The municipal bond market barely got a breather as volume for the week totaled a revised $7.81 billion, according to Thomson Reuters. This consisted of $6.10 billion of negotiated deals and $1.71 billion of competitive sales.
The market saw three deals of over $1 billion each sell during the week, topped by issuers in Chicago, Indiana, and California.
Morgan Stanley priced Chicago's $1.09 billion of taxable and tax-exempt general obligation bonds.
The issue was broken into $348 million of Series 2015A tax-exempt GOs, which were priced with a high yield of 5.69% in 2039 and $743 million of Series 2015B taxable GOs, which came with a high yield of 7.98% in 2042. Both series were rated BBB-plus by Standard & Poor's and Fitch Ratings and A-minus by Kroll Bond Rating Agency.
"Investors wanted to make a statement that they are bullish on Chicago and showed that as the city had strong demand for its $743 million taxable sale and was 10 times oversubscribed on the $348 million of tax-exempt bonds it successfully sold," a Chicago official said.
The deal helped Chicago shed the remaining general fund liquidity risks tied to the city's credit deterioration and clears its balance sheet of some operating expenses for budget relief. The deal's taxable piece was so large due to the city's plan to use proceeds to cover short-term operating expenses that would run afoul of long-term tax-exempt financing rules under the Internal Revenue Service code.
The high yield on the taxable portion fell just a couple basis points shy of 8%, 485 basis points over the yield on the 30-year U.S. Treasury. That's a steep jump from the 265 basis point spread the city paid on its 30-year bond in its last taxable issue in 2014, well before Moody's Investors Service cut the city's GO rating to a speculative grade on May 12.
The city also paid steep penalties on the tax-exempt tranche, though the deal generally fared better than the city's last GO sale in late May. The high yield of 5.69% came in at 252 basis points over Municipal Market Data's top-rated benchmark of 3.17% at the open of the market on the day of pricing. MMD put yields at 3.78% for an A-rated credit and 4.16% for a BBB-rated credit, underscoring how the market values the city's GOs deep in junk prices.
Bank of America Merrill Lynch priced the Indiana Toll Road ITR Concession Co.'s $1.05 billion of taxable senior secured notes. The deal was rated BBB by both S&P and Fitch.
The deal was offered only months after the original private owner of the publicly owned toll road went bankrupt. The new owner, Australian fund manager fund IFM Investors, is set to complete the financing of its takeover bid with next week's sale. The 157-mile Indiana Toll Road is a key link between Chicago and the East Coast.
JPMorgan priced the California State University Trustees' $1.04 billion of revenue bonds for institutions after a one-day retail order period. The issue was rated Aa2 by Moody's and AA-minus by S&P.
Bank of America Merrill Lynch priced the North Carolina Eastern Municipal Power Agency's $419.38 million of Series 2015 taxable revenue bonds. The bonds were priced at par to yield from 1.085% in 2016 to 4.058% in 2025. The deal was rated A-minus by S&P and A by Fitch.
In the competitive arena, Maryland sold $500 million of state and local facilities loan of 2015 GOs in two separate sales. Both issues were rated triple-A by Moody's Investors Service, S&P and Fitch.
JPMorgan won the $450 million of Second Series A tax-exempt GOs with a true interest cost of 2.83% and it also won the $50 million of Second Series B taxable GOs with a TIC of 1.35%.
"This was a great bond sale with high participation by outstanding investors," said State Treasurer Nancy K. Kopp. "This is truly a win-win situation. Maryland's taxpayers benefit from the low interest rates associated with a very competitive sale of a triple-A rated instrument while investors take advantage of a safe place to invest their money."
Proceeds from the bond sale provide funding for the state's investment in its infrastructure, with 60% of the proceeds supporting schools, colleges, and universities.
Secondary Market
The yield on the 10-year benchmark muni general obligation on Friday finished down two basis points to 2.29% from 2.31% on Thursday, while the yield on the 30-year GO was off two basis points to 3.25% from 3.27%, according to the final read of Municipal Market Data's triple-A scale.
