The spread between Illinois general obligation bonds issued Thursday over benchmark 10-year AAA bonds was narrower than the last time the pension-burdened state came to market with tax-exempt bonds.
Yields on Illinois bonds maturing in 2024 were offered at 129 basis points above their triple-A counterparts, according to Municipal Market Data, compared with a spread of 165 basis points on similar bonds issued by the state as part of a $1.3 billion sale in June.
The 10-year Illinois bonds Thursday came with a yield of 3.81%, lowered from initial pricing at 3.87%, compared with AAA 10-year benchmark yields of 2.52% on Wednesday. When the state issued in June, the 10-year bond priced at 4.46%, compared with an MMD yield of 2.81% the day prior.
"Illinois seems to be holding their own," said one managing director at a firm that participated in the deal. "The lack of supply does help, but people thought it was very fairly priced. I think it's a combination with good timing as the rest of the market was waiting for the deal."
The deal issued "a good amount of orders" and was oversubscribed, the person said. The state sold $1.025 billion of the bonds, $25 million more than the expected $1 billion. The state received $5.5 billion in orders from 109 individual investors, the state's assistant budget director said in a press release.
Citigroup Global Markets Inc. brought the $1 billion deal to the negotiated market Thursday morning, with yields ranging from 0.75% on a 3% coupon maturing in 2016 to 5.04% with a 5% coupon maturing in 2039.
Yields across the maturity spectrum of the deal declined in repricing.
"It's clearly benefitting from legislation that has passed even as there are still some outstanding issues with its legality," Adam Buchanan, vice president of sales and trading at Ziegler, said in an interview.
Retail orders were offered on bonds maturing from 2016 through 2024, and all the bonds, except for those maturing in 2028, feature an optional call at par in 2024. The 2028 bonds are callable at par in 2019.
Illinois bonds in the third and fourth quarter of 2013 were trading at a spread closer to 160 basis points above AAA, Buchanan said.
"The progress they've made there on the pension side is being shown," Chicago-based Buchanan said. "There's also the supply dynamic of our market in the beginning of this year, which has been extremely low, so there's that as well."
Volume this week is estimated to be less than $5 billion of new issues, and no other deals over $100 million were scheduled for Thursday.
Consistently low volume this month may be a result of greater emphasis by banks on direct lending instead of traditional bond issues, market observers said.
"My take on this has been that direct lending from banks off their balance sheet has taken a lot of supply out of the market," Ziegler's Buchanan said. "Originally it was health care and different yield sectors and now it's happening elsewhere and has kind of sucked a lot of the supply out."
Banks have become more aggressive in the direct lending space over the past year, a financial advisor in the west coast said in an interview. Direct lending can be cheaper for the issuer while offering a favorable rate to the bank, the advisor said.
"We've seen some of that, but I don't know what the numbers are on a larger scale," he said. "I don't think it's gotten to the point where it's the preferred method by any means but I think that could be taking some of the supply away."
Yields on the MMD AAA 5% scale were unchanged throughout the curve Thursday, reinforcing trader's commentary that activity in the market started slowly.
"There's cash to be put to work but folks are still pretty hesitant, people are just kind of waiting for a little bit of a backup," Buchanan said. "There was big run last month and that gave folks some pause."
Treasuries weakened Thursday, with the 30-year yield gaining three basis points to 3.67%, while the 10-year jumped to 2.71%. The two-year yield rose three basis points to 0.34%.
"There's very little going on, we're having trouble getting anything today," one California-based trader said in an interview Thursday morning.
Some traders said prices in the secondary market were too expensive.
"Personally I think they're expensive right now," the trader said. "I don't really like what I'm seeing. Looking forward to tomorrow to see what happens with non-farm payrolls and we'll see what that is."
The yields on bonds in a Standard & Poor's Dow Jones Indices index tracking investment-grade bonds have fallen 33 basis points so far this year to 2.78%, SPDJI said in a report Thursday.
"I think it's possible that people think they're expensive, but I think that they could continue going lower," one financial advisor said in an interview. "We're not seeing a ton of deals and when they do come they usually gather quite a bit of attention and get some aggressive bidding."
Market participants said government data tomorrow in the form of an employment situation report could move muni yields.
"Nonfarm payrolls tomorrow is the market moving number," according to Adam Buchanan, vice president of sales and trading at Ziegler. "We're going to be looking at the revised number from December because it was way off. We're going to look closely at that revision and see where it shakes out."
Nonfarm payroll employment in December grew 74,000, following an increase of 241,000 for November and a gain of 200,000 in October.
