Philly school district aces the market test

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The municipal market rallied to close out Thursday five basis points lower in yield, while the last two larger deals of the week priced, with the Philly School District passing its test with flying colors.

Thursday opened with bonds due in 10 years and beyond four to five basis points stronger, according to a New York City trader. “The short end is still weak with where ratios are standing,” he said.

Bank of America Merrill Lynch priced the School District of Philadelphia's $252.92 million of general obligation bonds. The majority of the deal is backed by the Pennsylvania State Aid Intercept Program and is rated Aa2 by Moody's and A-plus by Fitch. Half of the split bullet, series B bonds are insured by Assured Guaranty Municipal Corp., and rated AA by S&P.

“It was somewhere between 12 and 20 times oversubscribed, which makes sense since that was followed up with the biggest repricing that I may have ever seen,” said one Northeast trader.

He noted that the long serials were repriced down in yield by as many as 17-basis points.

“The AGM insured 2043 maturity was originally a 4.00% coupon at a 4.13 and was repriced at a 4.05. The uninsured 5’s in 2043 were a 4.00% repriced to a 3.80%. I would have liked to see more insurance on the deal as retail is still more trusting of insurance.”

He added that the State Aid definitely helps but two other factors also worked in favor of the deal.

“A bump in Moody’s from B-3 to B-2 with a Positive Credit outlook helped as well, oddly enough, but the real thing is there no [Pennsylvania] paper,” he said. “The primary market is down something like 38% to 40% but in Pa. it feels more like 50% to 60%. There just isn’t anything out there except [Pennsylvania] Turnpikes and some Commonwealth G.O.’s from older issues.”

He added that the market rally, with yields finishing the day five basis points lower on the long end, clearly the timing also helped.

Elsewhere, Morgan Stanley priced Rutgers University's $144.71 million bonds, with $100 million being taxables.

Thursday’s bond sales
School District of Philadelphia
Click here for the $252.92M pricing

Rutgers University
Click here for the $100M taxable pricing
Click here for the $44.05M tax-exempt pricing

Secondary market
Despite a lackluster trajectory of municipal bond performance through the end of the first quarter, there is evidence that the asset class is still attractive, according to a new report from Jim Colby, portfolio manager at VanEck Securities.

"Performance so far this year has been somewhat disappointing, but there are two significant characteristics of munis to point to that continues to favor the asset class," he wrote in the March 20 report.
Colby said the first reason is ratios of municipal yields to those of U.S. Treasury and corporate bonds continue to move lower and secondly, the taxable-equivalent yield comparative.

"While evidencing a move towards long-term averages and appearing to be somewhat less than compelling, spread contraction actually tells a story of solid demand for the asset class," he wrote. "Demand keeps yields low, while the secular move to higher rates pushes upwards on U.S. Treasury and corporate bonds."

For example, he said the ratio of the Bloomberg Barclays Municipal High Yield Index to the Bloomberg Barclays U.S. Corporate High Yield Index has moved below 100%, but at 88% it remains above the long-term average of 79%.

For example, the triple-A rated 10-year municipal bond yield was 2.49% and the U.S. Treasury 10-year bond yield was 2.89%, as of March 9, according to Colby, who said the comparison of taxable equivalency produces a result of 3.95% versus 2.89%.

"This is a clear 106 basis point advantage from a Federal tax perspective for a municipal bond investment," he wrote. "We believe investors should never overlook this critical, and very simple, piece of analysis. It remains a very compelling reason to continue to allocate to this asset class."

Tax-exempt money market funds saw outflows
Tax-exempt money market funds experienced outflows of $240.7 million, lowering total net assets to $135.15 billion in the week ended March 20, according to The Money Fund Report, a service of

This followed an outflow of $600.6 million on to $135.39 billion in the previous week.

The average, seven-day simple yield for the 198 weekly reporting tax-exempt funds increased to 0.74% from 0.67% the previous week.

The total net assets of the 831 weekly reporting taxable money funds decreased $17.65 billion to $2.654 trillion in the week ended March 19, after an outflow of $4.76 billion to $2.672 trillion the week before.

The average, seven-day simple yield for the taxable money funds increased to 1.14% from 1.09% from the prior week.

Overall, the combined total net assets of the 1,029 weekly reporting money funds decreased $17.89 billion to $2.790 trillion in the week ended March 19, after outflows of $5.36 billion to $2.807 trillion in the prior week.

9-year 10-month TIPs sold
The Treasury Department sold $11 billion of inflation-indexed 9-year 10-month TIPs at a 0.764% high yield, an adjusted price of 97.935177, with a 1/2% coupon.

The bid-to-cover ratio was 2.56.

Tenders at the market-clearing yield were allotted 94.40%.

Among competitive tenders, the median yield was 0.710% and the low yield 0.660%, Treasury said.

Treasury announcements
The Treasury Department announced these auctions:

  • $29 billion seven-year notes selling on March 28
  • $35 billion five-year notes selling on March 27
  • $30 billion two-year notes selling on March 26
  • $15 billion one-year 10-month floating rate notes selling on March 28
  • $24 billion 364-day bills selling on March 27
  • $45 billion 182-day bills selling on March 26
  • $51 billion 91-day bills selling on March 26

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.

-Gary E. Siegel contributed to this report.

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Primary bond market Secondary bond market School District of Philadelphia Rutgers University