Bond yields at a glance
MBIS benchmark (~AA)
MBIS indices are updated hourly on the Bond Buyer Data Workstation.
Three events were attracting to the focus of the municipal bond market on Monday – President Donald Trump’s State of the Union address, details of the Treasury Department’s quarterly refunding announcement and the Federal Reserve’s monetary policy announcement.
On Tuesday evening, Trump will set for his priorities for the coming year and the market will scrutinize it for any mention of an infrastructure program. On Wednesday, Treasury is set to announce details of its borrowing needs as the Federal Open Market Committee concludes its two-day monetary policy meeting.
In the primary sector, the big news of the day was that the large tobacco deal from Pennsylvania was placed on the day-to-day calendar, according to a market source.
Jefferies had been slated to price the $1.39 billion tobacco bond deal from the Pennsylvania Commonwealth Financing Authority on Wednesday. The bonds are rated A1 by Moody’s Investors Service, A by S&P Global Ratings and A-plus by Fitch Ratings.
The sources said that the deal was delayed due to a lawsuit filed Jan. 19 by several fireworks companies that contests the state’s authority to issue the bonds. The firms are fighting against the newly passed Act 43 of 2017, which authorizes the sale the bonds but also adds a tax to the sale of fireworks.
According to a supplement to the preliminary official statement, the state says it will “vigorously defend Act 43 before the court."
Action kicked off Monday when Wells Fargo Securities circulated a premarketing scale on Monday for the Hampton Roads Transportation Accountability Commission's $500 million of Series 2018A senior lien revenue bonds it plans to price on Tuesday.
The issue was offered as 5s to yield from 2.16% in 2025 to 2.99% in 2038, 3.06% in 2043, 3.14% in 2048, 3.21% in 2052 and as 5 1/4s to yield 3.21% in 2057.
The deal is rated AA by S&P Global Ratings and AA-plus by Fitch Ratings.
Also on tap, Bank of America Merrill Lynch is set to price the state of Hawaii's $775 million of Series 2018 FT general obligation bonds and Series 2018 FU and FV taxable GOs on Tuesday. The deal is rated Aa1 by Moody's, AA-plus by S&P and AA by Fitch.
Also on Tuesday, Citigroup is expected to price Ohio’s turnpike revenue bonds, junior and senior liens, for infrastructure projects. The senior liens are rated Aa2 by Moody’s, AA-minus by S&P and AA by Fitch while the junior liens are rated Aa3 by Moody’s and A-plus by S&P and Fitch.
Citi is also set to price the Providence St. Joseph Health Obligated Group’s $350 million of Series 2018A taxable corporate CUSIP bonds. The deal is rated Aa3 by Moody’s and AA-minus by S&P and Fitch.
Goldman Sachs is expected to price the Orlando Health Obligated Group’s $480 million of Series 2018 taxable corporate CUSIP hospital revenue bonds. The deal is rated A2 by Moody’s and A by S&P.
BAML is set to price the Upper Arlington City School District of Franklin County, Ohio’s $221 million of Series 2018A unlimited tax general obligation school facilities construction and improvement bonds. The deal is rated Aa1 by Moody’s and AAA by S&P.
There are no competitive sales of $100 million or above slated for the week.
Prior week's actively traded issues
Revenue bonds comprised 56.23% of new issuance in the week ended Jan. 26, up from 56.02% in the previous week, according to Markit. General obligation bonds made up 38.26% of total issuance, up from 38.24%, while taxable bonds accounted for 5.51%, down from 5.74% a week earlier.
Some of the most actively traded bonds by type were from California, Illinois and New York & New Jersey issuers.
In the GO bond sector, the Los Angeles Unified School District, 5s of 2024 traded 33 times. In the revenue bond sector, the Chicago Sales Tax Securitization Corp., 3.82s of 2048 traded 53 times. And in the taxable bond sector, the Port Authority of New York & New Jersey 2.114s of 2018 traded 16 times.
