Prices of top-quality municipal bonds finished mostly firmer on Wednesday, traders said, with yields unchanged to as much as one basis point stronger.
The muni market saw the pricing of the biggest deal of the week, the $1 billion pension bond offering from the Kansas Development Finance Authority, as well as offerings from the state of Michigan, the University of Minnesota and the Los Angeles County Public Works Authority.
Secondary Trading
Muni and Treasury yields fell earlier in the session as bond prices benefitted on Wednesday from a flight to quality after China devalued its currency on Tuesday. China intervened in the markets again to prop up its falling yuan, a move which caused equities around the world to decline early on.
The yield on the 10-year benchmark muni general obligation on Wednesday closed down one basis point to 2.17% from 2.18% on Tuesday, while the yield on the 30-year GO was unchanged from 3.06%, according to the final read of Municipal Market Data's triple-A scale.
Treasury prices were mostly higher on Wednesday, with the yield on the two-year Treasury note falling to 0.65% from 0.67% on Tuesday, while the 10-year yield dropped to 2.13% from 2.14% and the 30-year yield increased to 2.82% from 2.81%.
"The Treasury 10-year and bond had a huge rally overnight, but has given back nearly all the gains as the market speculates on the Fed's reaction." MMD Senior Analyst Randy Smolik wrote in a Wednesday market comment. "[N.Y. Federal Reserve Bank President William] Dudley stated that the Chinese devaluation had huge implications for world trade. Any indication that the Fed may delay rate hikes tends to cause the Treasury curve to steepen."
The Fed has held rates near zero since 2008. The Federal Open Market Committee meets on Sept. 16 to 17 and investors on Wednesday saw a 42% chance it would act then to raise rates for the first time in over nine years, according to Bloomberg. The odds are down from 54% on Friday, before all the geopolitical uncertainty surrounding the Chinese economy.
The Fed isn't drawing hasty conclusions about China, Thomas Costerg, senior economist at Standard Chartered Bank, told Bloomberg. "It seems that the Fed is watching what is happening in China, but they're not panicking."
In late trading, U.S. stocks were mixed after recovering from an earlier selloff. The Dow Jones Industrial Average fell about 20 points after having been down over 275 points earlier in the day. The Nasdaq gained eight while the S&P 500 was flat on the day Oil prices moved higher, with NYMEX crude for September delivery rising 22 cents a barrel to $43.29.
The 10-year muni to Treasury ratio was calculated on Wednesday at 101.8% versus 99.4% on Tuesday, while the 30-year muni to Treasury ratio stood at 108.5% compared to 108.4%, according to MMD.
Primary Market
Bank of America Merrill Lynch priced the KDFA's $1 billion of Series 2015H taxable revenue bonds for the Kansas Public Employees Retirement System.
All of the bonds were priced at par and yield from 1.435% in 2017 to 4.391% in 2030; a 2037 term bond was priced to yield 4.474%; and a 2045 term was priced to yield 4.927%. The taxable issue yields 80 basis points over the comparable 2019 Treasury on the short end to 230 basis points above the comparable 2030 Treasury on the long end.
The bonds were rated Aa3 by Moody's Investors Service and AA-minus by Standard & Poor's.
Late Tuesday, Moody's issued a report skeptical of the benefits of Kansas' sale of pension obligation bonds.
"The bonds, which are rated one notch lower than the state at Aa3/stable outlook, will do little to solve the challenges surrounding Kansas' poorly funded state-administered pension plans," Moody's said in the report.
Morgan Stanley priced the state of Michigan's $129.31 million of Series 2015A tax-exempt general obligation environmental program refunding bonds.
The bonds were priced to yield from 0.44% with a 3% coupon in 2016 to 2.76% with a 5% coupon in 2028. The issue was rated Aa1 by Moody's, AA-minus by S&P and AA by Fitch Ratings.
Goldman, Sachs priced the Los Angeles County Public Works Authority, Calif.'s $133.03 million of Series 2015B tax-exempt lease revenue refunding bonds. The series was priced as 5s to yield from 0.43% in 2016 to 3.41% in 2033; a 2015 maturity was offered as a sealed bid. Goldman also priced the PWA's $85.13 million of Series 2015C taxable lease revenue refunding bonds. The issue was priced at par to yield from 0.32% in 2015 to 3.737% in 2024. The taxable issue yields 50 basis points over the comparable 2015 Treasury on the short end to 160 basis points above the comparable 2024 Treasury on the longer end. Both series are rated A1 by Moody's, AA by S&P and A-plus by Fitch.
Barclays Capital priced the University of Minnesota's $100.19 million of Series 2015A and B bonds.
The $90.08 million of Series 2015A special purpose revenue refunding bonds, state supported stadium debt, were priced to yield from 0.31% with a 2% coupon to 3.47% with a 3.25% coupon in 2031. The series was rated Aa2 by Moody's and AA by S&P.
The $10.11 million of Series 2015B taxable GOs were priced at par to yield from 0.799% in 2016 to 3.589% in 2027 and to yield 3.889% in 2029 and 4.039% in 2031. The taxable issue yields 40 basis points over the comparable 2016 Treasury on the short end to 190 basis points above the comparable 2031 Treasury on the long end. The series is rated Aa1 by Moody's and AA by S&P.
On Thursday, Wells Fargo Securities is scheduled to price Charlotte, N.C.'s $475 million of water and sewer revenue bonds. The issue is rated triple-A by Moody's, S&P and Fitch.
Since 1995, Charlotte has issued roughly $8.59 billion of debt. The highest years of issuance occurred in 2008 and 2009, as the city issued $602 million and $1.13 billion, respectively. The city saw low years of issuance in 1995 and 1997, when it issued just $162 million and $75 million, respectively.
