Connecticut's $650 million general obligation bond sale, the week's second largest scheduled issuance, may sell at tighter spreads because of the healthy level of trading in the state's debt.
Morgan Stanley will price the bonds, which have received ratings of Aa3 from Moody's Investors Service and AA from Standard & Poor's and Fitch Ratings, on Tuesday.
"I like the Connecticut GO this week, it will be interesting to see if they will be able to tighten their spreads up from their last issuance now that credit spreads have tightened," a trader in Florida said."Larger deals will be able to trade tighter, and small, less liquid ones might have to spread out. The Connecticut GO might come at tighter spreads because it has better liquidity."
Credit spreads between triple-A GOs maturing in 10 years and 10-year AA GOs have tightened by four basis points to negative 20 on Monday from May 17, 2013.
Market technicals will also allow credit spreads of deals coming to market to tighten. Supply-demand dynamics in the muni market are currently in favor of issuers, with supply as of April 30 totaling $89.3 billion, compared with $122.72 billion during the same period in 2013, according to data provided by The Bond Buyer and Ipreo.
Municipal fund flows have also been positive most of the year, and totaled $943.2 million last week, according to Lipper FMI.
The largest deal of the week, the Missouri Highway and Transportation Commission's $920.3 million refunding bonds, came to market Monday with low yields when it was priced by Bank of America Merrill Lynch during its retail order period.
The deal was priced with yields for the first $599.3 million section of the two-part issuance ranging from 0.60% with a 3% coupon in 2017 to 2.45% with a 5% coupon in 2026. Yields on $320.9 million of second lien refunding bonds ranged from 0.93% with a 3% coupon in 2018 to 2.37% with a 3% coupon in 2025.
"The Connecticut GO's high ratings could make the deal receive less demand than the Missouri deal," the trader in New York said. "That name is a little bit more common and saturated in market. But it will get it done, maybe with less demand than Missouri, but it will get done."
The deal was priced up by about $25.8 million to $920.3 million, from $894.5 million originally scheduled. Both parts of the deal are callable at par in 2024. The deal is not yet rated, and will enter its institutional sale period on Tuesday.
Investors believe it will receive heavy demand during its institutional sale.
"It is rich, but appropriately priced," the trader in New York said. "It should receive broad demand from institutional investors."
The trader in Florida called the Missouri Highway issuance one of the "highlighted" deals of the week.
"It will receive a lot of attention," he said. "Is front-end loaded but it is a credit that I think many accounts are under-invested in, so I think it will do well."
"Clearly the revenue types of bonds Missouri Highway is issuing are in demand, so the deal should be okay tomorrow," the trader in New York said. "It's also a name you don't see very often, it's not a New York sewer or a California GO."
An indication of interest was released Monday for $157.8 million of federally taxable University of Massachusetts Building Authority refunding revenue bonds. Maturities on the bonds ranged from 2014 to 2025, with a sealed bid in 2014. Spreads vs. Treasury ranged from +20 in 2015 to +95 in 2025. The deal features a make whole call.
Ramirez & Co. is the lead underwriter. The deal is rated Aa2 by Moody's Investors Service, AA-minus by Standard and Poor's and AA by Fitch Ratings.
"The education sector is on fire, and I think it will be well received, it's under the index size so it will come at a more relaxed spread," the trader in Florida.
Strategists have been recommending that investors purchase high-education bonds, though they are divided on whether high-rated or lower-rated ones are attractive.
John Dillon, managing director at Morgan Stanley, wrote in a report Thursday that he is recommending investors look at the higher education sector, particularly bonds that carry A2 or A ratings or better, with 5% coupons.
Citigroup, in a report Monday, recommended lower-rated, long-dated higher education bonds.
"Owing to smaller lot sizes, [lower-rated long-dated higher education bonds] seem to have sidestepped broader market trends and continue to trade at attractive spreads," Citigroup wrote in the report. "Owing to their superior credit profile, super high-grade universities have richened fairly drastically in the rally and their richness feels sticky," Citigroup wrote in the report.
The largest deals in the competitive market this week come from the state of Massachusetts, for $200 million of GOs and Fulton, County, Ga., for $200 million of tax anticipated notes. Both deals are expected to price on Wednesday.
California's East Bay Municipal Utility District priced a two-part deal totaling $375.3 million of water system revenue refunding bonds on Monday. JPMorgan priced $243.2 million of the bonds with yields ranging from 0.13% with a 2% coupon in 2015 to 2.80% with a 5% coupon in 2030.
Wells Fargo Securities priced $132.1 million of the bonds with yields ranging from 2.53% with a 5% coupon in 2027 to 100% with a 3.50% coupon in 2035.All bonds are callable at par in 2024 and are rated Aa1 by Moody's, AAA by S&P and AA-plus by Fitch.
Municipal yields rose on Monday with bonds maturing in nine-to 26-years increasing by one basis point and 27-to 30-years rising by two basis points. The two-year and the 10-year held steady at 0.34% and 2.19%, according to Municipal Market Advisors data.The 30-year maturity's yield rose by one basis point to 3.44%.
Treasury yields were mixed, with the 30-year yields climbing five basis points to 3.39% and the 10-year benchmark jumping three basis points to 2.55%. The two-year note fell two basis points to 0.36%.
