What a difference a month makes. The Sales Tax Securitization Corp.’s bond deal on Tuesday saw yields soar compared with December’s inaugural sale due to a tougher market environment, sources said.
Goldman Sachs priced the Chicago corporation’s $376.275 million of Series 2018A tax-exempt bonds after distributing a pre-marketing scale on Monday.
The tax-exempts were priced as 5s to yield from 2.87% in 2031to 3.18% in 2038. A 2040 maturity was priced as 5s to yield 3.23% and a split 2048 maturity was priced as 4s to yield 3.69% and as 5s to yield 3.34%.
The spreads on the deal were in line with pre-marketing levels distributed ahead of the sale on Monday. The city saw spreads double on a comparable maturity from the inaugural sale in December, when the corporation hit the market on a day of falling yields.
The deal – which was delayed a week while the city revised the structure to include a taxable piece – drew 42 investors, was two times oversubscribed, and generated present value savings of 6.3%. "Despite a changing market environment and ratios, these refunding bonds priced approximately 275 basis points tighter than similar maturities on the city's most recent general obligation pricing just last year, demonstrating the strength of this credit and ability to achieve significant debt service savings on behalf of taxpayers," Chicago's chief financial officer Carole Brown said in a statement. The bonds refunded city GOs.
The city lists spreads on the December tax-exempt securitization at 26bp to 39bp on maturities from 2020 to 2030 and lists the spreads on the Tuesday sale at 52bp to 61bp on the maturities from 2031 to 2048 with 5% coupons and 96bp on a 2048 tranche with a 4% coupon. All compare favorable to 329bp to 338bp spreads on 12 to 17 maturities in a 2017 GO sale.
Brown said while spreads widened, she disagreed with the calculation that the spread had doubled on Tuesday's 2031 tax-exempt maturity from the 2030 maturity in the December deal. The city lists the spread on the December deal at a 39bp spread based on where the comparable AAA benchmark closed on the day of the pricing. The Bond Buyer calculated the spread at 24bp based on the yield at which the market closed the previous day to represent where yields were as the deal headed in to the market. Yields saw a big drop throughout the day of the December pricing.
The yield on Tuesday's 2031 maturity was more than 40bp higher than the December 2030 maturity, reflecting the higher prevailing rates in the current market.
On Tuesday, the city headed into a rockier market grappling with the aftermath of a temporary government shutdown, Central Bank meetings, and post-tax reform shifts this week compared to December when yields were lower and falling. The 10-year AAA benchmark closed the day ahead of the December pricing at 1.99% and was down to 1.88% at the market close on the day of pricing Wednesday, Dec. 6. The 10-year closed Monday at 2.14 % and was set at 2.15% at the close Tuesday.
Tuesday’s sale saw the short 13-year maturity in 2031 come in at a 53 basis point spread to the MMD AAA scale and at a 32 basis point spread to the AA scale. The mid-level 20-year maturity in 2038 landed at a 55 basis point spread to the AAA and a 34 basis point spread to the AA. The long $79 million 2048 maturity with a 5% coupon landed at a 60 basis point spread to the AAA and a 39 basis point spread to the AA. The $100 million 2048 maturity with a 4% coupon landed at a spread of 61 basis points on MMD’s AAA 4% coupon scale.
The 13-year 2030 maturity in the deal landed at 2.40%, 24 basis points over the AAA and just three basis points over the AA, and 15 basis points better than the pre-marketing scale. The maturities offered 5% coupons and a premium price.
Cabrera Capital Markets, Janney, Blaylock Van, Estrada Hinojosa and Siebert Cisneros Shank & Co. were members of the underwriting group.
Goldman took indications of interest on the corporation’s $304.05 million of Series 2018B taxables. The taxables were offered to yield about 100 basis points over the comparable Treasury security in 2048. The taxables have an expected average life of 27.2 years and are subject to a make-whole call feature.
The corporation’s $744 million December sale offered $572 million of taxable paper, including a $350 million tranche due in 2043 that landed at 3.587%, an 87.5 basis point spread to comparable Treasuries. A 2031 landed at a 105 basis point spread to comparable Treasuries.
The deal is rated AA by S&P Global Ratings and AAA by Fitch Ratings and Kroll Bond Rating Agency.
Also on Tuesday, Bank of America Merrill Lynch priced the Port Authority of New York and New Jersey’s $832.28 million bond deal.
The $677.8 million of 207th Series of consolidated bonds subject to the alternative minimum tax were priced to yield from 1.93% with a 5% coupon in 2022 to 3.29% with a 4% coupon and 3.04% with a 5% coupon in a split 2035 maturity. A 2043 maturity was priced as 4s to yield 3.44% and a 2048 maturity was priced as 5s to yield 3.18%.
The $154.48 million of taxable 208th Series consolidated bonds were priced at par to yield from 2.115% in 2018 to 2.767% in 2022.
