Market Close: With Weaker Secondary, Issuers Test Demand In Primary

Selling pressure in the market for existing municipal bonds  didn’t stop borrowers from tapping the primary market Wednesday as the largest deal of the week priced.

Underwriters were able to lower yields on new sales even as yields rose in the secondary.

“Bids wanted are coming up from customers in decent sizes,” a New York trader said. “It’s a few basis points weaker, more so on the long end.”

Still, Citi priced the largest deal of the week, $719.2 million Denver Airport System subordinate-lien bonds on behalf of the Department of Aviation, and lowered yields as much as 10 basis points on certain maturities. The bonds are rated A2 by Moody’s Investors Service and A by Standard & Poor’s and Fitch Ratings.

The first series of $326.1 million is subject to the alternative minimum tax. Yields ranged from 1.24% with a 4% coupon in 2015 to 5.33% with a 5.25% coupon in 2043. The bonds are callable at par in 2023. Yields were lowered between two and 10 basis points on bonds maturing within 10 years from a premarketing scaled released Wednesday morning. Yields were lowered as much as five basis points on bonds maturing beyond 2025.

In the second series of $393.2 million, yields ranged from 0.94% with a 3% coupon in 2015 to 5.05% with a 5% coupon in 2043. The bonds are callable at par in 2023. Yields were lowered as much as 10 basis points on bonds maturing in 10 years but were raised up to 10 basis points on bonds maturing between 2026 and 2033.

“The 10-year Treasury auction was 2.67% and the market is weaker,” a New York trader said. “But it looks like Denver did go well.”

In other primary deals, Bank of America Merrill Lynch repriced for institutions $188.5 million of Tarrant County Cultural Education Facilities Finance Corp. for the Methodist Hospitals of Dallas. The bonds are rated Aa3 by Moody’s and AA-minus by Standard & Poor’s.

Yields ranged from 0.75% with a 3% coupon in 2015 to 5.00% with a 5.25% coupon and 5.08% with a 5% coupon in a split 2043. Bonds maturing in 2014 were offered via sealed bid. The bonds are callable at par in 2023.

In repricing, yields were raised three basis points on bonds maturing in 2027, five basis points on bonds maturing in 2028, and nine basis points on bonds maturing in 2043. In preliminary pricing, yields were lowered as much as seven basis points from retail pricing on bonds maturing within 10 years. Yields were raised as much as eight basis points on bonds maturing between 2024 and 2031.

In the competitive market, JPMorgan won the bid for $182.7 million of School District of Miami-Dade County, Fla., general obligation school bonds, rated Aa3 by Moody’s and A-plus by Standard & Poor’s.

Yields ranged from 0.62% with a 4% coupon in 2015 to 4.71% with a 5% coupon in 2043. The bonds are callable at par in 2023. Traders said balances were left of bonds maturing between 2024 and 2027 as well as 2037 and 2038, but overall the deal was well received.

In the secondary market, yields continued to rise Wednesday, extending losses into a fourth consecutive session and some say munis now look cheap. “We believe the sweet spot in munis right now is the single-A and low double-A portion of the market,” said David Litvack, head of tax-exempt fixed income research at U.S. Trust. “You get better yields than triple-A, without being as exposed to stress as bonds at the triple-B level.

“The yield curve has gotten steeper,” Litvack said. “The five- to 10-year slope is pretty attractive, and we’re focusing on that range. You might be tempted to go further out on the curve to get even higher yields, but we are still concerned about rates rising and so don’t typically go much beyond 10 years.”

Wednesday, yields on the Municipal Market Data scale ended as much as five basis points higher. The 10-year yield increased one basis point to 2.75% and the 30-year yield climbed five basis points to 4.06%. The two-year was steady at 0.52% for the fourth session.

Yields on the Municipal Market Advisors scale also ended as much as four basis points higher Tuesday. The 10-year yield rose one basis point to 2.92% and the 30-year yield rose four basis points to 4.16%. The two-year was steady at 0.56% for the third session.

Treasuries ended much weaker Wednesday. The benchmark 10-year yield increased five basis points to 2.68% and the 30-year yield rose four basis points to 3.69%. The two-year was steady at 0.37%.

After the Federal Open Market Committee released minutes from its June meeting Wednesday afternoon, muni participants said the rise in rates has been a direct effect of uncertainty over Fed policy. “We were expecting June and July to have higher demand because of the heavy coupon payments in those months, but that doesn’t seem to have happened,” Litvack said. “The fixed income market in general seems to be worried about a slowdown in the Fed’s quantitative easing and higher interest rates.”

But some believe the recent selloff was an overreaction. “Having said that, we do believe that the rise in yields over the past month or two has been overdone,” Litvack said. “We believe muni yields may go up a little more between now and the end of the year, but most of this year’s increase probably happened already in the last two months.”

In the minutes Wednesday, some members of the FOMC said reductions in asset purchases are now appropriate, or would soon be, while others said a decrease in purchases would limit flexibility.

“Many members” wanted to see further improvement in the outlook for the labor market “before it would be appropriate to slow the pace of asset purchases,” the minutes said. “Some” also wanted “more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases.”

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