Municipals weaken as Illinois, Port Authority deals come to market
Municipal bonds were weaker across the curve on Tuesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields rose as much as four basis points in the one- to 30-year maturities. Munis also weakened on MBIS’ AAA scale as yields rose as much as five basis points.
Munis were also weaker according to Municipal Market Data’s AAA benchmark scale, which show yields gaining five basis points in the 10-year maturity and rising eight basis points in the 30-year maturity.
Treasury bonds were weaker with the 10-year yield rising above 3% for the first time in almost four years. The Dow Jones Industrial Average and S&P 500 rose while the Nasdaq index moved lower.
“Muni’s had been outperforming Treasuries. Then you get an uptick in muni supply and 10-year Treasury breaching a 3%, creating the selloff,” said one Midwest trader. “Munis had become a little frothy in here. There will probably be a little more pain to come."
In the competitive arena, Illinois sold $500 million of general obligation bonds in two sales.
Bank of America Merrill Lynch won the $450 million of Series of May 2018A GOs with a true interest cost of 4.7442%. BAML also won the $50 million of Series of May 2018B GOs with a TIC of 4.3348%.
The deals are rated Baa3 by Moody’s, BBB-minus by S&P and BBB by Fitch.
Demand for the deals was very high, according to market participants.
The TIC on the $450 million at 4.7442% is up from a TIC on the state’s similarly structured $655 million series in November 2017 won by BAML with a 4.33% TIC.
“The spreads came in at a fair level, not cheap and not rich,” said Brian Battle, director of trading at Performance Trust Capital Partners. “It’s not surprising that the deal was well-received. It’s a state credit and it has very high yields.”
Since 2008, Illinois has sold about $34.89 billion of securities, with the most issuance occurring in 2010 when it sold $8.68 billion. The Prairie State did not come to market in 2015.
The Metropolitan Council of the Minneapolis-St. Paul area sold $154.975 million of GOs in three sales.
RBC won the $105 million of Series 2016C GO wastewater revenue bonds with a TIC of 3.2011%.
Piper Jaffray won the $37.68 million of Series 2018D GO transit bonds with a TIC of 2.5345% and Dougherty & Co. won the $12.295 million of Series 2018B taxable GO wastewater revenue bonds with a TIC of 3.2771%.
Ramirez & Co. priced and repriced the Port Authority of New York and New Jersey’s $413.13 million of 209th Series consolidated bonds for institutions after holding a one-day retail order period.
The deal is rated Aa3 by Moody’s Investors Service and AA-minus by S&P Global Ratings and Fitch Ratings.
JPMorgan Securities priced the Putnam County Development Authority, Fla.’s $114.14 million of pollution control revenue refunding bonds.
JPMorgan also priced the University of Virginia’s $200 million of Series 2018 general revenue pledge bonds.
Citigroup received the written award on the New York Transportation Development Corp.’s $1.38 billion of special facilities revenue bonds. The issue is redevelopment financing to fix Delta Airlines’ Terminals C and D at LaGuardia Airport.
JPMorgan received the written award on the Texas Water Development Board’s $832.07 million of Series 2018 Master Trust State Water Implementation Revenue Fund for Texas revenue bonds.
RBC Capital Markets received the written award on the Main Street Natural Gas Inc.’s $1 billion of Series 2018 gas supply revenue bonds.
Morgan Stanley received the written award on the Connecticut Housing Finance Authority’s $118.28 million of housing mortgage finance program bonds.
Wednesday’s bond sales
Click here for the $450M state sale
Click here for the Putnam deal
Click here for Che pricing
Click here for the HFA pricing
Previous session's activity
The Municipal Securities Rulemaking Board reported 44,026 trades on Tuesday on volume of $8.76 billion.
California, New York and Texas were the states with the most trades, with the Golden State taking 19.04% of the market, the Empire State taking 10.95% and the Lone Star State taking 9.633%.
