Munis weaken as bond bonanza begins
As a wave of new municipal bond deals swept into the market, munis weakened along with Treasuries in secondary action.
Traders and analysts were going gaga over the $10 billion-plus supply swell this week, which is a record for the year so far.
The volume is 62% above the 12-week average of $6.2 billion, as 16 deals in excess of $100 million will head to market ahead of spring reinvestment season, Peter Block, managing director of credit strategy at Ramirez & Co. noted in his weekly municipal commentary.
“The secondary will likely take a backseat to the primary,” he wrote. “We think that munis — at least through five years — are more likely than not to outperform over the coming months due to the typically price-supportive negative net supply months of June/July” at negative net supply of $28 billion and $42 billion, respectively.
The $1.52 billion Grand Parkway transportation deal in Texas and the $914 million San Francisco Airport deal are two of the largest negotiated deals, he said, while the competitive market is led by the $1.25 billion Pennsylvania deal and $1.1 billion New York City Transitional Finance Authority deals.
The Pennsylvania deal’s spreads have remained firm at 56 basis points in 10 years over the past two years, despite widely publicized budget issues, he noted.
“In anticipation of weaker technicals — mainly higher rates across the curve — we continue to advocate a defensive posture — five- to seven-years effective duration — using a laddered approach that includes intermediate — 14- to 16-year — maturities,” Block wrote. He prefers the double-A general obligation and single-A rated revenue credits in the 14- to16-year intermediate maturity range with 5%-plus coupons and shorter calls between five and eight years. “These intermediate maturities with shorter-calls, which have become cheaper as the curve has flattened, capture 68% of the MMD curve, and provide incremental yield with consistent, low-volatility roll-down,” of 50 basis points, he added.
In general, he said the two-year, five-year, and 30-year spots maintain fair relative value versus the 12-month and three-year averages, at 73%, 72%, and 95%, respectively.
The New York City Transitional Finance Authority competitively sold $1.1 billion of Fiscal 2018 Series C tax-exempt and taxable fixed-rate bonds in five sales.
Goldman Sachs won the $122.09 million Subseries C-1 tax-exempt bonds with a true interest cost of 2.0935%.
Bank of America Merrill Lynch won the $329.92 million of Subseries C-2 tax-exempt bonds with a TIC of 3.6952%.
JPMorgan Securities won the $398.9 million of Subseries C-3 tax-exempt bonds with a TIC of 3.8733%.
Morgan Stanley won the $137.4 million of Subseries C-4 taxable bonds with a TIC of 3.6731%.
And UBS Financial won the $112.6 million of Subseries C-5 taxable bonds with a TIC of 3.8938%.
Also on Tuesday, Boston competitively sold $150 million of Series 2018A general obligation bonds.
BAML won the bonds with a TIC of 2.9565%.
Since 2008, Boston has sold about $1.9 billion of bonds, with the most issuance occurring in 2015 when it sold $266.7 million. It sold the least amount of bonds in 2016 when it issued $148.1 million.
The North Dakota Public Finance Authority competitively sold $128.65 million of Series 2018A state revolving fund bonds.
JPMorgan won the bonds with a TIC of 3.2792%.
Nevada competitively sold $116.76 million of Series 2018 highway improvement motor vehicle fuel tax revenue bonds.
BAML won the bonds with a TIC of 3.3387%.
Jefferies priced and repriced the Pennsylvania Turnpike Commission’s $441.87 million of oil franchise tax bonds.
Raymond James & Associates priced the Spring Branch Independent School District, Texas’ $132.35 million of Series 2018 unlimited tax schoolhouse bonds.
And the week's action is only just getting started.
In the competitive arena on Wednesday, Pennsylvania will competitively sell $1.25 billion of its First Series of 2018 general obligation bonds. Proceeds will be used to finance various capital projects.
In the negotiated sector on Wednesday, Citigroup is expected to price the city and county of San Francisco Airport Commission’s $914 million of second series revenue and revenue refunding bonds.
And Goldman Sachs is set to price the Grand Parkway Transportation Corp.’s $911 million of subordinate tier toll revenue bonds and $610 million of bond anticipation notes on Wednesday.
Tuesday’s bond sales
Click here for the $329.92 million sale
Click here for the Boston sale
Click here for the PFA sale
Click here for the Turnpike Commission sale
Municipal bonds were weaker on Tuesday, according to a late read of the MBIS benchmark scale.
Benchmark muni yields rose as much as three basis points in the three- to 30-year maturities and fell less than a basis point in the one- and two-year maturities. High-grade munis were weaker too, with yields calculated on MBIS’ AAA scale rising as much as three basis points in the one- to 30-year maturities.
Municipals were also weaker according to Municipal Market Data’s AAA benchmark scale, which showed yields rising six basis points in the 10-year general obligation muni and gaining seven basis points in the 30-year muni maturity.
Treasury bonds were weaker, with the 10-year yield passing through the 3% level as stocks fell sharply.
On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 81.7% 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 34,410 trades on Monday on volume of $7.53 billion.
California, New York and Texas were the states with the most trades, with the Golden State taking 15.598% of the market, the Empire State taking 13.021% and the Lone Star State taking 10.755%.
Treasury auctions $45B 4-week bills
The Treasury Department Tuesday auctioned $45 billion of four-week bills at a 1.655% high yield, a price of 99.871278.
The coupon equivalent was 1.680%. The bid-to-cover ratio was 3.13.
Tenders at the high rate were allotted 63.32%. The median rate was 1.630%. The low rate was 1.600%.
Gary Siegel contributed to this report.
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.