The deal is rated Aa3 by Moody’s Investors Service and AA-minus by S&P and Fitch.
Since 2008, the PANYNJ has sold about $21.89 billion of bonds, with the most issuance occurring in 2012 when it sold $3.69 billion and the least amount in 2016 when it sold $1.10 billion.
Also, BAML priced the Maryland Stadium Authority’s $426.44 million of Series 2018A construction and revitalization program revenue bonds for the Baltimore City Public Schools.
The issue was priced as 5s to yield from 1.35% in 2018 to 3.05% in 2038. A 2042 maturity was priced as 5s to yield 3.14% and a 2047 maturity was priced as 5s to yield 3.20%.
The deal is rated Aa3 by Moody’s, AA-minus by S&P and AA by Fitch.
Additionally, BAML priced for retail the Massachusetts School Building Authority’s $395 million of Series 2018A subordinated dedicated sales tax bonds.
The issue was priced for retail as 5s to yield from 1.45% in 2018 to 2.68% in 2038. A 2043 maturity was priced as 5s to yield 2.99% while a 2048 maturity was not offered to retail.
The deal is rated Aa3 by Moody’s, AA by S&P and AA-plus by Fitch.
And BAML priced for retail the city and county of Honolulu’s $304.785 million of wastewater system revenue bonds.
The $219.265 million of senior Series 2018A first bond resolution bonds were priced for retail to yield from 3.29% with a 3.25% coupon in 2035 to 3.28% with a 4% coupon in 2038. A split 2042 maturity was priced as 3 3/8s to yield 3.45% and while the second half was not offered to retail; a 2047 maturity was not offered to retail.
The $34.47 million of senior Series 2018B first bond resolution refunding bonds were priced for retail as 5s to yield from1.46% in 2018 to 2.21% in 2025.
The $42.015 million of junior Series 2018A taxable second bond resolution refunding bonds were priced for retail to yield from about 15 basis points above the comparable Treasury security in 2018 to about 45 basis points above the comparable Treasury security in 2023 and about 60 basis points above the comparable Treasury security in 2026.
The $9.035 million of junior Series 2018B second bond resolution refunding bonds were priced for retail as 4s to yield from 1.51% in 2018 to 2.14% in 2025.
The senior bonds are rated Aa2 by Moody’s and AA by Fitch and the junior bonds are rated Aa3 by Moody’s and AA-minus by Fitch.
The University of Washington competitively sold $133.79 million of Series 2018 general revenue bonds.
JPMorgan Securities won the deal with a true interest cost of 3.4797%. The issue was priced as 5s to yield from 1.43% in 2019 to 2.75% in 2038. A 2043 maturity was priced as 5s to yield 2.86% and a 2048 maturity was priced as 5s to yield 2.91%.
The deal is rated Aaa by Moody’s and AA-plus by S&P.
The MBIS municipal non-callable 5% GO benchmark scale was mixed in late trading.
The 10-year muni benchmark yield fell to 2.383% on Tuesday from the final read of 2.390% on Monday, according to Municipal Bond Information Services. The MBIS 30-year benchmark muni yield was unchanged from 2.854%.
The MBIS benchmark index is updated hourly on the Bond Buyer Data Workstation.
Top-rated municipal bonds finished mixed on Tuesday. The yield on the 10-year benchmark muni general obligation rose one basis point to 2.15% from 2.14% on Monday, while the 30-year GO yield fell one basis point to 2.73% from 2.74%, according to the final read of MMD’s triple-A scale.
U.S. Treasuries were stronger in late trade. The yield on the two-year Treasury declined to 2.06% on Tuesday from 2.07% on Monday, the 10-year Treasury yield dropped to 2.62% from 2.66% and the yield on the 30-year Treasury decreased to 2.90% from 2.93%.
On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 81.9% compared with 80.5% on Monday, while the 30-year muni-to-Treasury ratio stood at 94.0% versus 93.6%, according to MMD.
Treasury sells 4-week bills, 2-year notes
The Treasury Department Tuesday auctioned $35 billion of four-week bills at a 1.230% high yield, a price of 99.904333.
The coupon equivalent was 1.248%. The bid-to-cover ratio was 3.52.
Tenders at the high rate were allotted 87.48%. The median rate was 1.220%. The low rate was 1.200%.
Treasury also auctioned $26 billion of two-year notes with a 2% coupon at a 2.066% yield, a price of 99.871340.
The bid-to-cover ratio was 3.22. Tenders at the high yield were allotted 89.23%. The median yield was 2.022%. The low yield was 1.950%.
The two-year notes are dated Dec. 31 and due Dec. 31, 2019.
MSRB: Previous session's activity
The Municipal Securities Rulemaking Board reported 39,630 trades on Monday on volume of $9.09 billion.
