Investors' opinions diverged over whether New York City Mayor Bill de Blasio's deal with the United Federation of Teachers affected demand as $850 million of New York City general obligation bonds priced for retail investors on Monday.
Morgan Stanley priced the two-part issuance with yields on a $747.8 million series ranging from 0.78% with a 4% coupon in 2017 to 3.83% with a 3.75% coupon in 2034. Yields on a $102.2 million series ranged from 0.78% with a 3% coupon in 2017 to 2.44% with a 4% coupon in 2022.
"It's certainly true [de Blasio's deal with the teachers' union] impacted investors' view of New York City debt," a trader in Chicago said. "The name is getting talked about with some weakness."
In the first series there are sealed bids on bonds maturing in 2015 to 2016, and bonds maturing serially from 2028 to 2032 are not available for purchase during the retail order period. The bonds are callable at par in 2024.
There are sealed bids on bonds maturing from 2014 to 2016 in the second series, and the bonds in the series have no call option.
The deal will price for institutional sale on Wednesday and earned a Aa2 rating from Moody's Investors Service, and AA from both Standard & Poor's and Fitch Ratings.
The contract with the United Federation of Teachers would provide an 18% wage increase over the course of nine years. Moody's called the deal with educators a credit negative in a May 12 report, writing that it reveals the city's budget and finances are driven by personnel cost.
"It's the first time debt is being issued under de Blasio's budget plan, so it's exciting," a trader in New York said. "But with the news coming in the last few weeks about the payments to the teachers' union it makes me nervous. I've spoken to a few money managers saying they're staying far away from the deal."
Analysts have said they are worried the retroactive payments will set a precedent for an environment where municipalities will have difficulty negotiating with unions, because unions will choose to hold out for retroactive pay.
"It makes me nervous, I'm showing [the deal] to clients as an offering they have access to, but we're including the disclaimer that de Blasio is doing things with the budget, and money managers are staying away," the trader in New York said.
The same press release said the city intends to provide more than $1 billion in healthcare cost savings over the next four years.
"[The New York City government] just mentioned healthcare savings, and it's very non-specific in nature," Dan Heckman, senior fixed income strategist at U.S. Bank, said in an interview. "I think the uncertainty about where these cost savings are going to come from have caused some indigestion for the market for New York City bonds. All in all you have a situation where market backed up a bit yield wise, spreads have widened a bit, this incorporates some of the concerns with risk of the issue."
While Heckman said the deal with the teachers union makes investors nervous, he does not see it depleting demand for New York City bonds.
"The reality is that New York state and New York City are high tax areas, and we expect under de Blasio's leadership [demand for New York City bonds] will continue," he said. "People looking for ways to reduce tax bills."
Fred Bacani, Head of Fixed Income & Trading at Veritable LP in Newtown Square, Pa., remains wary of how de Blasio's actions affect the city's credit but still finds the debt attractive.
"Although I continue to monitor New York City from a credit perspective, particularly the mayor's actions and initiatives, I believe the city's adjusted debt service levels are manageable and the local economy is resilient enough to weather the new leadership's approach to spending," he said in an interview.
Wells Fargo Securities held a retail order period on Monday for a twofold deal totaling $218.5 million of Nebraska Public Power District, ND. GOs.
Yields on $194 million ranged from 0.19% with a 2% coupon in 2015 to a 4.125% coupon in 2044 at par. The bonds are callable at par in 2022 with a term bond in both 2039 and 2044.
The $24.5 million GO has a sealed bid in 2016, its only maturity. There is no call option.
The deal is rated A1 by Moody's Investors Service and A by S&P and A-plus by Fitch Ratings.
The trader in Chicago said the deal will get attention because Nebraska bonds are not commonly issued.
"It will certainly benefit from [Nebraska's] scarcity," he said. "The transaction is a new name from a less frequent issuer. It's a size deal and a diversifier for your portfolio."
The trader in New York also said the deal will do well because investors are hungry for power bonds. Only $722.1 million of electric power bonds were issued inMay, down 22% from the from the same month in 2013.
Rice Financial Products held a retail order period for $200 million of Connecticut GOs. Yields ranged from 0.76% with a 4% coupon in 2017 to 3.82% with a 3.625% coupon in 2034. There are sealed bids in 2015 and 2016. Bonds maturing serially from 2027 to 2031 were not available for purchase during the retail order period.
The debt, which is expected to enter institutional sale on Wednesday, is rated Aa3 by Moody's, AA by both S&P and Fitch and AA by Kroll Bond Rating Agency.
Municipal bond yields rose on Monday with bonds maturing in three to 21 years increasing by two basis points, and yields for bonds maturing in 22 years gaining by one, according to Municipal Market Data's triple-A scale. Bonds maturing in two years or less and bonds maturing in 23-to 30-years held steady.
Treasuries weakened Monday, with the two-year note climbing two basis points to 0.43% and the 10-year benchmark inching up one basis point to 2.61%. The 30-year yield was unchanged at 3.44% from Friday's market close.
