Market flush with billions of new paper as yields reverse course
Billions of dollars of new paper hit on the market on Thursday, as yields fell for the first time this week on speculation that some municipal exemptions may be preserved in the final tax bill.
With tax reform moving closer to reality with each passing day, issuers are trying to beat the clock and get in with advance refunding deals and private activity bonds while they still can. Investors are adapting the same mentality, as they try to buy up these types of bonds before the well dries up come 2018.
Yields reversed direction and fell, however, as House Ways and Means Committee Chairman Kevin Brady he might agree to preserve private activity bonds, in upcoming negotiations over a final tax bill with the Senate.
“With talk of getting closer to tax reform passing and likely leading to higher treasury rates, plus the fact that there is talk that there may be some resistance to including all the changes to muni issuance that was previously thought," a New York trader said. "Throw in that a lot -- or at least some -- of the advance refundings can’t get done at the higher [Municipal Markets Data] rates and you have a recipe for a major flip in psychology in the market, and that is exactly what we got today.”
The MBIS municipal non-callable 5% GO benchmark scale was stronger in trading through Thursday’s market close.
The 10-year muni benchmark yield fell to 2.425% on Thursday from the final read of 2.450% on Wednesday, according to Municipal Bond Information Services. The MBIS 30-year benchmark muni yield decreased to 2.914% from 2.937%.
The MBIS benchmark index is updated hourly on the Bond Buyer Data Workstation.
Top-rated municipals ended stronger on Thursday. The yield on the 10-year benchmark muni general obligation was six basis points lower to 2.15% from 2.21% on Wednesday, while the 30-year GO yield decreased six basis points to 2.79% from 2.85%, according to a final read of MMD’s triple-A scale.
U.S. Treasuries were weaker on Thursday at the market close. The yield on the two-year Treasury nudged up to 1.78% from 1.76%, the 10-year Treasury yield rose to 2.41% from 2.37% and the yield on the 30-year Treasury jumped to 2.83% from 2.81%.
On Thursday, the 10-year muni-to-Treasury ratio was calculated at 89.1% compared with 93.1% on Wednesday, while the 30-year muni-to-Treasury ratio stood at 98.6% versus 101.2%, according to MMD.
Goldman Sachs priced the city of Houston’s $545.22 million of public improvement and refunding bonds on Thursday. The bonds were priced to yield from 1.84% with a 5% coupon in 2020 to 3.41% with a 4% coupon in 2037. The deal is rated Aa3 by Moody’s Investors Service and AA by Fitch Ratings.
Morgan Stanley priced the Florida Development Finance Corp.’s $600 million of surface transportation facility revenue bonds for the Brightline Passenger Rail Project South Segment. The deal was priced at par as a bullet maturity in 2047 to yield 5.625%. The deal included a 10-year PUT date and is not rated.
“Usually with non-rated issues, they have to pre-sell them and that must have been what happened here as they got close to $3 billion in orders,” said one southern trader.
Since 2007, the Florida DFC has issued roughly $1.7 billion of bonds. Prior to this year, the most issuance occurred in 2013 when it sold $204 million of bonds. It issued the least amount of debt in 2007 when it sold $18.2 million.
Wells Fargo priced the Regents of the University of Colorado’s $480.39 million of enterprise refunding revenue bonds. The bonds were priced to yield from 1.21% with a 5% coupon in 2018 to 3.22% with a 4% coupon in 2039. A term bond in 2043 was priced to yield 3.29% with a 4% coupon and a term bond in 2046 was priced to yield 3.58% with a 3.50% coupon. The deal is rated Aa1 by Moody’s and AA-plus by Fitch.
Citi priced the Long Island Power Authority’s $350 million of electric system general revenue bonds. The deal was priced to yield from 1.79% with a 5% coupon in 2021 to 3.11% with a 5% coupon in 2037. A term bond in 2042 was priced to yield 3.16% with a 5% coupon and a term bond in 2047 was priced to yield 3.21% with a 5% coupon. The deal is rated A3 by Moody’s and A-minus by S&P and Fitch. LIPA received a revised outlook from S&P, to positive prior to today's sale.
“Investors have acknowledged the tremendous progress made since the LIPA Reform Act by stepping up with enormous demand today resulting in a great pricing for LIPA,” said Joseph Branca, chief financial officer, LIPA.
The LIPA deal saw bumps as much as 15 basis points from the preliminary to final pricing and garnered roughly $6 billion in orders from over 100 investors, essentially pricing like an AA rated deal, according to a trader.
Barclays priced the California Municipal Finance Authority’s $139.10 million of revenue bonds for Pomona College. The bonds were priced to yield from 2.21% with a 5% coupon in 2029 to 3.05% with a 4% coupon in 2038. A term bond in 2043 was priced to yield 3.11% with a 4% coupon and a term bond in 2048 was priced to yield 3.19% and 2.79% with a 4% coupon and a 5% coupon in a split maturity. The deal is rated triple-A by Moody’s, S&P and Fitch.
In the competitive sector, Washington State sold $499.09 million of various purpose general obligation refunding bonds. The deal was won by Morgan Stanley with a true interest cost of 3.03%. The bonds were priced to yield 1.16% with a 5% coupon in 2018 and from 1.93% with a 5% coupon in 2023 to 2.80% with a 5% coupon in 2035. The deal is rated Aa1 by Moody’s, AA-plus by S&P Global Ratings and Fitch.
Tax-exempt money market funds saw outflows
Tax-exempt money market funds experienced outflows of $596.3 million, bringing total net assets to $129.17 billion in the week ended Nov. 27, according to The Money Fund Report, a service of iMoneyNet.com. This followed an inflow of $568.4 million to $129.76 billion in the previous week.
The average, seven-day simple yield for the 198 weekly reporting tax-exempt funds increased to 0.50% from 0.49% in the previous week.
The total net assets of the 831 weekly reporting taxable money funds increased $22.77 billion to $2.629 trillion in the week ended Nov. 28, after an inflow of $20.31 billion to $2.606 trillion the week before.
The average, seven-day simple yield for the taxable money funds was unchanged at 0.73% from the prior week.
Overall, the combined total net assets of the 1,029 weekly reporting money funds increased $22.18 billion to $2.758 trillion in the week ended Nov. 28, after inflows of $20.88 billion to $2.736 trillion in the prior week.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Vanessa Kim at 212-803-8474 for more information.