Municipal bonds little changed as Pennsylvania, Grand Parkway deals price

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Municipal bonds were mixed on Wednesday as the market gave a warm welcome to large deals including Pennsylvania’s big competitive sale and the Grand Parkway negotiated offering.

Primary market
In the competitive arena, Pennsylvania competitively sold $1.25 billion of its First Series of 2018 general obligation bonds.

Bank of America Merrill Lynch won the bonds with a true interest cost of 3.6161%.

Assured Guaranty Municipal insured about $241.08 million of the deal, by backing the 2033, 2034 and 2039 maturities.

The deal was well received by the market, sources said.

“From what I heard, the majority of the Pennsylvania deal has been sold," said a New York trader. "If true, it would it not be surprising given the wider spreads.”

Since 2008, Pennsylvania has sold over $16 billion of debt with the most issuance occurring in 2016 when is offered $2.84 billion. It sold the least amount of bonds in 2008, when it offered $705.2 million of securities.
In the negotiated sector on Wednesday, Goldman Sachs priced and repriced the Grand Parkway Transportation Corp.’s $893.13 million of Series 2018 A&B subordinate tier toll revenue bonds and $608.27 million of Series 2018 bond anticipation notes.

Citigroup priced the city and county of San Francisco Airport Commission’s $874.75 million of second series Series 2018D and 2018E revenue bonds and Series 2018G revenue refunding bonds.

BAML priced the California Statewide Communities Development Authority’s $188.095 million of Series 2018 A&B insured revenue bonds for the Viamonte Senior Living 1 project.

Municipal sources said the demand in the primary is due to a combination of market technicals and the arrival of reinvestment season.

The recent demand and investor participation in new issues indicates a more interested market will absorb this week’s deals with even better reception, Jeffrey Lipton, head of municipal research and strategy and fixed income research at Oppenheimer Inc., predicted Tuesday in his weekly municipal report. He also said normalization of market technicals ahead of the summer months should be positive for the municipal market, with marked opportunities on the front end of the yield curve, though the reinvestment activity is expected to push supply into the net negative arena.

“While the muni curve is not as flat as the Treasury curve, the value of shorter dated securities should remain pronounced for the time being,” he wrote. “With a growing voice calling for four rate hikes this year, yields on shorter muni tenors will remain under upward pressure.”

The impact on performance should be positive, which could produce even lower relative value ratios, Lipton added.

“We still believe that buyers are tentative, but we have been witnessing a more constructive bid-side,” he said. “Perhaps there is now greater acceptance and understanding of tax reform and maybe there is less reluctance to get involved in this higher rate environment.”

The lower corporate tax rate has “diluted” the incentives for purchasing municipal bonds for banks and property and casualty insurance companies, according to Lipton. “The retail buyer is not likely to fill this void,” he said. "We would expect the rate of investment growth to be among the strongest with foreign buyers of munis, given the less compelling returns available abroad.”

Wednesday bond sales

Click here for the state sale

Click here for the Grand Parkway repricing

Click here for the Grand Parkway Transportation deal

Click here for the Grand Parkway BAN deal

Click here for the San Francisco Airport deal

Click here for the Statewide CDA deal

Click here for the Mesa deal

Secondary market
Municipal bonds were mostly weaker on Wednesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields rose as much as one basis point in the four- to 30-year maturities and fell less than a basis point in the one- to three-year maturities.

High-grade munis were mixed, with yields calculated on MBIS’ AAA scale rising as much one basis point in the nine- to 30-year maturities and falling as much as a basis point in the one- to eight-year maturities.

“Richer relative value levels made it difficult to defend against selling on Tuesday and the break lower in Treasuries allowed arb/relative value accounts to hit wider bids without really giving up any performance,” said one New York trader. “Today feels a touch better in terms of psychology but I think it’s more apathy as the market looks for further price discovery from the new issues.”

If the steady to one basis point cuts across the MMD curve were any indication, then the market has stopped the bleeding for at least for the day, he said. “It’s all going to be what direction Treasuries go next that will determine if a firmer bid develops for munis.”

According to another New York trader, the rising yields in the Treasury market over the last few trading sessions has stirred activity in the muni market in a good way, after the 10-year Treasury yield rose as high as 3.09%.

“There definitely was a shake up in our market,” he said on Wednesday afternoon. “There’s a lot of deals and we got much cheaper, which is healthy,” he added. “Anytime you get near 3% on the 10-year it starts to shake some people up.”

He said he observed strong bidding on new deals and investors are actively buying, such as this week’s Pennsylvania GO sale, which he said did well because it debuted at the market’s new levels. “The dealers are little more defensive than the buyers because the buyers have cash and want to put it to use,” he explained.

According to Municipal Market Data’s AAA benchmark scale, municipals finished weaker. Yields rose by one basis point in the 10-year general obligation muni and gained one basis point in the 30-year muni maturity.

Treasury bonds were weaker, with the 10-year yield remaining above the 3% level as stocks traded higher.

On Wednesday, the 10-year muni-to-Treasury ratio was calculated at 81.5% while the 30-year muni-to-Treasury ratio stood at 94.6%, according to MMD.

Previous session's activity
The Municipal Securities Rulemaking Board reported 42,120 trades on Tuesday on volume of $9.47 billion.

California, New York and Texas were the states with the most trades, with the Golden State taking 15.024% of the market, the Empire State taking 13.473% and the Lone Star State taking 9.002%.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Vanessa Kim at 212-803-8474 for more information.

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Primary bond market Secondary bond market State of California San Francisco Airport Commission California Statewide Communities Development Authority State of Texas Grand Parkway Transportation Corp., TX Commonwealth of Pennsylvania State of New York