On the heels of a state rating upgrade, new paper brought to market by California issuers Thursday was attractive to municipal bond investors.
Appetite in the secondary market for California general obligation bonds also improved following Moody's Investors Service's upgrade of the state GOs to Aa3 from A1 on Wednesday, due to the state's "rapidly improving" financial position. The rating agency expects California's economy and finances to progress in the near future and assigned the state a stable outlook.
"California is trading pretty darn well," a West Coast trader said. "Whenever there is a rating like this yields push a little tighter."
Traders also noted that California Build America Bonds were "trading pretty tight" in the secondary.
The most actively traded BAB CUSIP, 8.361s of 2034, traded five times, at an average of about 137 cents on the dollar, according to data analysis provided by Municipal Bond Information Services. The issuer's yields in the secondary reached a high of 45.478% Thursday, on a separate CUSIP of BAB 7.3s of 2039.
This is the first time since 2001 that California has earned a rating in the double-A category. California's ratings have lingered in the single-A category for the past decade with a brief dip to triple-B after the financial crisis.
"Reception is a lot more positive," said a New York trader. "The state is in better fiscal shape and the trend seems to indicate continued improvement."
Despite the uptick, some market participants believe market sentiment regarding California paper will grow more positive in the coming weeks.
"I don't think information about the upgrade is as distributed as we think," a second West Coast trader said. "Not all the hedge fund traders and managers are paying attention that much to the recent news. They're busy handling other things."
The largest deal of the week, $1.4 billion of Los Angeles tax and revenue anticipation notes, was priced by Ramirez & Co. Thursday, to yield 0.11% with a 1.50% coupon.
"Short-term notes are always gobbled up," a Florida trader said. "There is too much money in the market and guys are looking to park cash. Anything under five years will not have a hard time finding buyers."
The deal received a MIG-1 rating from Moody's Investors Service, SP-1-plus from Standard and Poor's and F1-plus from Fitch Ratings.
Piper Jaffray priced a six-part short-term deal totaling $200 million of California School Cash Reserve Program bonds. The $106.1 million note has 0.12% yield with a 2% coupon in 2015. The $45 million note has 0.11% coupon with a 2% coupon in 2015.The $39 million note has a 0.11% yield with a 2% coupon in 2015.
The $5.1 million note has 0.13% yield with a 2% coupon in 2015. The $4 million note has a 0.12% yield with a 2% coupon in 2015. The $1.2 million note has a 0.30% coupon with a 2% coupon in 2015. There is no optional call. The deal was rated SP-1-plus by S&P.
While some investors have no problem throwing their cash into the short-end of the curve, others feel like they're stuck in a never-ending cycle.
"Cash is your enemy if you're in fixed income," a second New York trader said. "It beats sitting in cash. It's just another day of groundhog day."
Wells Fargo Securities priced $379.7 million of Sacramento County Sanitation District Financing Authority revenue bonds. Yields ranged from 0.35% with a 4% coupon in 2016 to 3.59% with a 5% coupon in 2044. The bonds are callable at par in 2024. The credit is rated Aa3 by Moody's, AA by Standard & Poor's and AA-minus by Fitch.
The municipal market strengthened Thursday for the second straight day as the results of Wednesday's first quarter gross domestic product results give investors reassurance.
"The market feels very strong," a third New York trader said. "There's demand with limited supply. Anything with incremental yield is getting scooped up, which is not going to change anytime soon. It feels very rich."
Munis mostly strengthened Thursday, according to the Municipal Market Data triple-A GO scale. Yields on bonds maturing in three to six years, and those maturing beyond 2030, fell two basis points. Yields on the intermediate part of the curve slipped one basis point, while yields on the short-end of the curve and yields on bonds maturing from nine to 12 years were unchanged.
According to the Municipal Market Advisors 5% triple-A scale, the 30-year yield fell three basis points to 3.44%, the 10-year benchmark slipped two basis points to 2.55% and the two-year note held steady at 0.31%.
Treasuries strengthened Thursday, with the 30-year yield falling two basis points to 3.36% and the 10-year benchmark losing three basis points to 2.53%. The two-year note dipped one basis point to 0.48%.
Elsewhere in the new-issue market Wednesday, Citi priced $351.1 million of Western Minnesota Municipal Power Agency revenue bonds. Yields ranged from 0.91% with a 3% coupon in 2018 to 0.45% with a 5% coupon in 2046. The bonds are callable at par in 2024. The deal is rated Aa3 by Moody's and AA-minus by S&P.
Citi also priced $212.8 million of Pflugerville, Texas, Independent School District unlimited tax bonds. Yields ranged from 0.12% with a 0.5% coupon in 2015 to 3.35% with a 5% coupon in 2039. The bonds are callable at par in 2024.
