Philadelphia airports price as munis weaken with political, credit concerns

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Philadelphia came to market on Wednesday with an large airport bond sale on Wednesday, the latest in a series of large offerings the market has seen in 2020.

Municipals made a move for the first time in a month, with yields rising as much as four basis on the intermediate and long ends of the AAA scales as midweek pressure was building amid overall market uncertainty.

Softness in the U.S. Treasury market and a shift to risk-on assets was putting pressure on munis in the secondary, according to a New York trader.

“There is definitely a heavier tone,” especially on the longer end of the market, the trader said.

“Munis are significantly outperforming Treasuries today in the long end, but muni percent of Treasury yields still generally remain above 100%,” ICE Data Services said. “Taxable yields are as much as 6.5 basis points higher, underperforming a tightening corporate bond market.”

"Today we're seeing some cuts on benchmarks with some weight on Treasuries after more optimistic stimulus talks, but my sense is tomorrow or Friday will reverse again back to richer levels," another New York trader said. "What is striking to me is that underwriters are really just focused on the primary and frankly issuers might be getting a bit of a raw deal, even with these insane low rates. We see deals in premarketing coming pretty cheap, being oversubscribed and then only lowering levels a basis point or two. Then trading 10 up in the secondary after they are free to trade."

The first trader said the bid side of the 30-year bonds from last week’s New York Municipal Water Authority deal was down five to six basis points compared with the original pricing. “There is pressure on the more traveled names,” he said.

“The softness in Treasuries and the firmness in equities caused a shift — people are buying riskier assets and selling more safe haven bonds and that’s putting pressure on the fixed income sector,” including municipals, he said.

Uncertainty surrounding a stimulus package, the presidential election and the future of the coronavirus will add to the volatility in the near term, he said.

“If they can reach some type of agreement between the Democrats and the Republicans that’s going to help the equity market,” the trader said. “The debate from last night and the upcoming election will just create a little more uncertainty as you get closer to the 3rd of November.”

Liquidity challenges will also be a factor as the elections near.

“My guess is people don't want to own a lot of securities around a very potentially volatile period, so we would expect dealers to be lightening up ahead of the election,” he said.

And as the month came to an end, Kim Olsan, senior vice president at FHN Financial said trade flows in September have been showing signs of shifting as the election approaches.

“Preferences for shorter duration allocations are creeping in. During the most recent month’s trading, flows out to three-years increased to 14% of the daily total, and for the week ending Sept. 29 moved up to 15%,” she said. “Despite high-grade yields below 20 basis points, allotments appear to be growing.”

Last week’s Lipper flows showed that intermediate- and long-term funds lost $48 million. And intermediate volume is also showing a shift, making up 20% of daily volume in the latest week,.

“One aspect to this range is the availability of shorter-call structures. Yields are still below 1% to respective call dates, but meaningful concession to non-callables can be balanced with duration targets. Secondary bidding has been strong considering that new issues largely don’t offer five- to seven-year optionality.”

There has been a marginal decline in volume out past 12-years, she said, which averaged 52% of daily activity during the third quarter, but has since dropped to 50% as the month comes to an end.

“Whether in response to expected volatility ahead of the election or reduced inter-dealer activity (holding around 30%), the trend may indicate some caution in allocations,” Olsan said.

Primary market
Barclays Capital as senior manager priced Philadelphia, Pa.’s (A2/NAF/A/NAF) $372.255 million of airport revenue and revenue refunding bonds. Siebert Williams Shank, Morgan Stanley and TD Securities were co-managers.

The $178.765 million of Series 2020A airport revenue refunding private activity bonds not subject to the alternative minimum tax were priced to yield from 0.48% with a 5% coupon in 2024 to 2.47% with a 4% coupon in 2040.

The $37.525 million of Series 2020B airport revenue governmental non-AMT bonds were priced to yield from 0.30% with a 5% coupon in 2021 to 2.47% with a 4% coupon in 2040, 2.63% with a 4% coupon in 2045 and 2.68% with a 4% coupon in 2050.

The $155.965 million of Series 2020C airport revenue and refunding private activity AMT bonds were priced to yield from 0.50% with a 5% coupon in 2021 to 2.72% with a 4% coupon in 2040, 2.88% with a 4% coupon in 2045 and 2.93% with a 4% coupon in 2050.

