Chicago's $372.74 million sale of second lien water revenue bonds, scheduled for pricing Wednesday, captured the market's attention, as investors debated whether the bonds will offer sizable yields.
Some investors said Tuesday that the Chicago name would affect the sale, pushing yields higher on the bonds based on their association with the financially strapped city.
"I think there will be some yield, but it will be tighter than where the Chicago [general obligation bonds] have been trading," a trader in the Windy City said.
Others said that the bonds' decent ratings and technical factors such as this week's relatively low $3.1 billion supply and the continued demand for new issues coming to market would keep the yield down. The bonds earned ratings of A3 from Moody's Investors Service, AA-minus from Standard & Poor's and AA from Fitch Ratings.
A second trader in Chicago said the deal will come with a strong yield, but added: "I wouldn't be surprised to see them lowering the yield when the deal comes to market because it will be well subscribed."
A trader on the west coast also said there is a good chance the Chicago bonds will be repriced over the course of the day on Wednesday because of high demand.
"It's a solid AA by Fitch and that's marketable," he said.
Deals Repriced In Primary
Investors predicted the Chicago water bonds will be repriced, after the larger deals that came to market on Tuesday were increased.
The largest deal was a $112.9 million Colorado Springs utilities system issue of improvement bonds. The deal size was raised from an originally scheduled $110 million. The issue came in two-parts with yields on the $58.72 million section ranging from 1.25% with a 5% coupon in 2019 to 3.37% with a 5% coupon in 2044.
There were sinking funds on two term bonds in 2039 and 2044.
The second $54.2 million part of the deal's yields also ranged from 1.25% with a 5% coupon in 2019 to 3.37% with a 5% coupon in 2044.
This segment had sinking funds on 2039 and 2044 term bonds, too.
Bonds from both parts of the deal could be called at par in 2024 and were rated Aa2 by Moody's and AA by S&P and Fitch.
The second biggest deal sold on Tuesday - $100 million of Texas veteran bonds -- were repriced with a coupon of 0.04% in 2045, according to data provided by Ipreo. The bonds have a sinking fund of the 2045 term bond.
JPMorgan won the auction for 75% of the bonds, and Estrada Hinojosa & Company and Piper Jaffray won 12.5% each.
The bonds were rated triple-A by Moody's with a short term rating of VMIG 1.
Niagara Tobacco Stand Out:
A $44.3 million sale of Niagara Tobacco Asset Securitization Corporation bonds stood out in the primary, according to the second trader in Chicago.
The trader on the west coast said the sale was a deal to watch this week because it offered investors some yield. The bonds were priced with yields of 0.54% with a 4% coupon in 2015 to 4.08% with a 5.25% coupon in 2040, according to data provided by Bloomberg.
The trader on the west coast said investors were watching the deal because investors who sold their Puerto Rico debt recently could pick up some yield on these bonds.
"The deal did pretty well," as most such issues had, he said. "I was surprised I think people have a lower threshold for break-even than they usually have on these deals."
The bonds earned a rating of BBB-plus from Fitch.
Munis Follow Treasuries in Sell-Off:
Municipal bonds sold off across the curve on Tuesday. Yields rose by one basis point for bonds maturing in one to four years, according to Municipal Market Data's triple-A scale. They matured by two basis points for bonds maturing in six to 10-years, by one basis point for bonds maturing in 11 to 26 years, and by two basis points for bonds maturing in 27 to 30 years.
John Dillon, managing director at Morgan Stanley Wealth Management said in an interview that municipal bonds were following Treasuries.
The two-year note and the 10-year both rose by three basis points, to 0.56% and 2.50%, respectively, and the 30-year held steady at 3.23%.
A third trader in Chicago said that the municipal market's low weekly supply is what's causing them to follow in line with Treasuries so closely.
"Three billion for the second week in September!" he exclaimed. "That's just nothing."
The two-year municipal bond's yield held steady at 0.30%, the 10-year rose by two basis points to 2.15%, and the 30-year increased by one basis point to 3.30%, according to Municipal Market Advisors' data.
