The municipal bond market saw its share of ups and downs this past week as the Arizona Salt River Project's $1 billion bond issue met with a good reception, municipal bond funds saw continued cash outflows, and the City of Chicago was hit with three credit rating agency downgrades.
Meanwhile, prices of top-rated municipal bonds finished mixed on Friday, traders said, as yields were unchanged to two basis points lower.
The Good: The Week's Primary Market
A revised $7.5 billion of new deals came to market during the week, consisting of $5.5 billion of negotiated deals and $2 billion of competitive sales.
Goldman, Sachs & Co. priced the biggest deal - the Salt River Project's $917.95 million of Agricultural Improvement Power District, Ariz. Series 2015A revenue bonds. The bonds were priced for institutions after a one-day retail order period.
Traders said the issue received a good reception. The issuer was last in the market in 2012.
Siebert Brandford Shank & Co. priced Connecticut's $500 million of Series 2015B GO bonds for institutions after a one-day retail order period. The state will be back in the market again in the coming week, selling $480 million of Series 2015C SIFMA-indexed bonds.
Elsewhere, Loop Capital Markets priced the Pennsylvania Turnpike Commission's $495 million of turnpike revenue bonds. JPMorgan priced the Las Vegas Valley Water District's $388.12 million of Series 2015 A, B and C limited tax GO refunding bonds. And Goldman Sachs priced the Mid-Bay Bridge Authority, Fla.'s $282.93 million of first senior lien and second senior lien tax-exempt and first senior lien taxable revenue bonds.
In the competitive arena, Milwaukee sold $166.11 million of GOs, won by Bank of America Merrill Lynch. Milwaukee also sold $125 million Series 2015 R1 revenue anticipation notes which were won by TD Securities.
The Bad: Tax-Exempt Bond Funds Saw Outflows
Municipal bond funds which report weekly posted $32.398 million of outflows in the week ended May 13, after experiencing outflows of $211.078 million in the week ended May 6, according to the latest Lipper data.
The four-week moving average remained positive at $193.106 million in the latest week after being in the green at $79.627 million in the prior week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.
Long-term muni bond funds also saw outflows, losing $109.874 million in the latest week, after experiencing outflows of $396.088 million in the previous week.
High-yield muni funds recorded an outflow of $126.365 million in the latest reporting week, after seeing outflows of $308.950 million the previous week. Intermediate-term funds saw inflows of $99.505 million after seeing inflows of $112.153 million in the prior week. Exchange-traded funds had outflows of $17.072 million, after recording outflows of $6.193 million in the previous week.
The Ugly: Chicago Gets Cut by Moody's, S&P and Fitch
Earlier this month, the Illinois Supreme Court ruled that changes and cuts the state made to its pension system were unconstitutional. The Land of Lincoln has over $110 billion of unfunded pension liabilities and officials had been attempting to find ways to meet those obligations.
And all during the week, the fallout spilled over from state to city.
Moody's Investors Service on Tuesday downgraded the rating on Chicago's $9 billion of general obligation, sales tax, and motor fuel bonds by two notches to Ba1 - junk territory. Moody's cited concerns about the impact of the pension ruling when it cut the city to the speculative grade. The city has almost $20 billion of unfunded pension obligations of its own. Moody's also cut Chicago's $4 billion of water and wastewater bonds by two notches.
Additionally, Moody's cut its rating on both the Chicago Board of Education's $6 billion of debt and the Chicago Park District's $600 million of bonds, lowering both by three notches and dropping them out of investment-grade territory.
Hard on the heels of Moody's actions, Standard & Poor's Thursday hit Chicago with a two-notch downgrade of its own and warned of more cuts as it placed the city on negative CreditWatch. S&P cited the liquidity pressures posed by the Moody's downgrade as the reason for its action. S&P's cut to A-minus from A-plus still leaves the city at investment grade, four steps above junk status.
