Bonds were hit hard Wednesday as tax reform details were disclosed, according to traders. Muni yields spiked while more new issuance came into the market.
Secondary market
Top-shelf municipal bonds closed weaker. The yield on the 10-year benchmark muni general obligation was six basis points higher to 1.98% from 1.92% on Tuesday, while the 30-year GO yield also increased six basis points from 2.84%, according to a final read of Municipal Market Data's triple-A scale.
U.S. Treasuries were weaker at the market close on Wednesday amid concern over rising interest rates and the tax reform proposal. The yield on the two-year Treasury was up to 1.47% from 1.44%, the 10-year Treasury yield increased to 2.31% from 2.23% and the yield on the 30-year Treasury bond rose to 2.86% from 2.77%.
On Wednesday, the 10-year muni-to-Treasury ratio was calculated at 85.9% compared with 86.1% on Tuesday, while the 30-year muni-to-Treasury ratio stood at 99.3% versus 100.3%, according to MMD.
Primary market
A fresh wave of issuance hit the market on Wednesday, not particularly great timing for issuers as both Treasury and muni yields jumped as news of tax reform plans were announced.
The plan would shrink the current seven tax brackets, which range from 10% to 39.6% to three brackets, with rates of 12%, 25% and 35%. There would be flexibility to add a fourth rate for the wealthiest taxpayers. Lower tax rates may undercut the value of the municipal tax exemption, which a senior administration official said would be preserved.
“All those deals that came yesterday, I bet they are glad about the timing,” said one New York trader. “The market was way weaker today, given the tax reform talk, interest rate concerns – market conditions can change so quickly and today was just another example of that."
Kicking things off in the competitive arena, Minnesota sold a total of $858.175 million of general obligation trunk highway and refunding taxable bonds in five separate sales. The deals are rated AAA by Fitch Ratings.
Bank of America Merrill Lynch won the largest sale, $323.770 million of GO various purpose refunding bonds with a true interest cost of 2.07%. The bonds were priced to yield from 1.17% with a 5% coupon in 2020 to 2.62% with a 3% coupon in 2030.
Citi won the $312.295 million of GO various purpose bonds with a TIC of 2.74%. The bonds were priced to yield from 0.93% with a 5% coupon in 2018 to 2.68% with a 5% coupon in 2037.
Wells Fargo won the $114 million of GO state trunk highway bonds with a TIC of 2.57%. The bonds were priced from 5% at par in 2018 to about 3.245% with a 3.125% coupon in 2037.
BAML also won the $81.110 million of GO trunk highway refunding bonds with a TIC of 1.92%. Wells Fargo won the $27 million of GO taxable various purpose bonds with a TIC of 2.02%.
Since 2007, the Land of 10,000 Lakes has sold about $12.61 billion of securities, with the most issuance in 2010 when it sold $1.71 billion. The state saw the lowest year of issuance in 2008 when it sold $506 million.
BAML priced the New Jersey Economic Development Authority’s $350 million of school facilities construction bonds. The bonds were priced to yield from 1.81% with a 5% coupon in 2019 to 3.97% with a 5% coupon in 2035. A term bond in 2037 was priced to yield 4.13% with a 4% coupon and a term bond in 2042 was priced to yield 4.16% with a 5% coupon. The deal is rated Baa1 by Moody’s, BBB-plus by S&P and A-minus by Fitch.
BAML priced Wayne County Airport Authority’s $279.515 million of revenue bonds. The $51.12 million of Series 2017A non-alternative minimum tax airport revenue bonds was priced to yield from 1.23% with a 4% coupon in 2020 to 3.21% with a 5% coupon in 2037. A term bond in 2042 was priced to yield 3.34% with a 5% coupon. A term bond in 2047 was priced to yield 3.41% with a 5% coupon.
The $41.25 million of Series 2017B AMT bonds were priced to yield from 1.46% with a 4% coupon in 2020 to 3.44% with a 5% coupon in 2037. A term bond in 2042 was priced to yield 3.57% with a 5% coupon. A term bond in 2047 was priced to yield 3.64% with a 5% coupon.
The $78.74 million of Series 2017C non-AMT bonds were priced to yield from 0.98% with a 5% coupon in 2018 to 2.64% with a 5% coupon in 2028. These series are all rated A2 by Moody’s and A by S&P and Fitch.
The $61.965 million of Series 2017A junior lien non-AMT bonds were priced to yield from 1.13% with a 5% coupon in 2018 to 3.33% with a 5% coupon in 2037. This series is rated A3 by Moody’s, A-minus by S&P and A by Fitch, with the exceptions of the 2033 through 2036 maturities, which are insured by Assured Guaranty Municipal Corp. and rated A2 by Moody’s and AA by S&P.
The $46.44 million of Series 2017B junior lien AMT bonds were priced to yield from 1.36% with a 5% coupon in 2018 to 3.29% with a 5% coupon in 2032. This series is rated A3 by Moody’s, A-minus by S&P and A by Fitch.
BAML also priced the State of Kansas’ $200 million of department of transportation highway revenue bonds. The bonds were priced from 5% at par in 2019 to 2.76% with a 5% coupon in 2037. The deal is rated Aa2 by Moody’s, AAA by S&P and AA-minus by Fitch.
