The municipal bond market is set to see more supply hit the screens on Tuesday and many traders will be watching for the formal pricing of Chicago's $500 million of general obligation bonds.
Secondary Market
Treasuries were lower on Tuesday. The yield on the two-year Treasury rose to 0.95% from 0.92% on Monday, while the 10-year Treasury yield increased to 2.18% from 2.16% and the 30-year Treasury bond yield rose to 2.97% from 2.96%.
On Monday, top-quality municipal bonds finished weaker. The yield on the 10-year benchmark muni general obligation rose three basis points to 1.78% from 1.75% on Friday, while the 30-year muni yield also increased three basis points, to 2.73% from 2.70%, according to the final read of Municipal Market Data's triple-A scale.
The 10-year muni to Treasury ratio was calculated on Monday at 82.5% compared with 82.2% on Friday, while the 30-year muni to Treasury ratio stood at 92.4% versus 92.5%, according to MMD.
MSRB Previous Session's Activity
The Municipal Securities Rulemaking Board reported 34,950 trades on Monday on volume of $5.75 billion.
Primary Market
Citigroup is set to price Chicago's $500 million deal on Tuesday after it released a pre-marketing scale on Monday.
The Series 2015C general obligation refunding bonds were priced on a pre-marketing basis as 5s to yield from 3.60% in 2020 to 4.68% in 2031 with term bonds in 2035 and 2038 yielding 4.875% and 4.95%, respectively, market sources said.
This would reflect spreads of 260 basis points over the comparable triple-A rated 10-year muni on Municipal Market Data's triple-A scale and 167 over other triple-B-rated credits. A 22-year bond offered a yield of 4.95%, 240 basis points over the triple-A scale and 151 basis points over triple-B rated credits.
The issue is rated triple-B-plus by Standard & Poor's and Fitch Ratings and A-minus by Kroll Bond Rating Agency.
On Thursday, Illinois will competitively sell $480 million of Series of 2016 GOs. The bonds are rated Baa1 by Moody's Investors Service, A-minus by S&P and triple-B-plus by Fitch.
On the higher-rated side, the Illinois Regional Transportation Authority on Wednesday will competitively sell $100 million of Series 2016A GOs. This issue is rated Aa3 by Moody's and AA by S&P and Fitch.
Elsewhere, the Trinity Health Credit Group will be coming to market with a $568 million composite offering with bonds coming from four different issuers.
The deal consists of the Michigan Finance Authority's Series hospital revenue and refunding bonds; the Connecticut Health and Educational Facilities Authority's revenue bonds; the Idaho Health Facilities Authority's Series revenue bonds; and Montgomery County, Md.'s Series revenue bonds.
The issue is expected to be priced by Bank of America Merrill Lynch on Tuesday. The bonds are rated Aa2 by Moody's, AA-minus by S&P and AA by Fitch.
The California Health Facilities Financing Authority will be offering $500 million of Series 2016A revenue bonds for Sutter Health. The deal, which is rated Aa3 by Moody's and AA-minus by S&P and Fitch, is expected to be priced by Morgan Stanley on Wednesday.
Bond Buyer Visible Supply
The Bond Buyer's 30-day visible supply calendar rose $327.4 million to $13.53 billion on Tuesday. The total is comprised of $5.17 billion competitive sales and $8.36 billion of negotiated deals.
Citi Research: Munis Very Rich, But Not for Long
Municipal bonds are unsustainably rich, according to research report released on Monday by Citi Research.
Munis outperformed Treasuries from the time the Federal Reserve hiked interest rates to the end of 2015, according to Vikram Rai, Jack Muller and George Friedlander, who authored the report.
"Despite the strong positive correlation between triple-A municipals and Treasuries, this divergence in performance vs. Treasuries (where municipals have outperformed significantly) is largely a result of scarce supply over the last two months of the year," the Citi report said. "While gross municipal issuance in 2015 was up 19% on the year, issuance plummeted by 43.4% in December 2015 vs. the same period in 2014. This led to municipals staying artificially rich due to scarcity value."
Looking ahead, Citi feels the situation will reverse soon.
"Municipals have rallied in early 2016 as well and we strongly believe that these yield levels and ratios are unsustainably low and this richness will dissipate once the issuance calendar normalizes over the next one to two weeks," the report said. "Essentially, we maintain that municipals, especially long term municipals, are sound investments for 2016 but anticipate better entry points in late January."
