Top-quality municipal bonds finished Tuesday weaker, with yields as many as five basis points higher in some maturities, according to traders, as some of the week's larger deals flooded the market. Federal Reserve Chair Janet Yellen added fuel to the fire by signaling that more than one interest rate increase is possible this year.
Primary Market
The market was busy, as majority of the weeks' larger issuance was planned for Tuesday and another deal came a day earlier than scheduled.
"Buyers definitely faded once the market reacted hard to the downside as Federal Reserve Chair Janet Yellen took a perceived more hawkish stance on the economy and potential rate rises," said one New York trader. "The market is still very defensive but demand is actually still pretty good, technicals still ok, but accounts don't want to be too aggressive not knowing where rates are headed."
Bank of America Merrill Lynch priced the San Francisco Bay Area Toll Authority, Calif.'s $559.015 million of Series 2017A, B, C & D toll bridge term- and index-rate revenue bonds on Tuesday. The $125.225 million of Series A term rate bonds were priced at par to yield 2.95% in a bullet 2047 maturity. The mandatory tender date is April 1, 2026.
The $125.225 million of Series B term rate bonds were priced at par to yield 2.85% in a bullet 2047 maturity. The mandatory tender date is April 1, 2025.
The $151.715 million of Series C term rate bonds were priced at par to yield 2.10% in a bullet 2047 maturity. The mandatory tender date is April 1, 2022.
The $156.85 million of Series D index rate bonds were priced to yield about 55 basis points above the three month LIBOR in a bullet 2047 maturity. The mandatory tender date is April 1, 2021.The bonds are rated Aa3 by Moody's Investors Service and AA by S&P Global Ratings and Fitch Ratings.
BAML also priced the Delaware River Joint Toll Bridge Commission of Pennsylvania and New Jersey's $434.97 million of Series 2017 bridge system revenue bonds. The bonds were priced at par to yield 1.40% in 2020 and to yield 2.52% with a 3% coupon in 2025. The bonds were also priced to yield from 2.80% with a 4% coupon in 2027 to 3.59% with a 5% coupon in 2037. A term bond in 2042 was priced to yield 3.64% with a 5% coupon. A term bond in 2047 was priced to yield 4.04% with a 4% coupon and 3.69% with a 5% coupon in a split maturity. The deal is rated A1 by Moody's, A by S&P and A-plus by Fitch.
And BAML priced the New York Metropolitan Transportation Authority's $309.8 million of Series 2017A dedicated tax fund green bonds which are climate bond certified. The issue was originally slated to be priced on Wednesday after a one-day retail order period on Tuesday, but the deal was sped up to having the retail period on Monday, with preliminary institutional pricing Tuesday. The bonds were priced to yield from 0.95% with a 5% coupon in 2018 to 3.37% with a 5% coupon in 2038. A term bond in 2042 was priced to yield 3.69% with a 4% coupon and 3.41% with a 5% coupon in a split maturity. A term bond in 2047 was priced to yield 3.46% with a 5% coupon. The deal is rated AA by S&P and Fitch.
"The MTA deal was moved up to get ahead of Yellen's testimony," the New York trader said.
Goldman Sachs priced the Dormitory of the State of New York's $190.60 million of Series 2017 revenue bonds for Columbia University. The $150 million of Series 2017A bonds were priced to yield 2.40% with a 5% coupon and 3.49% with a 5% coupon in a split, bullet maturity in 2047.
The $40.595 million of Series 2017B bonds were priced to yield from 1.96% with a 5% coupon in 2024 to 2.61% with a 5% coupon in 2029. The deal is rated triple-A by Moody's and S&P.
Piper Jaffray is set to price two deals for the Gresham-Barlow School District No. 10JT, Ore., totaling $291.17 million on Tuesday. The deals consist of $152.43 million of Series 2017B general obligation current interest bonds and $138.74 million of Series 2017A GO DIBs. The deals are rated A-plus by S&P.
In the competitive arena, the Las Vegas Valley Water District, Nev., sold $152.77 million of GOs in two separate offerings on Tuesday.
Citigroup won the $129.33 million of Series 2017A limited tax GO water refunding bonds additionally secured by pledged revenue with a true interest cost of 3.37%. The issue was priced to yield from 0.96% with a 5% coupon in 2018 to 3.65% with a 4% coupon in 2038.