Ramirez: Munis need to cheapen before strengthening
With all eyes on the Treasury curve and expectations of weaker technicals, Peter Block, managing director at Ramirez & Co. believes municipals need to get cheaper before strengthening on a relative value basis.
In the last week, municipals have outperformed Treasuries, mutual fund outflows have surged, new issue supply has been manageable and secondary supply has weighed on muni performance.
“The market remains keenly focused on the 10-year Treasury yield and the 5s and 30-year curve for further flattening,” Block wrote in an April 23 report.
“The market continues to test the psychologically important 3% level as rates edge higher, although the consensus rate path is for the 10yr to end 2018 at 2.95%,” he added.
“It appears that relatively expensive Munis are here to stay during the summer months due to strong market technicals, including higher levels of negative net supply,” Block wrote.
In anticipation of weaker technicals, however, the firm continues to advocate a more defensive posture, namely 5 years-to-7 years effective duration, according to Block.
This includes intermediate duration of 14-years to 16-years, double A rated bonds with 5%-plus coupons with shorter calls of five- to eight-years, which he said are “cheaper now due to recent front-end widening.”
“We believe that curves will likely remain flat for some time,” Block said.
“Given this, we think it makes sense to add short-call structures to a defensive position for incremental yield, rolldown, and reinvestment. These structures capture 75% of the MMD curve and should maintain above-average roll-down -- and below-average volatility -- with rolldown returns versus 3yr average at 50 basis points,” he wrote.
BlackRock: Technicals expected to stay favorable
The technical backdrop for municipal bonds is expected to remain favorable with muni issuance remaining muted going into the summer, alongside firm retail demand, according to Peter Hayes, head of BlackRock’s municipal bonds group.
“The recent performance of munis has reset relative valuations to more attractive levels, particularly in the long end of the curve, which is likely to draw increased interest from crossover buyers, providing support to the market,” Hayes wrote in the firm’s latest commentary.
The group, which oversees $129 billion of municipal assets, said it shifted from a defensive to a more neutral stance on duration (interest-rate sensitivity), while maintaining the barbell yield curve strategy with exposure concentrated in maturities of zero- to two-years and 20-years and beyond.
“We reduced exposure to maturities of zero- to three- and six- to eight-years, and added to 20-plus year maturities. Holdings of longer-dated bonds (20-plus years) contributed the most to the fund’s positive performance in March,” said the report. “We increased the fund’s positions in the transportation, healthcare and utilities sectors and reduced exposure to cash and state tax-backed bonds. An overweight to tobacco was most beneficial for performance in March.”
The fund’s largest revenue bond allocations are transportation, healthcare and utilities.
From a credit quality perspective, the fund increased exposure to higher-yielding AA and A issues, while decreasing exposure to higher-quality AAA-rated issues. As of March 31, approximately 19% of the fund’s net assets were high-yield municipal bonds, which primarily include tobacco, corporate-backed, healthcare and education bonds.
“We believe flexible strategies with the ability to be nimble around interest rate and policy uncertainty are likely to continue to outperform the broad municipal market,” the report said.
Treasury auctions $35B 5-year notes
The Treasury Department Wednesday auctioned $35 billion of five-year notes, with a 2 3/4% coupon, a 2.837% high yield, a price of 99.597097. The bid-to-cover ratio was 2.49.
Tenders at the high yield were allotted 56.70%. All competitive tenders at lower yields were accepted in full.
The median yield was 2.800%. The low yield was 2.188%.
Treasury sells $17B 2-year FRNs
The Treasury Department Wednesday auctioned $17 billion of two-year floating rate notes with a high discount margin of 0.033%, at a 0.033%, a price of par. The bid-to-cover ratio was 3.65. Tenders at the high margin were allotted 91.62%.
The median discount margin was 0.029%. The low discount margin was 0.010%.
The index determination date is April 23 and the index determination rate is 1.830%.
Gary Siegel and Yvette Shields 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.