Texas, California, and New York made up the top three states with the most trades on Monday with the Lone Star State taking 11.294% of the market, the Golden State taking 10.724% and the Empire State taking 9.141%.
Five trends that could affect munis in 2018
The top five trends in the municipal market place in 2018 will be the acceleration of taxable municipal issuance; the outperformance of high-yield municipal bonds; the underperformance of intermediate municipal bonds; the fall of tax-exempt municipal to Treasury ratios to 20-year lows; and the decline of tax-exempt market liquidity, according to a forecast released by MacKay Municipal Managers on Monday.
The year ahead offers both risk and rewards, said the MacKay municipal bond team.
“The traditional approach of being a passive investor focused solely on income is no longer suitable,” John Loffredo and Robert DiMella, co-heads of MacKay said in a market comment released on Monday. “Tax reform and new regulatory policies will present investment opportunities for well-positioned municipal investors, but also increase the risk for those who fail to adjust to the new investment environment.”
MacKay said it expects taxable muni issuance could double to approximately $60 billion annually. “We believe that low rates, tight credit spreads and demand for yield should keep taxable municipal yields low. Issuers will likely refinance their higher cost tax-exempt debt with taxable municipal bonds, overcoming the elimination of tax-exempt financed advance refundings by the Tax Cuts and Jobs Act of 2017. The increased volume of taxable municipal bonds should broaden the investor base for these securities, increase liquidity, and provide attractive yield opportunities. Individual investors in high tax states where the top marginal rate is quickly reached may also find in-state taxable municipal bonds, still exempt at the state level, to be attractive.”
MacKay also said it expects favorable technical and improving fundamental conditions will result in tighter high-yield muni credit spreads and outperformance relative to investment-grade municipal bonds.
Conversely, low yields, interest-rate sensitivity, the correlation to Treasury yields, and curve flattening will result in underperformance of higher quality intermediate municipal bonds, MacKay said.“We anticipate higher short-term yields and diminished demand in intermediate municipal bonds by banks and property and casualty insurance companies will lead to a flatter curve,” according to the report.
MacKay expects the muni/Treasury ratios will decline due to supply/demand technicals and improving fundamental conditions. "As a result, we anticipate that tax-exempt municipal bonds will outperform Treasury bonds and other high-quality taxable bonds,” MacKay said.
Finally, MacKay said it believes liquidity for tax-exempt municipals will decline and volatility will rise.
“Lower corporate tax rates will reduce the profitability of trading tax-exempt debt for broker-dealers, leading to a reduction in trading capital committed to the municipal market,” the report said. “As a result, they will likely redeploy capital into the taxable markets to generate trading profits. For capital still committed to the municipal market, we expect broker-dealers to prefer rated, liquid names as the capital cost of positioning non-rated paper will be prohibitive. As a result, non-rated bonds will trade primarily on an agency basis, where the broker will only transact with the seller and buyer simultaneously. We believe this will further reduce their liquidity and, most likely, value.”
MacKay Municipal Managers is the municipal bond team of investment management company MacKay Shields LLC, which is an indirect wholly owned subsidiary of New York Life Insurance Co. and a wholly owned subsidiary of New York Life Investment Management Holdings LLC. It has $113 billion in assets under management as of Nov. 30, 2017, which reflects the addition of the Cornerstone Capital Management Holdings LLC’s investment teams that joined MacKay on Jan. 1. MacKay manages fixed income and equity strategies for high-net worth individuals, institutional clients and mutual funds.
BlackRock’s portfolio helped by healthcare, transportation, tobacco
BlackRock, which oversees about $124 billion of municipal debt, put out its monthly report late on Monday afternoon and said the fund posted a strong positive return in December, driven by a longer duration posture, sector allocation and security selection.
“Allocations to the healthcare, transportation and tobacco sectors contributed positively, as did security selection within utilities and state tax-backed,” wrote Peter Hayes, head of the municipal group at BlackRock and portfolio manager of the Strategic Municipal Opportunities Fund, a 5-star fund that adapts to changing municipal markets. “From a yield curve perspective, an overweight in the 20-plus year space added to performance. Exposure to high yield and taxable muni bonds also proved beneficial. Detracting from performance were the fund’s underweight positions in the 0- to 1-year and 8- to 9-year parts of the curve.”
He also added that in December, they started with a pro-risk stance as they took advantage of attractively priced opportunities in the primary market.
“After the tax reform was signed later in the month, we moved to a more defensive posture as we expect rates to move higher amid stronger global growth, less accommodative policy from developed-market central banks and strengthening inflation. We reduced the fund’s duration and increased cash. From a yield curve perspective, we increased exposure to the 0- to 3-year part of the curve while reducing exposure to 15 years and out.”
--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.
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Updated January 24, 2018 at 9:50AM: This article was updated with pricing details.