Illinois State Toll Highway Authority's $450 million bonds sale will be be greeted with demand when it comes to market this week, traders said.
The sale, scheduled for Wednesday, is expected to be the largest negotiated deal of the week, and it is being brought to market by Citigroup Global Markets.
"I've seen a general Illinois rally," a trader in Chicago said Monday. "Not as much as Chicago, but I've seen [the state] rally."
The bonds will mature serially from 2025 to 2034 with a term bond in 2039. The deal is rated Aa3 by Moody's Investors Service and AA-minus by both Standard and Poor's and Fitch Ratings.
"If [the Illinois State Toll Highway Authority deal is] even leaning towards being cheap, it will probably be gobbled up because people are hurting and looking for yield," a trader in New Jersey said. "Anything that evens sniffs like it's going to be cheap gets demand."
Illinois $750 million general obligation bond issuance that came to market on April 24 was priced less aggressively than GOs the state had issued previously this year, coming to market with a spread up to 125 basis points above MMD. At the time traders had said the deal was not priced as well because the market was saturated with Illinois paper.
The trader in New Jersey said that could occur with Wednesday's bonds.
"When you look for things that are somewhat cheap and give you some spread, it's the same names," he said. "Illinois, Chicago, Cook County names. You get tired of looking at names that come across as the cheapest and the widest spreads. In the interest of balance and diversity, sometimes have to look for different names."
The trader in Chicago said that high-yield issuers have been using this year's lack of supply to their advantage when coming to market, and listed Chicago and Illinois among such high-yield issuers.
"Maybe best thing is to pull back, have a dry period for a quarter or for six months to set up bond sales to disappear a little bit," the trader in New Jersey said.
Yields remained unchanged for most maturities Monday, according to Municipal Market Data's Triple-A scale.
"Supply has been really low this week," the trader in Chicago said. "There has not been a lot out there, but what is out there is going to hold pretty strong."
Municipal Market Advisors' data released on Monday showed that the benchmark 10-year and 30-year bonds' yields held steady at 2.32% and 3.61% they had respectively reached on Thursday's market close. The two-year's yield fell by one basis point to 0.37%
"I don't think there is going to be anything dramatic occurring in [the muni market] in the next two weeks," a second trader in Chicago said. "I think supply is going to stay low."
The total potential volume for this week is $3.9 billion, down from last week's $6.2 billion issuance, according to data provided by Ipreo and The Bond Buyer.
Issuance this year has been low, totaling $86.75 billion up to April 30, compared to $122.72 billion for the same period in 2013, according to data provided by Ipreo and The Bond Buyer.
Municipal bond yields have not been following Treasuries, which weakened Monday afternoon, with the 30-year yields climbing three basis points to 3.40% and the 10-year benchmark inching up one basis point to 2.61%. The two-year notes were unchanged at 0.43% from Friday's market close.
"Munis did not rally like treasuries did on Friday in the long end of the curve," the second trader from Chicago said. "I think [treasuries rallied] mostly because of things happening in the Ukraine. It is all geopolitical right now I think."
The first trader believes tensions in the Ukraine will continue to have more of an effect on Treasuries, as Russia-Ukraine pressures did on Friday.
"Monday tend to be the most quiet day of the week as buyers look at what's coming to market later in the week," the second trader from Chicago said.
Strategists are expecting the intermediate part of the curve to be attractive for the rest of the second quarter.
"Wells Fargo Advisors (WFS) Municipal Research currently recommends a duration target of 7.25 years for tax advantaged accounts, which is slightly short of the Barclays Municipal Bond Index of 7.45 years," Dorian Jamison, municipal analyst at Wells Fargo Advisors, said in a report released on Friday.
Jamison wrote in the report this part of the curve is ideal because investors can pick up more than half of the Municipal Market Data triple-A yield curve within eight years due to the steepness of the intermediate portion of the yield curve.
"Since municipal bond buyers can pick up 80 percent of the high grade MMD curve within 15 years, it is not necessary for investors to take on additional interest rate risk by venturing out too far on the yield curve," he wrote.
Morgan Stanley's chief municipal bond strategist John Dillon is also recommending buying in the intermediate part of the curve as part of his group's longer-term strategy, Dillon said in a report released on Friday.
"We prefer 5% coupons in our focus maturity range of 4- to 9-years and acknowledge value in the 20-year range amid further yield curve flattening," Dillon wrote.
