Illinois bonds gained after lawmakers approved a pension overhaul and New York tobacco bonds generated demand from retail investors, limiting damage in the municipal market as fixed income securities slumped on positive economic news.
Governor Pat Quinn, praising the Illinois General Assembly for passing the proposed legislation, said today he was encouraged by the bipartisan solution and would sign the bill promptly. Traders in Chicago agreed that the market reacted positively to the deal.
Spreads were tighter Wednesday for both Chicago and Illinois general obligation paper by 10 to 35 basis points, according to Interactive Data. Illinois credits including Lake County, Schaumburg and Springfield also traded at improved spreads.
“Nobody really bought into the speculation that something would actually get done I mean, it’s Chicago,” an Illinois-based trader said. “It doesn’t go as far as it needs to, but it’s a start, and the market clearly likes it.”
The long-term impact of the bill will depend on whether protesting unions delay its adoption, one trader suggested.
“It’s largely no different at this juncture,” another Chicago-based trader said. “It’s not a law, it’s just a proposal, and unions are talking about taking legal action against it. It’s going to be in the courts for a while.”
The municipal market as a whole was weaker Wednesday as ADP showed more job growth than expected. The figure was shocking, the same Chicago trader said.
“We’re off three basis points in the mid-yield range, and more out around nine to ten years longer,” he said. “Things are just kind of up in the air with sequestration, where the economy is going, and I think people are nervous about the fed stopping quantitative easing at some point.”
ADP, which processes company payrolls, reported private payroll growth of 215,000 in November, larger than the 185,000 consensus by Econoday. The better-than-expected numbers may have added to the growing concern among municipal investors that the U.S. government will begin to slow down its quantitative easing, traders said.
“With ADP data this morning showing a little stronger job growth, you worry that too strong of a jobs number will mean the fed eases up on their monthly buying,” a New York-based trader said of the Federal Reserve’s bond-buying program.
Municipal bond buyers are acting more like day traders than investors, the Chicago trader said, predicting an adjustment to bring the market more in line with treasuries is on the horizon.
“I think we’ll see some adjusting in here,” he said. “We may not fall back as hard as treasuries and we haven’t had a huge adjustment, so at some point when we get supply we’ll make that correction.”
Volume this week is expected to be larger than the week of Thanksgiving, with potential volume totaling $6.55 billion, up from sales of $652.2 million last week, according to Ipreo, The Bond Buyer and Thomson Reuters numbers.
In the negotiated market, Citi priced $1.2 billion of New York tobacco settlement bonds for retail Wednesday morning. The deal featured two series of bonds rated AA-minus by Standard & Poor’s and Fitch Ratings with maturities ranging from 2018 to 2022. The deal’s short-term calls were appealing to buyers who grabbed up the bonds quickly, a New York-based trader said.
“It’s going really well with the short calls and kickers offered in the deal,” the trader said in an interview. “This was the big deal kind of ending the year for New York. It was a big amount to go right out the door off the bat.”
Bonds maturing in 2020 with a 5% coupon and optional call in 2015 were scooped up the fastest, he said.
Yields in the first series ranged from 0.65% with a 3% coupon in 2018 to 2.15% with a 5% coupon in 2022. The bonds feature optional par calls as early as 2014 for bonds maturing in 2018, and 2017 for bonds maturing in 2022.
The second series offered bonds with 5% coupons and yields ranging from 0.80% in 2019 to 2.15% with a 5% coupon in 2022. The bonds feature optional par calls as early as 2014 for bonds maturing in 2019.
In the taxable market, Siebert Brandford & Shank offered $370 million of New York dormitory authority revenue bonds rated AAA by S&P, Fitch and Moody’s. Bonds were all priced at par and ranged from a 0.49% coupon in 2015 to a 4.29% coupon maturing in 2027.
Trades compiled by data provider Markit showed weakening across the board.
Yields on California Tobacco Settlement financing authority 5.3s of 2037 rose four basis points to 7.9% and Massachusetts health and education facilities 5.75s of 2036 gained five basis points to 4.70%.
Yields on the Municipal Market Data triple-A scale remained higher through Wednesday. Bonds maturing in 2017 rose two basis points, bonds maturing in 2018 rose three basis points and bonds with maturities from 2019 and beyond saw yields rise as much as five basis points.
Yields on the Municipal Market Advisors benchmark triple-A scale were higher through the entirety of the curve from four years out. Bonds maturing between 2030 and 2033 saw yields jump four basis points, while bonds with maturities in 2029 gained five basis points in yield.
Treasuries were weaker across the yield curve. The benchmark 10-year yield gained four basis points to 2.83% while 30-year yields rose five basis points 3.90%, respectively.
