With the long-awaited bond issuance by Puerto Rico in the rearview mirror, municipal bond buyers Wednesday had more than $4 billion of new bonds to purchase.
The biggest offering, about $1.79 billion of California general obligation bonds, held institutional pricing for the remainder of its bonds today after retail buyers scooped up most of the issuance in a retail-only order period on Tuesday.
Much of the market focus early in the day was on Puerto Rico's newly minted 8% coupon bonds maturing in 2035, sold Tuesday in the island's historic $3.5 billion deal. The bonds, which became free to trade fifteen minutes before market close Tuesday, had rallied as much as 45 basis points by Wednesday afternoon.
Yield on the Puerto Rico bonds, with an 8% coupon maturing in 2035, fell by 14 basis points Tuesday to 8.59%. The yield sank another 27 basis points to 8.32% Wednesday, according to Bloomberg data. Puerto Rico's new bonds accounted for one-fifth of all municipal market trading activity Wednesday morning.
"People had to clearly pay up to get access," Adam Buchanan, vice president of sales and trading at Ziegler, said in an interview. "From our perspective, it proves what we thought this transaction would be. It's a good trade; it's a great short term investment."
Most of the activity on the bonds Wednesday was through trades greater than $500,000, according to MSRB data compiled by The Bond Buyer. Of all trades conducted by market closing time, just 10% of the transactions were in sums greater than $1 million.
With trades less than $200,000 comprising 22% of all transactions, market participants said retail demand for the bonds may have helped drive the rally in the secondary.
"I was little surprised at how aggressive it came out this morning," one trader in New York said in an interview. "You scratch your head and wonder if they could have pushed it and done a better pricing level, but for a deal like that, you start to draw that fine line where you put the emphasis on getting the deal done."
Puerto Rico chose to bypass a retail order period in its offering Tuesday, instead opting to sell single term bond with a sinking fund. Underwriters in the syndicate, co-led by Barclays PLC, Morgan Stanley and RBC Capital Markets, chose the structure due to the expectation that much of the purchasing would be driven by cross-over buyers such as hedge funds.
"We expected a strong secondary market; it was a question of magnitude," Patrick Smith, chief investment officer at Granite Springs Asset Management, said in an interview. "There was a great deal of demand that wasn't met. They could have increased the size and would have found more takers."
The commonwealth's offering stood in stark contrast to the way the week's second-largest deal, the $1.79 billion of California GOs, entered the market.
California's practice of offering bonds to retail traders first, the result of an effort to encourage California residents to buy their state's bonds, enables the state to gauge market levels before selling the bonds to institutions.
"From a business standpoint it helps us negotiate better prices for tax-payers when the institutional folks come in," Tom Dresslar, director of communications at the California State Treasurer's office, said in an interview. "The higher the demand from retail, the better our bargaining position is. We're able to get some reductions in the yields before the final prices are and you're seeing that today."
Retail investors may have bought up to 66% of the offering through a retail order period that stretched into Wednesday morning, according to Dresslar.
Yields on the first retail series of Cal GOs ranged from 0.39% with a 5% coupon in 2016 to 4.22% with a 5% coupon in 2043. Institutional pricing was still unavailable.
The California bonds, rated A1 by Moody's Investors Service and A by Standard & Poor's and Fitch Ratings, presented a highly-rated alternative to the high-yielding Puerto Rico bonds.
While prices firmed for the Puerto Rico bonds in the secondary, Matt Fabian, managing director at Municipal Market Advisors, said the biggest challenge to that deal was just getting the bonds to the market.
"A lot hinged on the execution of this bond deal, the rating agencies were forcing Puerto Rico to do this bond deal almost at any price," Fabian said in an interview. "If they weren't able to do this deal they were facing downgrades and you didn't have a sense where the credit would be."
Price was probably secondary in the minds of the issuer and underwriter, Fabian said.
"In the end yields maybe could have been lower but when you're actually putting that deal together, from 270 accounts, that's a lot to coordinate," he said.
The deal was certainly a success despite the secondary firming, said Ashton Goodfield, head of municipal bond trading at Deutsche Asset & Wealth Management.
"I'm not surprised the bonds have firmed up as much as they have, not at this point," Goodfield said. "It certainly did not look like it was going to be this way six weeks ago, but as interest started developing and we heard more about the deal, the demand grew, especially this week."
With retail not the target audience in the bond's initial offering, market participants said high net worth investors and even some mom and pop-type investors grabbed the bonds on Wednesday.
"It's possible," Goodfield said. "The yields are very high. It's hard to find these kinds of yields anywhere, especially ones that are triple tax-exempt. They might be of some interest for an ultra-high net-worth individual".
The price gains weren't limited to just the commonwealth's new bonds. Puerto Rico GO yields on a 5% coupon maturing in 2041 fell seven basis points to 7.38%, while Sales Tax Financing Corp. (COFINA) yields also slid seven basis points to 6.73% on a 5.5% coupon in 2023.
Municipal bond yields measured by Municipal Market Data's AAA scale firmed on both intermediate and long-term bonds, falling as much as four to six basis points, respectfully. Municipal Market Advisors also reported yields falling by as much as five basis points.
Treasury yields firmed Wednesday, as the 30-year and the 10-year benchmark were both down five basis points to 3.68% and 2.73%, respectfully. Two-year notes were one basis point lower at 0.37%.
