Top-quality municipal bonds finished weaker on Thursday, traders said, as Bank of America Merrill Lynch won the competitive bidding for Illinois' $480 million of general obligation bonds.
BAML won the state's Series of January 2016 unlimited tax GOs with a true interest cost of 3.9989%.
Thursday's issue was priced to yield from 1.15% with a 5% coupon in 2017 to 4.13% with a 4% coupon in 2039; a 2041 maturity was priced as 5s to yield 4.27%.
Gov. Bruce Rauner's administration sought to highlight the true interest cost rate of 3.99% which was under the state's last four deals. An official said the results show "the financial markets have confidence in the governor's leadership."
The rate reflects prevailing rates that are lower now as the state's spreads have actually widened since its last sales in the spring of 2014.
"We recognize that rates have declined since the last time Illinois issued general obligation bonds, but we were pleased to price lower than the state's recent trades in the secondary market," Rauner spokeswoman Catherine Kelly said.
Market participants said the narrowing of spreads over recent secondary trading levels represented an aggressive bid by BAML.
The sale saw spreads to the Municipal Market Data triple-A rated benchmark of 155 basis points on the 10-year maturity and 161 basis points on the 25-year bonds. The spreads are lower than where state paper had recently been trading.
"Overall, the deal was offered at very firm levels, especially when compared to recent secondary activity," MMD Senior Market Analyst Randy Smolik wrote in a Thursday market comment. "For example, yesterday previously issued Illinois GO's in 8/2022 traded at 3.00%-2.98% (+171/+169 basis points vs. implied). Today, Illinois GO's in 1/2022 were priced at 2.60% (+140 basis points vs. early MMD)."
Illinois sold no bonds in 2015, but came to market several times in 2014. The state had last competitively sold bonds on April 10, 2014, when BAML won the $250 million of Series of April 2014 GOs with a TIC of 4.08%. At its 2014 sales, Illinois saw spreads over the MMD benchmark of between 95 and 110 basis points for 10-year paper, but that was before recent rating downgrades.
This issue was rated Baa1 by Moody's Investors Service, A-minus by Standard & Poor's and triple-B-plus by Fitch Ratings except for the 2034 and 2037-2039 maturities, which were insured by Assured Guaranty Municipal and rated A2 by Moody's and AA by S&P.
Chapman and Cutler and Pugh Jones & Johnson were bond counsel on the deal and Public Financial Management was advising the state.
Primary Market
Goldman, Sachs priced the New Jersey Turnpike Authority's $150.93 million of Series 2016A turnpike revenue bonds. Proceeds of the sale are expected to refund all or part of its outstanding Series 2004B bonds.
The issue was priced to yield from 2.76% with a 5% coupon in 2031 to 3.25% with a 3.125% coupon and 2.96% with a 5% coupon in a 2035 split maturity. The bonds were rated A3 by Moody's, A-plus by S&P and A by Fitch.
Goldman was lead underwriter of a syndicate that included PNC Capital Markets, RBC Capital Markets and Wells Fargo Securities. The financial advisor was First Southwest and Wilentz, Goldman & Spitzer was bond counsel.
BAML priced the Indiana Finance Authority's $285.7 million of Series 2016A and 2016B health system revenue bonds for the Franciscan Alliance Obligated Group.
The $201.42 million of Series A bonds were priced as 4s and 5s in a split 2051 maturity to yield 4.10% and 3.55%, respectively. The $84.328 million of Series B bonds were priced to yield from 0.75% with a 5% coupon in 2016 to 3.58% with a 3.375% coupon in 2036; a 2041 split maturity was priced as 5s and 3 3/4s to yield 3.36% and 3.86%, respectively. The issue was rated Aa3 by Moody's and AA by Fitch.
Secondary Market
The yield on the 10-year benchmark muni general obligation rose one basis point to 1.79% from 1.78% on Tuesday, while the 30-year muni yield was up two basis points to 2.74% from 2.72%, according to the final read of MMD's triple-A scale.
Treasuries were mostly lower. The yield on the two-year Treasury dropped to 0.89% from 0.90% on Wednesday, while the 10-year Treasury yield rose to 2.09% from 2.05% and the 30-year Treasury bond yield increased to 2.89% from 2.84%.
The 10-year muni to Treasury ratio was calculated on Thursday at 85.2% compared with 86.2% on Wednesday, while the 30-year muni to Treasury ratio stood at 94.7% versus 95.6%, according to MMD.
Muni CUSIP Requests Drop in December
The volume of requests for new municipal CUSIP identifiers declined in December to 1,037, a 9.6% drop from November, according to data released by CUSIP Global Services on Thursday.
The report tracks the issuance of new security identifiers as an early indicator of debt market activity. The latest data hint at continued volatility in new municipal bond issuance over the next several weeks.
On a year-over-year basis, muni identifier requests were up 16.1% for 2015, reflecting strong issuance ahead of the Federal Reserve's interest rate hike in December.
"A great deal of the activity in corporate and municipal bond issuance over the course of 2015 was defined by speculation around interest rates," Richard Peterson, Senior Director, S&P Capital IQ, said in a press release. "It is fitting, then, given the December move by the Fed that we're now seeing a slow-down to the fever pitch of bond issuance we saw earlier in the year. Expect that trend to continue throughout the first part of this year."
Regionally, municipal bond issuers in Texas saw the highest volume of new CUSIP identifiers in December, accounting for a total of 139 identifier requests during the month.
"While seasonality certainly plays a role in the December totals for corporate and municipal issuance, the CUSIP request volumes for the year 2015 paint a picture of a marketplace that's been closely monitoring interest rates for signs of change," said Gerard Faulkner, director of operations for CUSIP Global Services.
Tax-Exempt Money Market Funds Post Inflows
Tax-exempt money market funds experienced inflows of $416.1 million, bringing total net assets to $257.12 billion in the week ended Jan. 11, according to The Money Fund Report, a service of iMoneyNet.com. This followed an inflow of $2.54 billion to $256.71 billion in the previous week.
The average, seven-day simple yield for the 359 weekly reporting tax-exempt funds remained at 0.01% for the 141st straight week.
The total net assets of the 941 weekly reporting taxable money funds increased $11.48 billion to $2.504 trillion in the week ended Jan. 12, after an outflow of $16.06 billion to $2.492 trillion the prior week.
The average, seven-day simple yield for the taxable money funds increased to 0.07% from 0.06% in the prior week.
Overall, the combined total net assets of the 1,300 weekly reporting money funds rose $11.90 billion to $2.761 trillion in the period ended Jan. 12, which followed an outflow of $13.51 billion to $2.749 trillion in the prior week.
