Market Post: Market Cautious as California Heads to Market

The market turned its eyes to the West Coast Tuesday morning as California was expected to price for retail $2.15 billion of tax-exempt bonds and took indications of interest on almost $600 million of taxable debt.

JPMorgan is expected to open the first of two retail order periods for $2.15 billion of California various purpose general obligation bonds, rated A1 by Moody's Investors Service, A by Standard & Poor's, and A-minus by Fitch Ratings. The series include $1.08 billion of various purpose new money GOs and $1.07 billion of various purpose refunding GOs. A second retail order period is expected Wednesday followed by institutional pricing Thursday.

Goldman, Sachs & Co. took indications of interest on $364.2 million of California federally taxable GOs. The bonds had a 0.25% coupon in 2015 and 0.375% coupon in 2016. Spreads were 50 and 65 basis points above the comparable Treasury yield.

Goldman also took indications of interest on a remarketing of $228 million of taxable California Build America Bonds. The bond had a 2.75% coupon in 2039 with 175 basis point spread above the comparable Treasury.

"California could give the market direction one way or another," a Los Angeles trader said. "We are cautious going into it but hopefully will come out stronger."

Outside the California deal, the overall market is weaker. "It's a little cheaper than where we had been the first part of last week so the market has sold off a little," he added. "For retail, 4s on the long end look attractive."

He described the market as "cautious" saying, "There is a little support from Treasuries but the market is concerned about being able to absorb supply."

In the remainder of the primary market, Bank of America Merrill Lynch is expected to price $641.4 million of Indiana Finance Authority Ohio River bridges east end crossing project, rated BBB by Standard & Poor's and Fitch.

Wells Fargo Securities is expected to sell $625.7 million of New York's Empire State Development Corp. bonds. Institutional pricing is expected Wednesday.

Ramirez & Co. should price for institutions $519.6 million of the New York City Municipal Water Finance Authority water and sewer system second general resolution revenue bonds, rated Aa2 by Moody's Investors Service and AA-plus by Standard & Poor's and Fitch Ratings.

In retail pricing Monday, yields ranged from 3.257% with a 3.125% coupon in 2027 to 3.858% with a 4% coupon in 2038. The bonds are callable at par in 2023. Portions of bonds maturing in 2034, 2035, and 2038 were not offered for retail.

In the competitive market, North Carolina is expected to auction $312.8 million of GOs.

On Monday, municipal bond market scales ended weaker after posting losses for five consecutive trading sessions last week.

Yields on the Municipal Market Data triple-A GO scale ended as much as two basis points higher. The 10-year yield and 30-year yield closed flat at 1.99% and 3.08%, respectively, for the second consecutive session. The two-year closed at 0.31% for the 15th straight session.

Since the beginning of March, the 10-year MMD yield has jumped 16 basis points from 1.78% on March 1. The 30-year yield has soared 18 basis points from 2.90% at the beginning of the month.

On Monday, yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale closed as much as two basis points higher. The 10-year yield and the 30-year yield rose one basis point each to 2.00% and 3.16%, respectively. The two-year was steady at 0.33% for the 10th session.

Since the beginning of March, the 10-year yield spiked 18 basis points from where it started the month at 1.82%. The 30-year yield also jumped 18 basis points from 2.98% on March 1.

Treasuries were mostly stronger Tuesday morning for the second session this week. The benchmark 10-year yield dropped three basis points to 2.03% while the 30-year yield fell one basis point to 3.24%. The two-year yield rose one basis point to 0.27%.

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