The Puerto Rico turmoil that has shaken the municipal bond market the past two weeks will boost demand for the high-grade $108.3 million Pflugerville, Texas, Independent School District general obligation bonds expect to price on Monday.
The recent sell-off of the commonwealth's and Puerto Rico organizations' junk bonds has made investors hungry for high-quality new issuances. Market participants believe this ups the attractiveness of the Texas ISD GOs because they are rated triple-A since they are backed by the Texas Permanent School Fund.
"You have the Puerto Rico and Detroit situations, so people will orient towards buying higher grade stuff," a trader in Dallas said. "The Pflugerville ISD GOs certainly are qualified because of their triple-A rating."
The Texas PSF is run by the state and is used to guarantee the principal and interest payments of school districts, giving bonds issued by the school districts a triple-A rating.
"Regardless of the underlying rating, it gives the bonds a triple-A rating," he said. "It's a very secure investment."
The bonds carry underlying ratings of Aa2 from Moody's Investors Service and AA from Standard & Poor's.
Over the weekend of June 28, Puerto Rico Gov. Alejandro García Padilla signed into law a bill to allow public corporations to restructure their debts. Soon after the law was enacted Moody's and Fitch Ratings did mass downgrades of Puerto Rico debt. S&P has also downgraded several Puerto Rico organizations and has put others on negative credit watch.
Puerto Rico debt sold off so rapidly that it impacted the broader muni market, causing yields for benchmark municipal bonds to rise most of last week, according to data provided by Municipal Market Advisors.
Municipal bond funds also reported their first outflows in 10 weeks last week, according to Lipper FMI. Fund flows for all muni bond funds showed outflows of negative $790.3 million for the week ending July 9, following inflows of $193.6 million the week before.
A trader in Florida expects there will continue to be a great deal of money flowing out of municipal bond funds, but said market participants are still sitting on a great deal of cash that they will likely deploy toward new issues.
"[Demand for the Pflugerville deal] really has to do with amount of cash investors have to put to work, and they will gravitate towards the higher grade, better known credits," he said. "Texas offers them that, especially with PSF program."
The trader in Dallas said Puerto Rico headlines will continue to dominate the market this week.
"It's certainly having a drag on market, particularly in secondary market," he said. "This is why I think the Pflugerville deal will do well. Puerto Rico is causing people to take a flight to quality."
"Secondary trading is really, really quiet," the trader in Florida said.
Municipal bond yields opened steady across the curve on Monday, according to Municipal Market Data's triple-A scale.
Treasuries were mixed Monday, with the 10-year benchmark climbing two basis points to 2.54% and the two-year note inching up one basis point to 0.47%. The 30-year yield fell two basis points to 3.36%.
On Tuesday Bank of America will bring a two-part deal totaling $1.4 billion of California Bay Area Toll Authority revenue bonds. The $1.2 billion portion of the deal has a soft put. The deal is rated Aa3 by Moody's Investors Service and AA-minus by Fitch Ratings.
"The Cali deal will be gobbled up," the New York trader predicted. "With a deal like this, I like to see where the maturities line up."
Morgan Stanley priced for retail $675 million of New York City Transitional Finance Authority revenue bonds. Yields ranged from 0.66% with a 4% coupon in 2017 to 4% at par in 2039. The bonds are callable at par in 2024. There is a sealed bid in 2016. The deal is expected to price for institutions on Wednesday.
The issuer will also sell $125 million in the competitive market on Wednesday. The deals are rated Aa1 by Moody's and AAA by both Standard & Poor's and Fitch.
Bank of America will bring to market $117.3 million of California Health Facilities Financing Authority revenue bonds. The deal is rated Aa3 by Moody's, AA-minus by S&P and AA by Fitch.
Morgan Stanley will price $250 million of Kansas Department of Transportation revenue bonds. The deal is rated Aa2 by Moody's and AA-plus by Fitch.
Goldman Sachs will issue a three-part deal totaling $216.3 million of Oregon Department of Administrative Services Lottery revenue bond. The deal is rated Aa2 by Moody's and AAA by S&P.
In the competitive market, the Colorado General Fund will auction $500 million of tax and revenue anticipation notes. The deal is rated MIG1 by Moody's and SP-1-plus by S&P.
Palms Springs Unified School District, Calif., will auction $109.4 million of general obligation bonds. The deal is rated AA-minus by S&P.
