As Pennsylvania prepares to sell $1.39 billion of tobacco bonds next week, Invesco released a report on the sector that highlights several reasons why investors should be holding tobacco bonds in their portfolios.
Jefferies will price the Pennsylvania Commonwealth Financing Authority’s Series 2018 Tobacco Master Settlement Payment revenue bonds next week.
Invesco’s report, Tobacco bonds: An unfiltered look at a unique municipal asset class, says the benefits of tobacco bonds include: potential return enhancement; liquidity; inflation adjustment; and payments extending into perpetuity.
“Tobacco bonds are a predominately high-yield U.S. municipal asset class,” Invesco analysts Steve Hong, Allen Davis and Stephanie Larosiliere write in the report. “In 2017, high-yield tobacco bonds returned 22%, outpacing all other revenue sectors of the U.S. municipal market.”
Invesco said robust high-yield municipal bond fund flows and the demand for yield were the main drivers of last year’s strong performance.
While this year’s return potential may be limited on the back of 2017’s strong performance, Invesco said there were several other reasons to hold tobacco bonds.
“Tobacco bonds provide potential yield and total return enhancement over traditional general obligation and revenue municipal bonds,” Invesco writes. The analysts noted tobacco bonds are structured like asset-backed securities with various tranches that provide different risk and returns.
Tobacco bonds also accounted for $19.81 billion, or 19%, of the total rated high-yield debt in the U.S.
“Given the significant weighting of tobacco bonds within the high-yield municipal bond sector, there is demand throughout a credit cycle for tobacco bonds from both U.S. mutual funds and hedge funds.”
The 1998 Master Settlement Agreement provided for tobacco companies to make annual payments to the 52 states and territories signing on to it in perpetuity in return for dropping any future legal claims against the tobacco manufacturing companies.
Annual MSA payments are subject to inflation adjustment with a floor of 3%. Since 1999, 21 states and territories have securitized the MSA payments by selling tobacco bonds or transferring their rights to the MSA payments for an upfront fee.
Possible risks to the sector include the chances of greater-than-expected consumption declines; the possible bankruptcy of a tobacco company; failure of the states to enforce qualifying statutes; and the extension of prepayment risks.
The MBIS municipal non-callable 5% GO benchmark scale was mixed in early trading.
The 10-year muni benchmark yield fell to 2.447% on Thursday from the final read of 2.477% on Wednesday, according to Municipal Bond Information Services. The MBIS 30-year benchmark muni yield rose to 2.906% from 2.883%.
The MBIS benchmark index is updated hourly on the Bond Buyer Data Workstation.
U.S. Treasuries were narrowly mixed in early activity on Thursday. The yield on the two-year Treasury rose to 2.09% from 2.08% on Wednesday, the 10-year Treasury yield gained to 2.66% from 2.65% and the yield on the 30-year Treasury was unchanged from 2.93%.
Top-rated municipal bonds finished weaker on Wednesday. The yield on the 10-year benchmark muni general obligation rose five basis points to 2.20% from 2.15% on Tuesday, while the 30-year GO yield gained five basis points to 2.78% from 2.73%, according to the final read of MMD’s triple-A scale.
On Wednesday, the 10-year muni-to-Treasury ratio was calculated at 83.0% compared with 81.9% on Tuesday, while the 30-year muni-to-Treasury ratio stood at 94.8% versus 94.0%, according to MMD.
MSRB: Previous session's activity
The Municipal Securities Rulemaking Board reported 47,639 trades on Wednesday on volume of $11.94 billion.
California, Texas, and New York were the three states with the most trades on Tuesday, with the Golden State taking 13.98% of the market, the Lone Star State taking 9.429% and the Empire taking 9.29%.
In the competitive sector on Thursday, New York’s Triborough Bridge and Tunnel Authority is selling $251.93 million of Series 2018A general revenue bonds.
The deal is rated Aa3 by Moody’s Investors Service and AA-minus by S&P Global Ratings and Fitch Ratings.
The TBTA last competitively sold comparable bonds on May 30, 2012, when Citigroup won the $231.49 million of Series 2012A general revenue bonds with a true interest cost of 3.6057%
In the negotiated sector, JPMorgan Securities is expected to price the Burke County Development Authority, Ga.’s $399.785 million of pollution control revenue bonds for the Oglethorpe Power Corp.’s Vogtle project.
Since 2008, the Development Authority of Burke County has sold about $1.76 billion of bonds, with the most issuance occurring in 2008 when it sold $618 million. The authority did not come to market in 2009 or 2014 through 2017.
JPMorgan is also set to price the Tri-County Metropolitan Transportation District of Oregon’s $111.15 million of Series 2018 capital grant receipt revenue bonds.
The deal is rated A3 by Moody’s and A by S&P.
Bond Buyer 30-day visible supply at $6.71B
The Bond Buyer's 30-day visible supply calendar decreased $966.9 million to $6.71 billion on Thursday. The total is comprised of $1.70 billion of competitive sales and $5.01 billion of negotiated deals.
Tax-exempt money market funds saw inflows
Tax-exempt money market funds experienced inflows of $1.68 billion, bringing total net assets to $137.80 billion in the week ended Jan. 22, according to The Money Fund Report, a service of iMoneyNet.com.
This followed an inflow of $719.3 million to $136.12 billion in the previous week.
The average, seven-day simple yield for the 198 weekly reporting tax-exempt funds fell to 0.75% from 0.86% the previous week.
The total net assets of the 833 weekly reporting taxable money funds increased $24.17 billion to $2.663 trillion in the week ended Jan. 23, after an outflow of $29.01 billion to $2.639 trillion the week before.
The average, seven-day simple yield for the taxable money funds increased to 0.96% from 0.94% from the prior week.
Overall, the combined total net assets of the 1,031 weekly reporting money funds increased $25.85 billion to $2.801 trillion in the week ended Jan. 23, after outflows of $28.29 billion to $2.775 trillion in the prior week.
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.