Lackluster trading flows were seen amid a modestly improved tone on the heels of Chicago's strong deal pricing, according to Interactive Data.
"With no Greece headlines we are pretty much flat to up on the Treasury," said a New York trader earlier Friday afternoon. "Overall, the market is obviously a little richer than yesterday, up plus one or plus two [basis points]."
Treasury prices were mixed on Friday, with the yield on the two-year Treasury note rising to 0.67% from 0.66% on Thursday, while the 10-year yield fell to 2.34% from 2.36% and the 30-year yield declined to 3.08% from 3.12%.
The 10-year muni to Treasury ratio was calculated on Friday at 99.8% versus 98.2% on Thursday, while the 30-year muni to Treasury ratio stood at 106.9% compared to 105.0%, according to MMD.
Municipal Bond Funds See $29.3M Cash Outflow
For the 11th straight week, municipal bond funds reported cash outflows. The weekly reporting funds saw $29.255 million of outflows in the week ended July 15, after experiencing outflows of $305.707 million in the previous week, according to the latest Lipper data. This brought to 14 out of 29 weeks this year the funds have seen cash withdrawals.
The four-week moving average remained negative at $409.882 million after being in the red at $507.779 million in the previous week. The moving average has now been negative for eight weeks in a row. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.
Long-term muni bond funds, however, experienced inflows, gaining $34.223 million in the latest week, after seeing outflows of $147.939 million in the previous week. It was the first week of cash flowing into the long-term funds since April 29.
Intermediate-term funds again recorded inflows, of $20.109 million after seeing inflows of $53.613 million in the prior week.
High-yield muni funds saw inflows of $14.513 million in the latest reporting week, after seeing an outflow of $122.823 million the previous week. And exchange traded funds saw inflows of $45.314 million, after experiencing outflows of $27.250 million in the previous week.
Analysts have suggested technical reasons as well as headline risk surrounding credits such as Puerto Rico have contributed to the continuing cash redemptions.
Municipal bond funds have been impacted somewhat by the deteriorating financial situation in Puerto Rico, according to Van Eck Global's senior municipal strategist James Colby.
"Mainstream news articles showed how widely Puerto Rico credits were held -- and I emphasize the word 'were' because many investors told their advisors 'get me out' and some professionals said 'these securities don't fit with our investment criteria anymore.' "
Investors continue to look at the municipal bond market as a unique entity, he said, one that is supposed to deliver a constant income stream while providing high-credit quality. And when that doesn't always happen, "it plays into some of the redemption flows."
Some felt it was just better to exit the muni market now and then revisit it at a later date when things had calmed down, he said, adding that while investors are quick to exit, they are slow to come back.
Is there a silver lining?
"As I look at yields rising, and performance at or near zero," Colby said, "I am optimistic at the possibility of having a pretty strong finish for municipal bond performance in 2015."
The Week's Most Actively Quoted Issues
Puerto Rico and New York were some of the most actively quoted names in the week ended July 17, according to data released by Markit.
On the bid side, the Puerto Rico commonwealth GO 5 1/8s of 2037 were quoted by 10 unique dealers. On the ask side, New York Triborough Bridge and Tunnel Authority revenue bond 5s of 2020 were quoted by 21 dealers. And among two-sided quotes, the Puerto Rico commonwealth GO 8s of 2035 were quoted by 12 dealers, Markit said.
The Week's Most Actively Traded Issues
Some of the most actively traded issues in the week ended July 17 were in Puerto Rico, Pennsylvania and Illinois.
In the revenue bond sector, the Lehigh County General Purpose Authority, Pa., 4 1/4s of 2045 were traded 75 times. In the GO bond sector, the Puerto Rico commonwealth 8s of 2035 were traded 98 times. And in the taxable bond sector, the Chicago 7 3/4s of 2042 were traded 51 times, according to Markit.
Yvette Shields contributed to this report.
