NEW YORK – The tax-exempt market is struggling to hold its ground amidst the year’s largest week on municipal issuance. The primary and secondary market was noticeably weaker, although one deal bumped up prices – showing demand is still strong for certain credits.
“Munis seem to be hanging tough though the increasing supply will unquestionably have a drag on yields,” a Connecticut trader said.
“All in all munis feel like they have a weaker tone,” a New Jersey trader said. “It’s possible the institutional buyers took their January and February coupons, reinvested them, and now they are just content to sit and hope rates get more attractive.”
He added the New York City Municipal Water Finance Authority deal did not go well. “I’m a little surprised by the pricing,” he said. “The bonds that were not available during retail look like they might be having trouble and they are priced significantly cheaper. The spreads are significantly wider than what we were looking at during retail. So it will be interesting to see how that goes.”
Munis were weaker Tuesday, according to the Municipal Market Data scale. Yields inside four years were steady while the five- and six-year yield rose two and three basis points. The 7- to 19-year yields jumped four and five basis points while yields outside 20 years increased up to three basis points across the curve.
On Tuesday, the two-year yield ended flat at 0.26%, its record low first recorded by MMD on Feb. 16. The 10-year yield jumped four basis points to 1.98% while the 30-year yield rose one basis point to 3.29%.
Treasuries were stronger Tuesday. The two-year yield fell one basis point to 0.29%. The benchmark 10-year and the 30-year yields dropped five basis points each to 1.95% and 3.08%, respectively.
In the primary market, Barclays Capital priced $2.3 billion of Puerto Rico improvement refunding bonds, rated Baa1 by Moody’s Investors Service, BBB by Standard & Poor’s, and BBB-plus by Fitch Ratings.
Yields ranged from 4.00% with 4% and 5% coupon in 2020 to 5.35% with a 5% coupon in 2041. The bonds are callable at par in 2022. The deal was upsized from $1.7 billion and institutional pricing was pushed up a day.
Morgan Stanley repriced $505.8 million of Houston, Texas, Airport System refunding bonds, rated A by Standard & Poor’s and A-plus by Fitch.
Yields on the first series, $288.2 million of subordinate lien revenue refunding bonds subject to the alternative minimum tax, ranged from 1.63% with a 5% coupon in 2016 to 4.30% with a 5% coupon in 2032. The bonds are callable at par in 2022. Prices were bumped between five and 10 basis points across the curve from preliminary pricing.
Yields on the second series, $217.6 million of subordinate lien revenue refunding bonds not subject to the alternative minimum tax, ranged from 2.64% with a 5% coupon in 2012 to 3.78% with a 5% coupon in 2032. The bonds are callable at par in 2022. Prices were bumped up to five basis points on the long end from preliminary pricing.
M.R. Beal & Co. priced for institutions $502.2 million of New York City Municipal Water Finance Authority water and sewer system second general resolution revenue bonds after a retail order period Monday. The credit is rated Aa2 by Moody’s and AA-plus by Standard & Poor’s and Fitch. Details were not available.
In the competitive market, Bank of America Merrill Lynch won the bid for $160.5 million of Virginia College Building Authority, rated Aa1 by Moody’s, AA by Standard & Poor’s, and AA-plus by Fitch.
Yields ranged from 1.30% with a 5% coupon in 2018 to 3.00% at par in 2027. Credits maturing between 2014 and 1017, in 2019, in 2020, and between 2028 and 2030 were sold but not available. The bonds are callable at par in 2022.
Goldman Sachs won the bid for both the $115 million and the $119.8 million San Francisco competitive deals, rated Aa2 by Moody’s and AA-minus by Standard & Poor’s.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board continued to show weakening.
Bonds from an interdealer trade of Washington 5s of 2032 yielded 3.16%, five basis points higher than where they traded a week ago.
Bonds from an interdealer trade of California Health Facilities Financing Authority 5.875s of 2023 yielded 2.21%, four basis points higher than where they traded last week.
A dealer bought from a customer Connecticut Health and Educational Facilities Authority 5s of 2041 at 4.45%, two basis points higher than where they traded a week ago.
Another dealer bought from a customer New York City Municipal Water Finance Authority 5s of 2045 at 3.85%, one basis point higher than where they traded last Thursday.
After several days to digest the news that Stockton, Calif., is getting closer to filing for bankruptcy, reaction in the municipal market remains muted.
Stockton is “not another domino” and a “long time coming” according to analysts at Trident Municipal Research. “The city was hit hard by the recession and foreclosures and has been negotiating with unions in an attempt to unlock fixed costs for several years,” they added. “Although the unions have made some concessions, the city is still dealing with large budget imbalances and pushing the limits of solvency.”
And while California State as a whole is dealing with many budget issues, TMR analysts said there is still demand for California debt, as proven by last week’s $2 billion GO issue. “The deal’s good reception and tight credit spreads highlight the ability of the state to continue to access the capital markets at favorable rates, which is a credit positive.”
However, the analysts do question whether the tight spreads are a true representation of the state’s financial problems. “We do not see the potential for credit spreads, generally, to tighten much further. We would avoid getting caught up in the reach for yield and look to underweight exposure to California until after more clarity develops on its ability to deal with structural deficits and-or credit spreads widen.”
