Top-rated municipal bonds ended unchanged on Tuesday, according to traders, as Chicago's $500 million of general obligation bonds came to market in the primary.
Citigroup repriced the Windy City's GO refunding bonds to lower yields on some maturities. The Series 2015C bonds were repriced as 5s to yield from 3.53% in 2020 to 4.67% in 2031 with 5% term bonds in 2035 and 2038 yielding 4.82% and 4.875%, respectively.
"We were very pleased with the work that Citi" did on the transaction as yields came down from pre-marketing levels Monday, said Chicago's chief financial officer Carole Brown.
The top yield in 2038 reflects a spread of 229 basis points over the comparable triple-A rated muni bond on Municipal Market Data's triple-A scale.
The deal's overall spreads came in about 20 basis points under its summer sale and 40 basis points on a spring sale, both of which pre-dated passage of a big property tax hike to fund rising public safety pensions.
The offering attracted a total of 69 buyers, including 26 new to the city's GO paper. Overall, the deal was about two and half times oversubscribed with some early maturities oversubscribed by as much as six times, Brown and deputy comptroller Jeremy Fine added.
The GOs had been tentatively priced on Tuesday as 5s to yield from 3.58% in 2020 to 4.67% in 2031 with 5% term bonds in 2035 and 2038 yielding 4.86% and 4.93%, respectively. On a pre-marketing basis Monday, the GOs were offered as 5s to yield from 3.60% in 2020 to 4.68% in 2031 with the 5% terms in 2035 and 2038 yielding 4.875% and 4.95%, respectively.
The issue was rated triple-B-plus by Standard & Poor's and Fitch Ratings and A-minus by Kroll Bond Rating Agency. All three rating agencies have a negative outlook on the city.
Since 2006, the Windy City has issued about $9.50 billion of GOs, with the most issuance occurring in 2007 and 2015 when the city sold $1.55 billion and $1.76 billion respectively. The city did not come to market with GOs in 2013.
Morgan Stanley priced the California Health Facilities Financing Authority's $475.45 million of Series 2016A revenue bonds for Sutter Health.
The issue was priced as 5s to yield from 1.24% in 2021 to 2.89% in 2035; a 2036 maturity was priced as 3 1/4s to yield 3.40%, a 2041 maturity was priced as 5s to yield 3.08% and a 2046 maturity was priced as 5s to yield 3.14%. The bonds were rated Aa3 by Moody's Investors Service and AA-minus by S&P and Fitch.
The Trinity Health Credit Group came to market with a $552.81 million composite bond offering from four different issuers. Bank of America Merrill Lynch priced all four series.
The Michigan Finance Authority's $269.49 million of Series 2016MI hospital revenue and refunding bonds were priced to yield from 0.91% with a 5% coupon in 2017 to 2.15% with a 3% coupon in 2024 and from 2.62% with a 3% coupon in 2027 to 3.63% with a 3.50% coupon in 2037; a 2041 maturity was priced as 5 1/4s to yield 3.26%, a 2045 split maturity was priced as 4s and 5s to yield 3.80% and 3.35%, respectively.
The Connecticut Health and Educational Facilities Authority's $218.47 million of Series 2016CT revenue bonds were priced to yield from 0.86% with a 2% coupon in 2017 to 2.10% with a 2% coupon in 2024 and from 2.57% with a 3% coupon in 2027 to 3.45% with a 3.25% coupon in 2036; a split 2041 maturity was priced as 3 1/2s and 5s to yield 3.69% and 3.25%, respectively; a 2045 maturity was priced as 5s to yield 3.30%.
Montgomery County, Md.'s $41.86 million of Series 2016MD revenue bonds were priced as 5s to yield 3.12% in 2045.
The Idaho Health Facilities Authority's $22.98 million of Series 2016ID revenue bonds were priced as 5s to yield 3.17% and as 4s to yield 3.62% in a split 2045 maturity.
The issues were rated Aa3 by Moody's, AA-minus by S&P and AA by Fitch.
Morgan Stanley priced the Build NYC Resource Corp.'s $139.05 million of Series 2016 tax-exempt refunding bonds for the New York Law School project. The issue was priced to yield from 1.22% with a 4% coupon in 2017 to 3.60% with a 5% coupon in 2036; a 2041 maturity was priced as 5s to yield 3.68% and a 2045 maturity was priced as 4s to yield 4.05%. The bonds were rated Baa3 by Moody's and triple-B by S&P.
Wells Fargo Securities priced Montgomery Co., Texas's $111.84 million of Series 2016 unlimited tax road bonds and limited tax refunding bonds. The $53.18 million of road bonds were priced to yield from 0.64% with a 2% coupon in 2017 to 2.80% with a 5% coupon in 2037; a 2041 maturity was priced as 4s to yield 3.25%. The $58.66 million of refunding bonds were priced to yield from 1.94% with a 5% coupon to 2.58% with a 5% coupon in 2032. The issue was rated Aa1 by Moody's and AA-plus by S&P.
Secondary Market
The yield on the 10-year benchmark muni general obligation was unchanged from 1.78% on Monday, while the 30-year muni yield steady from 2.73%, according to the final read of Municipal Market Data's triple-A scale.
Treasuries were narrowly mixed on Tuesday. The yield on the two-year Treasury declined to 0.91% from 0.92% on Monday, while the 10-year Treasury yield decreased to 2.10% from 2.16% and the 30-year Treasury bond yield dropped to 2.88% from 2.96%.
The 10-year muni to Treasury ratio was calculated on Tuesday at 84.8% compared with 82.5% on Monday, while the 30-year muni to Treasury ratio stood at 94.8% versus 92.4%, according to MMD.
Citi Research: Munis Very Rich, But Not for Long
Municipal bonds are unsustainably rich, according to research report released on Monday by Citi Research.
Munis outperformed Treasuries from the time the Federal Reserve hiked interest rates to the end of 2015, according to Vikram Rai, Jack Muller and George Friedlander, who authored the report.
"Despite the strong positive correlation between triple-A municipals and Treasuries, this divergence in performance vs. Treasuries (where municipals have outperformed significantly) is largely a result of scarce supply over the last two months of the year," the Citi report said. "While gross municipal issuance in 2015 was up 19% on the year, issuance plummeted by 43.4% in December 2015 vs. the same period in 2014. This led to municipals staying artificially rich due to scarcity value."
Looking ahead, Citi feels the situation will reverse soon.
"Municipals have rallied in early 2016 as well and we strongly believe that these yield levels and ratios are unsustainably low and this richness will dissipate once the issuance calendar normalizes over the next one to two weeks," the report said. "Essentially, we maintain that municipals, especially long term municipals, are sound investments for 2016 but anticipate better entry points in late January."
