Another set of Build America Bonds came to market yesterday, adding to the taxable BAB issuance this week that has helped push yields down in the tax-exempt market.
The tax-exempt market showed gains for the second day in a row after nearly a two-week lull.
The first big set of BAB issuance in April had helped send yields on a triple-A rated, 30-year general obligation bond down to a 2009 low of 4.35% April 22, and they had fallen back until Wednesday, when they started to recover.
The yield stood at 4.48% after trading yesterday, down from 4.58% earlier this week.
“It seems fairly quiet, particularly on the short end, but the long end is enjoying a nice rally,” a trader in San Francisco said. “There’s better buying, kind of on the heels of the BABs. It helped push up two weeks ago, and it’s happening again now.”
In the new-issue market, two deals that had an option to go taxable or tax-exempt came fully with taxable BABs. Both had 10-year, callable at par options — not the make-whole call options some earlier BAB deals have included — making any interest rate savings absolute.
BMO Capital Markets priced $54 million of taxable revenue BABs for Southern Illinois University. Originally planned to be split into a taxable and tax-exempt portion, SIU went completely with BABs maturing 2011 through 2025 with a term bond in 2030.
Yields ranged from a taxable 2.40% with a 2.50% coupon in 2011 to 6.2% with a 6.2% coupon in 2030, translating into 1.56% and 4.03% yields taking into account the 35% subsidy. The bonds had a standard 10-year par call option. The bonds, which are insured by Assured Guaranty Corp., saved the university about $4.2 million on a present-value basis, or 1.00% all-in yield compared to a tax-exempt structure, according to BMO Capital Markets.
On the competitive side, Kansas’ Johnson County Unified School District No. 233 sold three deals, including $95 million of GO taxable BABs. The bonds mature 2014 through 2029 and were sold to Morgan Keegan & Co. at a true interest cost of 3.491% — or 5.37% without the 35% subsidy.
Despite allowing both taxable and tax-exempt bids, the district received just taxable offers. The bonds, which are callable at par in 2019, are rated AA by Standard & Poor’s and Aa3 by Moody’s Investors Service.
It also sold to Robert W. Baird & Co. a $35.4 million tax-exempt GO issue at a true interest cost 2.2132% and a $22.5 million tax-exempt GO issue at a true interest cost of 2.0957%.
Mesa, Ariz., Wednesday issued $59.9 million of utility systems revenue bonds as BABs after giving bidders taxable and tax-exempt options.
The city had an overall interest savings of $12.5 million, selling the bonds — which matured 2023 through 2033 — to Robert W. Baird at a taxable interest cost of 6.2457%, or 4.122% true interest cost adjusted for the 35% federal subsidy.
Nine bidders went the taxable route, with just Morgan Stanley making a tax-exempt bid, at a net interest cost of 5.028%. The difference in rates accounts for the savings, as Mesa retained its 10-year, par call option, avoiding a make-whole call option that some other BAB deals have included.
Two BAB deals that priced early this week came to market at tighter spreads to Treasuries than earlier issues and have traded up in the secondary markets. Wichita Unified School District No. 259 bonds, for instance, traded at a weighted average yield of 6.02% yesterday after coming to market at 6.22% Tuesday, according to BondDesk’s MuniTicker.
Even pricing more than 100 basis points closer to Treasuries than some of the early offerings, the BAB deals still look attractive to investors, said Cumberland Advisors vice president and portfolio manager Peter Demirali.
“You have sort of awakened taxable bond buyers to a new asset class where they have virtually no exposure, and any exposure is good exposure from a diversification perspective,” Demirali said.
“And these bonds are still viewed as being very competitive if not outright cheaper compared to corporates, and that’s the driving force,” he said. “From a credit standpoint and the relatively low probability of default, it’s still viewed being attractive — it’s almost a quasi-Treasury, if you will, 225 basis points over.”
Elsewhere, JPMorgan priced $129.5 million of GO refunding bonds for Loudoun County, Va. The bonds mature from 2010 through 2020, with yields ranging from 1.01% with a 4% coupon in 2011 to 3.20% with a 5% coupon in 2020.
The bonds, which are callable at par in 2019, are rated triple-A by all three rating agencies.
In the competitive markets, Tulsa, Okla., sold $51.8 million of GOs to Morgan Stanley at a true interest cost of 3.8049%.
The Treasury market was weaker yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.18%, was quoted recently at 3.30%. The yield on the two-year note was quoted recently at 0.99% after opening at 0.96%. The yield on the 30-year bond, which opened at 4.09%, was quoted recently at 4.26%.
In economic data yesterday, preliminary first-quarter productivity rose 0.8%, ahead the expectations of economists’ polled by Thomson Reuters of 0.6%. Initial jobless claims for the week of May 2 fell 34,000 to 601,000.