Market continues to weaken due to increased supply from tax reform rush

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The muni market picked up right where it left off on Tuesday: with a steady stream of supply, the dilemma of how to beat tax reform and a weaker tone.

“Supply continues to weigh on tax-exempt bonds, as anxious issuers rush to take advantage of advance refunding savings prior to year-end,” said one New York trader. “As always, the market is readjusting due to heavy supply.”

Illinois sold total of $750 million of general obligation bonds in two competitive sales on Wednesday: $655 million and $95 million.

Bank of America Merrill Lynch won both sales, the larger one with a true interest cost of 4.33%. The bonds were priced to yield from 2.25% with a 5% coupon in 2018 to 4.42% with a 5% coupon in 2042.

BAML also won the smaller offering with a TIC of 3.71%. Both transactions carry ratings of Baa3 from Moody’s Investors Service, BBB-minus from S&P Global Ratings and BBB from Fitch Ratings.

Since 2007, the Prairie State has issued over $35 billion of bonds, with the most issuance occurring in 2010 when it sold $8.68 billion of bonds. The state did not come to market in 2015. With Wednesday’s sales, this year becomes the second highest issuance total for the state in the past decade.

The only other notable competitive deal of the day came from the Washington Suburban Sanitary District, which sold $80.945 million of consolidated public improvement refunding bonds. The deal was won by Citi with a TIC of 2.16% and is rated triple-A by Moody’s, S&P and Fitch.

Washtubs, as the district is commonly called, was originally scheduled to sell roughly $190 million, and ended up downsizing the deal.

“It was a crossover refunding to prior issues, we ended up pulling some of it out, due to market conditions we wouldn’t have achieved the proper amount of savings if we had went through with it,” said Wye River Group, the financial advisor on the deal.

On the negotiated side, Barclays priced the Board of Regents of the University of Texas’ $342.64 million of revenue financing system bonds. The bonds were priced to yield from 1.57% with a 4% coupon in 2019 to 3.20% with a 4% coupon in 2037. A term bond in 2042 was priced to yield 3.00% with a 5% coupon, a term bond in 2047 was priced to yield 3.05% with a 5% coupon, a term bond in 2052 was priced to yield 3.53% with a 4% coupon and a term bond in 2057 was priced to yield 3.58% with a 4% coupon. The 2018 maturity was offered as a sealed bid. The deal is rated triple-A by Moody’s, S&P and Fitch.

RBC priced the New York State Environmental Facilities Corp.’s $337.015 million of Series 2017E state clean water and drinking water revolving funds revenue bonds for New York City Municipal Water Finance Authority projects. The bonds were priced to yield from 1.19% with a 3% coupon in 2018 to 2.92% with a 5% coupon in 2038. A term bond in 2042 was priced to yield 2.97% with a 5% coupon and a term bond in 2047 was priced to yield 3.02% with a 5% coupon. The deal carries ratings of triple-A from Moody’s, S&P and Fitch.

One deal that was planned for Wednesday will no longer be coming. BAML was scheduled to price Maryland Stadium Authority’s $426.44 million of construction and revitalization program revenue bonds for the Baltimore City Public Schools, but it has been delayed. According to a notice, the issuer decided to postpone the transaction due to market conditions.

“This is a new-money transaction and does not need to be rushed, especially when market conditions are not pristine” said one market source. “In all likelihood, this transaction will now take place in 2018.”

Secondary market

  • The MBIS municipal non-callable 5% GO benchmark scale was weaker on trading through midday Wednesday.

The 10-year muni benchmark yield rose to 2.433% on Wednesday from the final read of 2.413% on Tuesday, according to Municipal Bond Information Services. The MBIS 30-year benchmark muni yield increased to 2.925% from 2.902% on Tuesday.

The MBIS benchmark index is updated hourly on the Bond Buyer Data Workstation.

  • U.S. Treasuries were mostly weaker on Wednesday morning. The yield on the two-year Treasury nudged up to 1.77% from 1.75%, the 10-year Treasury yield rose to 2.38% from 2.34% and the yield on the 30-year Treasury jumped to 2.82% from 2.77%.
  • Top-rated municipals were weaker still on Wednesday. The yield on the 10-year benchmark muni general obligation was between three and five basis points higher from 2.16% on Tuesday, while the 30-year GO yield increased between two and four basis points from 2.82%, according to a read of Municipal Market Data’s triple-A scale.
  • On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 92.4% compared with 91.1% on Monday, while the 30-year muni-to-Treasury ratio stood at 101.9% versus 101.0%, according to MMD.

Bond Buyer reports 30-day visible supply
The Bond Buyer's 30-day visible supply calendar decreased $221.3 million to $18.27 billion on Tuesday. The total is comprised of $6.40 billion of competitive sales and $11.87 billion of negotiated deals.

MSRB: Previous session's activity
The Municipal Securities Rulemaking Board reported 44,253 trades on Tuesday on volume of $9.629 billion.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Vanessa Kim at 212-803-8474 for more information.

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Primary bond market Tax reform Secondary bond market State of Illinois Washington Suburban Sanitary Commission The University of Texas Board of Regents New York State Environmental Facilities Corporation Maryland Stadium Authority