Prices of top-rated municipal bonds finished weaker on Friday, traders said, after the U.S. jobs report for October came in much better than expected.
Total muni volume for the week holiday shortened of Nov.9 is estimated by Ipreo at $4 billion. This is down from a revised total of $5.21 billion in the prior week, according to Thomson Reuters. There will be no bonds sold or traded on Wednesday, as the market will be in observance of Veterans Day.
By far the largest deal on the calendar for next week is the Florida Development Finance Corporation's $1.75 billion of revenue bonds for the All Aboard Florida passenger rail project. The deal is expected to be priced by Bank of America Merrill Lynch on Tuesday. However, there is a lot of skepticism surrounding the deal and there is no guarantee that it will price on Nov. 10.
Market sources told the Bond Buyer that "they have been trying to get the deal done for weeks but have been having trouble getting enough people interested in the deal, even those investors who are looking for yield."
All Aboard, a planned 235-mile intercity express train between Miami and Orlando, is owned by Florida East Coast Industries whose parent company is Fortress Investment Group. If completed the project would be the first privately owned passenger train developed in the U.S.
The project received a private activity bond allocation from the U.S. Department of Transportation, but continues to fight state and federal legal challenges brought by Martin and Indian River counties where the train will pass through but not stop. Both counties have said they will suffer numerous ill effects from the project.
The deal is not rated and being sold to qualified institutional buyers and accredited investors.
Citi is scheduled to price Springfield, Ill.'s $498 million of senior-lien electric revenue bond sale on Thursday, which will restructure debt for operating relief and generate traditional present value savings. It is anticipated that the deal will mature serially from 2018-2035 and also include a term bond in 2040. Moody's revised its outlook on the city utility's A3 credit to stable from negative and Standard & Poor's affirmed its A rating and stable outlook.
The largest competitive sale on the docket will take place on Thursday as the California Public Works Board will be selling roughly $223.15 million of lease revenue bonds, for the Department of Corrections and Rehabilitation and California State Prison, Corcoran and various buildings. The jail bonds are rated A1 by Moody's, A-plus by S&P and A by Fitch Ratings.
Secondary Market
Prices of top-rated municipal bonds finished sharply lower on Friday, traders said, after the U.S. jobs report for October came in much better than expected.
The yield on the 10-year benchmark muni general obligation ended six basis points stronger at 2.16% from 2.10% on Thursday, while the yield on the 30-year GO was six basis points stronger at 3.17% from 3.11%, according to a the final read of Municipal Market Data's triple-A scale.
Muni yields are now about 10 to 12 basis points higher than the prior week. On Friday, Oct. 30, the yield on the 10-year muni stood at 2.04% while the 30-year muni was at 3.07%.
Treasury prices plunged after the Labor Department reported that non-farm payrolls rose 271,000 last month. Economists surveyed by IFR Markets had expected a gain of 189,000 in non-farm payrolls.
Bond traders now see a 70% chance the Federal Reserve will hike interest rates when it meets next month, up from a 56% chance before the jobs release, according to Bloomberg.
"A surprising jump in payrolls and hourly earnings should give the Fed the ammo they need to raise rates in December," MMD Senior Market Analyst Randy Smolik wrote in a market comment.
For municipals, any future rate increase by the Fed may see a muted response from the market.
"If the Fed raises rates in December, the reaction by the municipal bond market probably will be modest and not last very long," J.R. Rieger, Global Head of Fixed Income at S&P Dow Jones Indices, said in a press release.
A rate hike has long been anticipated by traders and is most likely already built into the muni bond market, Rieger said. He also said there were other factors to consider when looking at the market.
"On the surface, municipal bond new issue supply looks like it has rebounded, but the majority of that new debt is refunding older higher coupon debt, actual 'new money' borrowings have remained lower than previous years," he said. "Demand is still outweighing supply."
In late Friday trading, the yield on the two-year Treasury rose to 0.89% from 0.84% on Thursday. The Treasury 10-year yield rose to 2.33% from 2.24% and the 30-year yield increased to 3.09% from 3.01%.
The 10-year muni to Treasury ratio was calculated on Friday at 92.7% versus 93.7% on Thursday, while the 30-year muni to Treasury ratio stood at 102.6% compared to 103.3%, according to MMD.
"The historical litmus test for determining whether municipal bonds are rich or cheap to U.S. Treasuries has been the yield ratio (tax-free yield over U.S. Treasury Bond yield). The historical yield ratio has been 70% to 80% of U.S. Treasuries," Rieger said. " It is hovering around 95% to 100% indicating the municipal bond market has established itself in the cheaper range of historical trends."
The Week's Most Actively Quoted Issues
The Port Authority of New York and New Jersey and the Massachusetts Bay Transit Authority were some of the most actively quoted names in the week ended Nov. 6, according to data released by Markit.
On the bid side, the Port Authority of New York and New Jersey taxable 4.81s of 2065 were quoted by 14 dealers. On the ask side, the Massachusetts Bay Transit Authority revenue 5s of 2040 were quoted by 17 dealers. And among two-sided quotes, California taxable 7.55s of 2039 were quoted by 8 dealers, Markit said.
The Week's Most Actively Traded Issues
In the revenue bond sector, the Bexar County, Texas 4s of 2051 were traded 90 times. In the GO sector, the California 5s of 2045 were traded 29 times. And in the taxable bond sector, the Los Angeles Municipal Improvement Corp. 3.432s of 2021 were traded 27 times, Markit said.
Shelly Sigo and Yvette Shields contributed to this report.