Philadelphia’s deal was just the latest in a spate of large airport bond transactions this year and came hard on the heels of Atlanta’s sale of $365 million of airport general revenue refunding AMT and non-AMT bonds on Tuesday.

Last week, Chicago, Ill., came to market with a $1.2 billion offering for O’Hare International Airport and in Dallas and Fort Worth, Texas, sold $1.19 billion of taxable revenue refunding bonds for the Dallas-Fort Worth International Airport in July.

On Wednesday, the U.S. Treasury Department announced it made loans to seven passenger airlines under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The carriers are Alaska Airlines, American Airlines, Frontier Airlines, JetBlue Airways, Hawaiian Airlines, SkyWest Airlines and United Airlines.

Treasury said initial loan amounts are currently limited to $7.5 billion per passenger air carrier, or 30% of the $25 billion available for passenger air carriers.

BofA Securities as senior manager priced the Salt River Project Agricultural Improvement and Power District, Ariz.’s (Aa1/AA+/NR/NR) $602.715 million of electric system revenue bonds.

The $224.69 million of Series 2020A bonds were priced as 5s to yield from 0.12% in 2022 to 0.65% in 2028; a split 2045 maturity was priced as 4s to yield 1.83% and as 5s to yield 1.66% and a 2048 maturity was prices as 2.375s to yield 2.40%.

The $100 million of Series 2020B taxable bonds were priced at par to yield 2.57% in a 2050 bullet maturity.

The $278.025 million of Series 2021A forward delivery bonds were priced as 5s to yield from 0.57% in 2023 to 1.16% in 2029.

In the competitive arena, the Massachusetts School Building Authority (Aa2/AA+/AAA/NR) sold $389.46 million of Series 2020C taxable senior dedicated sales tax refunding bonds.

Jefferies won the issue with a true interest cost of 2.90%.

The bonds were priced to yield 0.40% with a 0.45% coupon in 2023, 0.60% with a 0.75% coupon in 2024 and 2.85% with a 2.95% coupon in 2043.

PFM Financial Advisors is the financial advisor; Mintz Levin is the bond counsel.

Wells Fargo Securities priced the Charleston Educational Excellence Financing Corp.’s (Aa3/AA-NR/NR) $157.145 million of taxable installment purchase revenue refunding bonds for the Charleston County School District, S.C. project. The deal was priced at par to yield from 0.427% in 2021 to 1.919% in 2030.

Two New York issuers were in the market Wednesday with smaller deals.

Ramirez & Co. priced the New York State Energy Research and Development Authority’s (NAF/NAF/NAF/A) $16.69 million of taxable Series 2020A residential solar and energy efficiency financing green revenue bonds while BofA priced the New York City Housing Development Corp.’s (Aa2/AA+/NR/NR) $63.265 million of Series 2020H multi-family housing revenue sustainable development bonds.

On Tuesday, Goldman Sachs priced the Puerto Rico Housing Finance Authority’s (NR/AA-/NR/NR) $249.155 million of capital fund modernization program refunding bonds for Puerto Rico public housing projects and the bobnds were freed to trade Wednesday.

Omar J. Marrero Díaz, executive director of the Puerto Rico Fiscal Agency and Financial Advisory Authority, said that Puerto Rico was successful in accessing the capital markets, with the deal refinancing existing HFA bonds, generating about $43 million in debt service savings.

“This bond issue achieves average annual debt service savings of over $8.5 million, which could be used to assist the Public Housing Modernization Program," said Marrero Díaz, who is also chief financial officer of the Government of Puerto Rico. "The new bonds have similar maturities to the outstanding bonds, from 2020 to 2028. This deal is an important step in Puerto Rico’s return to the capital markets and proves that the market is reestablishing its trust in Puerto Rico.”

He said there was a substantial demand for the bonds from traditional investors, with over $750 million in indications of interest, producing a demand that was over three-times the available amount of bonds. The true interest cost, including expenses associated with pricing and selling the new issue, was 1.27%.

The principal of and interest on the bonds are payable from annual appropriations by the U.S. Congress to fund housing projects through the Department of Housing and Urban Development. The HFA bonds aren’t a debt of the Commonwealth.

