Investors are conflicted over the appeal of the $850 million of New York City general obligation bonds in light of New York City Mayor Bill de Blasio's deal with the United Federation of Teachers.
Moody's Investors Service called the deal with educators a credit negative in a May 12 report, writing that it reveals the city's budget and finances are driven by personnel cost.
"It's the first time debt is being issued under de Blasio's budget plan so it's exciting, but with the news coming in the last few weeks about the payments to the teachers' union it makes me nervous," a trader in New York said. "I've spoken to a few money managers saying they're staying far away from the deal."
The contract with the United Federation of Teachers will provide an 18% wage increase over the course of nine years, and intends to provide the city more than $1 billion in healthcare cost savings over the next four years, according to a press release.
Analysts have said they are worried the retroactive payments will set a precedent for an environment where municipalities will have difficulty negotiating with unions because unions will choose to hold out for retroactive pay.
"It makes me nervous, I'm showing [the deal] to clients as an offering they have access to, but we're including the disclaimer that de Blasio is doing things with the budget, and money managers are staying away," the trader in New York said.
New York City Comptroller Scott Stringer released an analysis of the city's modified FY15 executive budget on June 4 that showed out-year budget gaps could be smaller than originally projected.
"The Comptroller's Office estimates that the gaps would be $1.77 billion in FY 2016, $406 million in FY 2017, and $914 million in FY 2018," according to a June 4 press release.
Fred Bacani, Head of Fixed Income & Trading at Veritable LP in Newtown Square, Pa., remains wary of how de Blasio's actions impact the city's credit but still find the city's debt attractive.
"Although I continue to monitor New York City from a credit perspective, particularly the mayor's actions and initiatives, I believe the city's adjusted debt service levels are manageable and the local economy is resilient enough to weather the new leadership's approach to spending," he said in an interview.
Morgan Stanley is pricing the bonds for retail Monday and the issue earned an A2 rating from Moody's, and AA from both Standard & Poor's and Fitch Ratings.
Wells Fargo Securities is expected to hold a retail order period on Monday for $201.4 million of Nebraska Public Power District. GOs. The deal is rated A1 by Moody's and A by S&P and A-plus by Fitch.
Rice Financial Products will also start a retail order period for $200 million of Connecticut GOs . The retail order period will continue into Tuesday before institutional sale on Wednesday. The deal is rated Aa3 by Moody's, and AA by S&P, Fitch and Kroll Bond Rating Agency.
There are no large deals scheduled in the competitive market on Monday.
Treasuries weakened Monday morning, with the 30-year yield and the two-year note inching up one basis point each to 3.45% and 0.42%, respectively. The 10-year benchmark rose two basis points to 2.62%.