Treasury to sell $25B of 4-week bills
The Treasury Department said it will sell $25 billion of four-week discount bills Tuesday. There are currently $94.991 billion of four-week bills outstanding.
Treasury auctions bills
Tender rates for the Treasury Department's latest 91-day and 182-day discount bills were mixed, as the three-months incurred a 1.425% high rate, off from 1.430% the prior week, and the six-months incurred a 1.625% high rate, up from 1.615% the week before.
Coupon equivalents were 1.450% and 1.661%, respectively. The price for the 91s was 99.639792 and that for the 182s was 99.178472.
The median bid on the 91s was 1.400%. The low bid was 1.370%. Tenders at the high rate were allotted 46.50%. The bid-to-cover ratio was 2.98.
The median bid for the 182s was 1.600%. The low bid was 1.570%. Tenders at the high rate were allotted 61.29%. The bid-to-cover ratio was 3.21.
MSRB: Previous session's activity
The Municipal Securities Rulemaking Board reported 38,674 trades on Friday on volume of $9.74 billion.
California, New York and Texas were the three states with the most trades on Tuesday, with the Golden State taking 12.593% of the market, the Empire State taking 11.859% and the Lone Star State taking 7.755%.
Previous week's top underwriters
The top municipal bond underwriters of last week included Bank of America Merrill Lynch, Goldman Sachs, Robert W. Baird, JPMorgan Securities and Stifel, according to Thomson Reuters data.
In the week of Jan. 21 to Jan. 27, BAML underwrote $2.87 billion, Goldman $1.48 billion, Robert W. Baird $430.0 million, JPMorgan $356.7 million and Stifel $217.6 million.
Market wonders if state tax workaround plans would hit Treasury
High-tax states, looking for ways to mitigate the effects of recent reform could be costly to Treasury, according to a report.
Under the legislation, the state and local tax deduction was capped at $10,000, which will impact high tax states, particularly California, New York, Illinois and New Jersey. Workarounds being discussed could cost the Treasury about $154 billion over eight years, Merrill Lynch Global Research said on Monday, citing a report.
“We have shown that just six states — primarily California — accounted for over half the value of the SALT deduction in tax year 2015,” said Ian Rogow, municipal research strategist at Merrill Lynch. “We have also shown that the SALT deduction as a percentage of adjusted gross income (AGI) is highest in New York at 9.3%, that the average deduction per filer is largest in Connecticut ($7,852), and that of the top 100 counties for state and local tax deductions, 39 of them are from the states of California (16), New Jersey (13) and New York (10).
The workarounds are focused on replacing state income taxes, which are now subject to the $10,000 cap, with payroll taxes on employers, which would be fully deductible by corporations, or letting residents make tax-deductible charitable contributions to their state governments rather than pay state income tax.
Merrill Lynch said a recent report by Bloomberg and a University of Chicago Law School professor estimated if California, New York, Illinois, New Jersey and Connecticut were able to devise ways around the SALT cap, they could “remove roughly $154 billion from federal coffers over the next eight years, adding to anticipated deficits.”
However, Rogow said such workarounds are decidedly uncertain.
“…as we previously stated, the states’ ability to adopt such radical modifications remains uncertain, as does the potential federal response to such changes. The Tax Foundation has noted that the charitable donation route faces challenges from both federal case law and IRS regulation in that they ‘generally require charitable intent for a contribution to be deductible . . . [and here] the sole purpose of the proposed contributions in lieu of taxes proposal is financial gain.’ ”
Rogow also said the IRS could consider a new employer-side payroll tax with a fully compensatory tax credit to constitute payment of an employee’s income taxes by the employer, which would not only negate the benefit of the plan, but could actually increase taxpayer liability.
“To the extent the IRS or federal courts do not intervene to prevent the states’ actions, we could expect Congress to act through technical changes to the law.”
--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.