Morgan Stanley won the $23.44 million of Series 2017B limited tax GO water refunding bonds additionally secured by Southern Nevada Water Authority pledged revenue with a TIC of 2.64%. The deals are rated Aa1 by Moody's and AA by S&P.
Since 2007, the district has sold about $3.3 billion of bonds, with the most issuance coming in 2016 when it offered $606 million. The water district did not come to market in 2007 or 2013.
The Long Beach Unified School District, Calif., sold $450 million of general obligation bonds in two separate parts on Tuesday.
The offerings consist of $300 million of election of 2016 Series A unlimited tax GOs and $150 million of election of 2016 Series E unlimited tax GOs. Citi won the larger offering with a TIC of 3.74%. The bonds were priced to yield from 0.90% with a 5% coupon in 2018 to 1.27% with a 5% coupon in 2020. The bonds were also priced to yield from 2.45% with a 5% coupon in 2027 to 3.79% with a 4% coupon in 2043. A term bond in 2045 was priced to yield 3.82% with a 4% coupon. A term bond in 2047 was priced to yield 3.84% with a 4% coupon.
Morgan Stanley won the smaller deal with a TIC of 3.92%. The deals are rated Aa2 by Moody's and triple-A by Fitch.
Wake County, N.C., sold two competitive deals totaling $113.96 million of Go public improvement bonds. Wells Fargo won both deals; the larger deal of $80.415 million won with a TIC of $2.845, while the $33.7 million was won with a TIC of 2.81%. Both deals are rated triple-A by Moody's, S&P and Fitch.
Secondary Market
The 10-year benchmark muni general obligation yield rose five basis points to 2.37% from 2.32% on Monday, while the yield on the 30-year GO increased three basis points to 3.12% from 3.09%, according to a final read of Municipal Market Data's triple-A scale.
The yield on the two-year Treasury rose to 1.23% from 1.20% on Monday, while the 10-year Treasury gained to 2.47% from 2.43%, and the yield on the 30-year Treasury bond increased to 3.06% from 3.03%.
On Tuesday, the 10-year muni to Treasury ratio was calculated at 96.0% compared to 95.5% on Monday, while the 30-year muni to Treasury ratio stood at 101.9%, versus 102.0%, according to MMD.
Yellen: There Will Be Increases `At Some' 2017 Meetings
Testifying before the Senate Banking Committee, Federal Reserve Board Chair Janet Yellen reiterated that three interest-rate increases will be appropriate this year if the economy grows as expected.
"At our upcoming meetings, the committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate," she said.
Responding to two direct questions about whether there will be a rate hike in March or June, Yellen refused to be pinned down, noting, "Every meeting is live."
Given the Federal Open Market Committee expectations for three rate increases this year, Yellen said there would be increases at some 2017 meetings but not at others, depending on data. "Our expectation is that rate increases [at several meetings this year] will be appropriate."
SPDJI Looks at 'The Uncorrelated'
Now might be a good time to examine "The Uncorrelated" – those asset classes which are not correlated to the equity market, J.R. Rieger, managing director and global head of fixed income at S&P Dow Jones Indices, wrote in a Monday market comment.
Corporate bonds of the issuers in the S&P 500 are tracked in the S&P 500 Bond Index, according to Rieger, who said that as a group they bonds have had a negative correlation to the equities market. Heavily composed of investment-grade bonds, this index has recorded a positive return of 0.65% year-to-date and a weighted average yield of 3.3%.
"Investment-grade municipal bonds also historically have had negative correlations to the equities markets," Rieger wrote. "
Senior loans are higher in the capital market structure than unsecured high-yield bonds and are also floating rate instruments.
"These characteristics help make them less correlated with the equities market as well as the fixed rate bond markets. The S&P/LSTA U.S. Leverage Loan 100 Index has recorded a positive return of 0.30% year-to-date. The floating rate senior loans tracked in this index have a weighted average yield to maturity of 4.76%."
High-yield or "junk" bonds tend to be more highly correlated to equities due to their position in the capital market structure, he writes.
"As a result, junk bond and stock prices can at times move in the same direction based on the market's perception of the companies strength or weakness," Rieger says. "With a weighted average yield of 5.85% the S&P U.S. High-Yield Corporate Bond Index the index is up 1.57% compared to the S&P 500 Index, which is up 3.66% (total return)."