The Puerto Rico HFA has around $300 million of bonds outstanding, maturing 2020 to 2027, which were issued under HUD’s capital fund program in 2003 and 2008.

NYC to sell $1.1B GOs next week
New York City will sell about $1.1 billion of tax-exempt fixed rate general obligation bonds on Wednesday, Oct. 7 after a two-day retail order period.

The deal will be priced by book-running lead manager Siebert Williams Shank, with BofA Securities, Citigroup, JPMorgan, Jefferies, Loop Capital Markets, Ramirez & Co., RBC Capital Markets and Wells Fargo Securities as co-senior managers.

Proceeds from the sale will be used to fund capital projects and convert certain issues of floating-rate debt to fixed-rate debt.

ICI: Muni bond funds see $1.5B inflow
Long-term municipal bond funds and exchange-traded funds saw combined inflows of $1.505 billion in the week ended Sept. 23, the Investment Company Institute reported Wednesday.

It marked the 21st straight week that the funds saw inflows. In the previous week, muni funds saw an inflow of $1.986 billion, ICI said.

Long-term muni funds alone had an inflow of $1.343 billion in the latest reporting week after an inflow of $1.708 billion in the prior week.

ETF muni funds alone saw an inflow of $164 million after an inflow of $278 million in the prior week.

Taxable bond funds saw combined inflows of $3.533 billion in the latest reporting week after a revised inflow of $13.474 billion in the prior week originally reported as a $15.465 billion inflow.

ICI said the total combined estimated outflows from all long-term mutual funds and ETFs were $14.582 billion after a revised inflow of $21.643 billion in the previous week, originally reported as a $21.732 billion inflow.

Secondary market
Some notable trades Wednesday:

Maryland GOs, 5s of 2022, traded at 0.30%-0.19%. The state's GOs, 5s of 2027, at 0.54%.

Georgia GOs, 5s of 2024 at 0.19% while 5s of 2026 traded at 0.39%.

University of Texas revs, 5s of 2025, trade at 0.32%-0.30%. Texas waters, 3s of 2037, traded at 1.73%-1.72% compared to yesterday at 1.70%-1.73%.

New York City TFA, 3s of 2046, at 2.54%. But to look at where rates have come, that bond was sold in July at 3.06%.

Out long, Cleveland ISD 4s of 2050 traded at original selling price of 1.98%.

High-grade municipals were mixed Wednesday, according to final readings on Refinitiv MMD’s AAA benchmark scale. Yields were flat in 2021 and 2022 at 0.12% and 0.13%, respectively. The yield on the 10-year muni rose four basis points to 0.87% while the 30-year yield increased four basis points to 1.62%.

The 10-year muni-to-Treasury ratio was calculated at 128.5% while the 30-year muni-to-Treasury ratio stood at 111.5%, according to MMD

The ICE AAA municipal yield curve showed short maturities steady, with the 2021 maturity at 0.12% and the 2022 maturity at 0.13%. The 10-year maturity rose three basis points to 0.83% and the 30-year gained three basis points to 1.64%. The 10-year muni-to-Treasury ratio was calculated at 128% while the 30-year muni-to-Treasury ratio stood at 111%, according to ICE.

The IHS Markit municipal analytics AAA curve showed yields at 0.16% in 2021 and 0.17% in 2022. The 10-year muni rose one basis point to 0.89% and the 30-year was up one basis point to 1.63%.

The BVAL AAA curve showed the yield on the 2021 maturity unchanged at 0.11%, the 2022 maturity unchanged at 0.13%, the 10-year up three basis points to 0.83% and the 30-year three basis points higher at 1.61%.

Treasuries were weaker as stock prices traded higher.

The three-month Treasury note was yielding 0.10%, the 10-year Treasury was yielding 0.69% and the 30-year Treasury was yielding 1.46%.

The Dow rose 1.40%, the S&P 500 increased 1.05% and the Nasdaq gained 1.05%.

Lynne Funk contributed to this report.

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Primary bond market Secondary bond market Municipal bond funds City of Philadelphia, PA City of Atlanta, GA City of Dallas, TX City of Fort Worth, TX Massachusetts School Building Authority Commonwealth of Puerto Rico City of New York, NY