Moody’s, AA-plus by Standard & Poor’s, and AA by Fitch.
Yields ranged from 1.90% with a 5% coupon in 2018 to 4.67% with a 5.25% coupon in 2039. The bonds are callable at par in 2023. Yields were lowered between 12 and 15 basis points from preliminary pricing.
Bank of America Merrill Lynch priced more than $200 million of toll revenue senior lien bonds for the Transportation Commission rated BBB-minus. The Los Angeles trader said bonds maturing in 2044 and 2048 were 16 times oversubscribed and yields were lowered 20 basis points.
Morgan Stanley priced $235 million of New York State Thruway Authority state personal income tax revenue bonds, rated AAA by Standard & Poor’s and AA by Fitch.
Yields ranged from 0.519% with a 3% coupon in 2015 to 4.17% with a 5% coupon in 2033. The bonds are callable at par in 2023. Yields were lowered five to 15 basis points from preliminary pricing. Yields were lowered five to 15 basis points from preliminary pricing.
In the competitive market, triple-A rated Georgia auctioned $685 million of general obligation bonds in three pricings.
JPMorgan won the bid for the first pricing of $427.4 million. Yields ranged from 0.17% with a 2% coupon in 2014 to 4.00% priced at par in 2033. The bonds are callable at par in 2023. Bonds with 5% coupons maturing between 2015 and 2026 were priced 12 to 32 basis points below Tuesday’s MMD scale.
Citi won the bid for the second pricing of $163.2 million. Yields ranged from 0.35% priced at par in 2014 to 4.53% priced at par in 2033. The bonds are callable at par in 2023.
Citi won the bid for the third pricing of $94.4 million of taxable qualified school construction bonds. Yields ranged from 0.35% priced at par in 2014 to 4.53% with a 4.65% coupon in 2033. The bonds are callable at par in 2023. Spreads ranged from 20 basis points to 155 basis points above the comparable Treasury yield.
Wednesday, yields on the MMD ended as much as 22 basis points lower. The 10-year yield dropped 20 basis points to 2.61% and the 30-year yield plunged 22 basis points to 3.91%. The two-year yield fell five basis points to 0.50%.
Treasuries ended stronger Wednesday. The benchmark 10-year yield slipped four basis points to 2.55%. The two-year and 30-year yields fell two basis points each to 0.39% and 3.58%, respectively.