And Friday, Fitch Ratings downgraded Chicago's GOs to BBB-plus from A-minus, its sales tax bonds to BBB-plus from A-minus and commercial paper notes, 2002 program series A (tax exempt) and B (taxable) bank bond ratings to BBB from BBB-plus. Fitch put the credit on negative watch.
Fitch said its downgrade reflects the increased fiscal pressures on the city following the court decision and a subsequent Moody's downgrade.
Kroll Bond Rating Agency still rates Chicago GOs A-minus and assigns a stable outlook.
In the first trading session after the Moody's downgrade, the price of Chicago bonds fell sharply.
Some of the city's GOs had already been trading in the speculative grade area of at least 200 basis points over Municipal Market Data's top-rated benchmarks. But on the day after the Moody's cut, yields on most Chicago related credits rose from 30 to 40 basis points, Interactive Data said. According to Markit, yields shot up on Chicago GOs. And Municipal Market Analytics added the trades widened out as the day progressed.
And the bonds continued to trade lower after the S&P action. On the day after the S&P downgrade, Chicago GO 5 1/4s of 2030 traded on $5 million at $94.905, or 5.77%, which is 300 basis points over the Municipal Market Data triple-A benchmark. A few days before, it stood at $97.406, or 5.51%, which was 275 basis points over the MMD scale.
And the OK in Puerto Rico
On Friday, Puerto Rico's leaders reached a major tax and spending pact Friday morning that would achieve a balanced budget but may hurt the island's economy.
Puerto Rico bonds rallied on the news.
On Friday afternoon, the commonwealth's Series 2014A general obligation 8s of 2035 traded at a high price of 81.75 and a low yield of 10.142% on volume of $134.92 million and trading 56 times, according to the Municipal Securities Rulemaking Board's EMMA website. This compares to trades on Thursday at a high price of 80.25 and low yield of 10.351% on volume of $33.34 million and trading 17 times.
According to Markit, Commonwealth GOs were up one to two points on Friday, with the evaluation on CUSIP 74514LE86 at 80.5 versus 79 on Thursday.
Market also saw some strength in the Puerto Rico employee retirement system bonds, with block size trades at 42 on Friday comparing to quotes or trades in the 39 range earlier in the week.
And Markit said its evaluations on some commonwealth Sales Tax Financing Corp. bonds were also stronger, with COFINA bonds trading two to three points stronger.
Secondary Market
The yield on the 10-year benchmark muni general obligation was flat from 2.25% on Thursday, while the yield on the 30-year GO fell two basis points to 3.23% from 3.25%, according to the final read of Municipal Market Data's triple-A scale.
Treasury prices were higher on Friday as the yield on the two-year Treasury note dropped to 0.53% from 0.55% from Thursday, while the 10-year yield declined to 2.14% from 2.24% and the 30-year yield decreased to 2.92% from 3.05%.
The 10-year muni-to-Treasury ratio was calculated on Friday at 105.2% versus 100.8% on Thursday, while the 30-year muni to Treasury ratio stood at 110.4% compared to 106.5%, according to MMD.
The Week's Most Actively Quoted Issues
Puerto Rico, New York and California names were among some of the most actively quoted issues in the week ended May 15, according to data released by Markit.
On the bid side, the Puerto Rico Aqueduct and Sewer Authority 6s of 2044 were quoted by 13 unique dealers. On the ask side, the New York Sales Tax Asset Receivable Corp. 5s of 2029 were quoted by 17 dealers. And among two-sided quotes, the Illinois 5.1s of 2033 were quoted by 13 dealers, Markit said.
The Week's Most Actively Traded Issues
Among some of the most actively traded issues in the week ended May 15 were issuers from New Jersey, Connecticut, and Chicago, according to Markit.
In the revenue bond sector, the New Jersey Transportation Trust Fund Authority 5 1/4s of 2036 were traded 235 times. In the GO bond sector, the Connecticut 3 3/8s of 2029 were traded 118 times. And in the taxable bond sector, the Chicago Board of Education 6.519s of 2040 were traded 44 times, according to Markit.
