Market Close: Maryland GOs Withstand Market Selloff

Despite overall softness in the municipal bond market Wednesday, the week’s largest deal saw buying support, with yields outperforming the benchmark scales.

Gilt-edged Maryland’s $680.6 million general obligation loan was considered a bellwether for the market, and was priced to yield as much as four basis points cheaper than Tuesday’s MMD scale. The overall market weakened by as much as seven basis points.

“The 10-year spot of the Maryland deal looks about four basis points off but the MMD curve is four to five basis points off too,” a Virginia trader said. “With Treasuries backing up, there’s definitely a softer tone out there today. It looks like it’s pushing Maryland to come cheaper.”

The deal was priced competitively in two tranches: $500 million and $180.6 million.

Citi won the bid for the $500 million of state and local facilities loan GOs. Yields ranged from 0.43% with a 5% coupon in 2016 to 2.95% with a 3% coupon in 2028. The bonds are callable at par in 2021. Maturities with a 5% coupon were priced flat to four basis points higher than the MMD scale on Tuesday.

JPMorgan won the $180.6 million component. The bonds had a 4.5% coupon and maturities from 2014 to 2021. Prices were not yet available.

One trader said the Maryland deal set the tone for the rest of the day. “Here we go with Maryland and that will set the tone with high-grade stuff,” a Chicago trader said. “It’s a little weaker today. It’s certainly not unchanged. If you need to create liquidity, you’re getting a lower number than yesterday.”

While the market weakened overall, the Chicago trader noted he is seeing success with specialty states and unique credits. “Those continue to be pulled off my inventory.”

Outside the Maryland deal, traders Wednesday said munis were driven softer by supply headwinds and weaker Treasuries.

“I think it certainly does not help to have a 30-day visible supply at $11 billion, but this week’s calendar is manageable,” the Virginia trader said. Still, this trader added that California was making headlines by announcing additional issuance in the coming weeks.

“Whenever you have Treasuries backing up and muni supply increasing at the same time, you get a multiplier effect and munis weakening a little bit,” he added. “If we continue to get an uptick supply from here and Treasury softness, you could see munis underperform.”

Others agreed that while supply this week is manageable, a growing calendar could put pressure on prices. “It looks like we are on a trajectory where supply is coming back to the market,” the Chicago trader said. “There is a growing New York calendar and a growing California calendar. And if you look at where bonds have traded in terms of gross volume, those are regularly the two largest states. So there are a couple of clouds in the sky now and bearish bond sentiment for munis.”

He continued that when 30-day visible supply is over $10 billion, market participants get “queasy” about the market. Still, with employment numbers expected to be released Friday morning, any big bearish bets will be put on hold. “If there is money coming in to bond funds and you get a bad economic number Friday, then supply is OK and we move up. But the forces at work create a volatility that is much stronger than they have been in the past.”

In other primary news Wednesday, Raymond James priced $400.5 million of Virginia Housing Development Authority home ownership mortgage bonds, rated Aa1 by Moody’s Investors Service and AA-plus by Standard & Poor’s. Pricing details were not available by press time.

Citi priced for institutions $400 million of Connecticut general obligation bonds, rated Aa3 by Moody’s and AA by Standard & Poor’s and Fitch Ratings. The bonds are also rated AA by Kroll Bond Ratings. Institutional pricing was not yet available.

In retail pricing Tuesday of $200 million of GOs, yields ranged from 1.07% with a 2% coupon in 2019 to 3.30% priced at par and 3.07% with a 4% coupon in a split 2033 maturity. The bonds are callable at par in 2023.

In the secondary market, trades compiled by data provider Markit showed mostly weakening.

Yields on Lower Colorado River Authority in Texas 5s of 2029 jumped seven basis points to 3.17%.while Salt Verde, Ariz., Financial Corp. 5s of 2032 increased three basis points to 4.00%.

Yields on Connecticut Health and Educational Facilities Authority 5s of 2042 and California 3.375s of 2030 rose two basis points each to 1.48% and 3.42%, respectively.

Yields on New York City Municipal Water Finance Authority 4s of 2047 increased two basis points to 3.78% while Dormitory Authority of the State of New York 5s of 2039 rose one basis point to 2.45%.

Overall, municipal bond market scales ended weaker Wednesday for the third straight session.

Yields on the Municipal Market Data triple-A GO scale ended as much as seven basis points higher. The 10-year yield jumped seven basis points to 1.90% while the 30-year yield increased six basis points to 3.00%. The two-year closed at 0.31% for the 12th straight session.

Yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale closed as much as six basis points higher. The 10-year and the 30-year yield jumped five basis points each to 1.90% and 3.06%, respectively. The two-year was steady at 0.33% for the seventh session.

Treasuries ended softer for the third session this week. The benchmark 10-year yield jumped four basis points to 1.94% while the 30-year yield rose five basis points to 3.15%. The two-year yield increased one basis point to 0.26%.

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