The New Jersey Turnpike Authority's $1 billion of revenue bonds were priced by Goldman, Sachs Tuesday, testing the market for maturities ranging from 13 to 21 years.
Yields on the bonds ranged from 3.11% with a 5% coupon maturing in 2027 to 4% at par in 2035. The deal found buyers among investors starved for supply, even as some market participants questioned the value of intermediate term credits.
"We are seeing the curve flatten," Ronald Schwartz, CFA and director of tax exempt management at StableRiver Capital Management, said in an interview. "If you are seeing the curve flatten you want to avoid the belly, the 10-year area of the curve."
The deal received an A3 rating from Moody's Investors Service, an A-plus from Standard & Poor's and an A from Fitch Ratings. There is an optional call at par in 2024.
"The middle part of the curve is just not that exciting right now, is overdone," a trader in New York said. "You can get a decent amount of yield in that longer area."
J.R. Rieger, Vice President of Fixed Income Indices at S&P Dow Jones Indices wrote in a report published on Friday that the long end of the bond market continues to enjoy double digit returns.
"The S&P Municipal Bond 20 Year High Grade Rate Index has returned just under 12% year to date with yields dropping by 70bps on the year," he wrote in the report.
Rieger also noted that on the shorter-end of the curve, municipal bonds tracked by the S&P AMT-Free Municipal Series 2021 Index often outpaced the equity market. The seven year non-callable bonds the index tracks outpaced the equity market returning 4.41% with yields dropping by 33 basis points this year, and bonds maturing in nine years retuned over 6.2% year to date with yields of the bonds tracked in the S&P AMT-Free Municipal Bond 2023 Index dropping by 79 basis points.
John Dillon, managing director at Morgan Stanley Wealth Management, said in an interview that Morgan Stanley likes the high side of the four-to nine-year range.
"If you look at the trajectory of the yield curve, you're still seeing the steepest trajectory inside of the 10-year range," he said, adding that year-over-year some of the largest changes are in the four-to nine-year range.
However, a trader in Dallas said Tuesday morning that he believed the deal's maturity range was attractive.
"It's in the desirable spot of the yield curve, from 2027 to 2035," he said. "There should be good institutional interest."
A trader in New Jersey also said that the intermediate part of the curve, and the 10-to 15-year range in particular is a kind of sweet spot.
"Traditionally I think there is a weird kind of gap for 10-to 15-year space, its kind of an orphan," he said. "I think in some ways the 10-to 15-years is a spot that kind of goes neglected. A lot of retail investors, conservative ones, want to stay 10 years and under. Income investors want to look at the long end."
Dillon said that 20-year bonds, which fall in the New Jersey Turnpike's range, are an attractive buy.
"You're getting 93% of the curve at 20-years, which is a pretty good value because it flattens out after 20-years," he said. "Going beyond that, the risk vs. rewards gets pretty questionable."
The Dormitory Authority of the State of New York brought $198.5 million of school district revenue bond financing program revenue bonds to market in four series.
"A lot of people have New York State Dorms in their portfolios," the trader in New Jersey said. "There are all sorts of different kinds of New York State Dorm bonds and people may feel like 'I can't put another dorm name in my portfolio.' However, there is not a lot of supply so people will eat it up anyway."
The biggest section of the deal totaled $153.88 million with yields ranging from 0.42% with a 2% coupon in 2016 to 4.10% with a 4% coupon in 2043. It was rated A-plus by S&P and Fitch. It has two sinking fund schedules. The first fund's starts in 2035 and the second begins in 2039.
The $7 million part of the issuance was priced to yield from 0.48% with a 3% coupon in 2016 to 3.58% with a 3.50% coupon in 2029. The $29 million part of the issuance was priced to yield from 0.48% with a 3% coupon in 2016 to 3.99% with a 5% coupon in 2042. It also has a two-part sinking fund schedule starting in 2035 for the first fund, and beginning in 2038 for the second one.
The $8.7 million portion of the issuance has yields ranging from 0.48% with a 3% coupon in 2016 to 3.53% with a 3.375% coupon in 2029.
The second series earned a Aa3 rating from Moody's Investors Service and A-plus from Fitch, the third received a AA from S&P and an A-plus from Fitch, and the fourth got a Aa2 from Moody's and an A-plus from Fitch.
Municipal Market Data's triple-A scale reported that yields fell across the curve with bonds maturing in 10-year dropping one basis point, bonds maturing in 11-years, 15-to 20-years and the 27-to 30-years by two basis points. Maturities of 12-to 14-years and 21-to 26-years declined by three basis points.
The front-end of the curve maturing under 10-years held steady.
Municipal Market Advisors data reported that the two-year held steady at 0.35%, the 10-year and the 30-year both fell by two basis points to 2.26% and 3.52% respectively.
Treasuries strengthened on Tuesday with yields for the two-year note dropping by two basis points to 0.39%, decreasing by six basis points to 2.6% for the 10-year and by four basis points to 3.45% for the 30-year.
