Jumping municipal bond yields on Tuesday helped the performance of lower rated deals in the primary market, while hurting some of the triple-A rated sales, market participants said.
The triple-B rated $236.2 million Maryland Health and Higher Educational Facilities Authority deal received a lot of attention from buyers, traders said, because it was one of the few deals in the primary that promised some yield so investors were paying attention to it.
The deal team was able to reprice the Maryland bonds with shorter maturities with lower yields, according to data provided by Ipreo.
"With the triple-B piece there may have been some uncertainty of where the yields in Treasuries would back up," a trader in New York said. "Because it's a lower rated credit [the deal team] could justify the [originally] cheaper levels. A cheap scale on a new issue deal, though, probably gets a lot more people looking at the scale, and then at this point you can reprice at better levels. The Maryland deal is still not high yield, but its high enough yield that people are looking at it. That probably why people saw an oversubscription."
Yields on the longer maturities in the deal were raised, which isn't necessarily a negative, a trader in Chicago said.
"The parts of the deal where yields were lowered means they were heavily in demand -- same for where yields stayed the same," he said. "The market is incredibly volatile today, especially on the longer maturities. So everyone is trying to chase it, and the triple-Bs are better equipped, too. Rising yields on the longer maturities mean investors can get more yield on the bonds, and just means these will be bought up quickly, and that yield will be in demand enough that it will almost certainly come down in the secondary."
Traders said the sell-off had a negative impact on some of the higher rated deals that came to market, especially the triple-A deals. The trader in Chicago said this effect can be seen in how yields on $305.87 million of Delaware general obligation bonds were raised during their institutional pricing on Tuesday from their retail pricing on Monday. Yields were increased from three to 20 basis points on the bonds.
Market participants said yields were raised on the Delaware bonds in response to the municipal market's selling off for a second straight day.
Yields on the Delaware bonds for institutions ranged from 0.30% with a 2% coupon in 2016 to 3.07% with a 3.50% coupon in 2034. There is a sealed bid on the 2015 maturity, and the bonds can be called at par in 2024.
The bonds earned triple-A ratings from the three major rating agencies.
"You can see price adjustments with the Delaware deal; they adjusted yields to follow the [Municipal Market Data]," a second trader in New York said.
Scales Rise
Yields rose by one basis point for bonds maturing in one year, according to MMD. Bonds maturating in four years yields increased by two basis points, by four basis points for bonds maturing in five years, by six basis points for bonds maturing in six to seven years, and by eight basis points for bonds maturing in eight to 16 years.
Bonds maturing in 17 to 26 years yields increased by seven basis points, and yield rose by six basis points for 27 to 30 year maturities.
The rest of the curve held steady.
Traders said municipal bonds are weakening because they are following Treasuries' weakness earlier on Tuesday morning on positive news from Europe Tuesday morning, when the European Central Bank announced it is considering pushing money back into Europe's economy by buying corporate bonds. Though there is no certainty about the plan, or even a preliminary timetable, European stocks rallied and Treasuries fell after the announcement. Market participants had cited Eurozone weakness as the key driver behind the Treasury rally last week.
Treasuries mostly weakened on Tuesday from Monday's market close with the 30-year and 10-year's yields rising by three basis points to 2.99% and 2.23% respectively. The two-year note held steady at 0.37%.
The triple-A $178.8 million Washington Health Care Facilities Authority revenue bonds were downsized from the $247.6 million the pricing wire said the deal was supposed to total when the bonds were priced earlier on Tuesday, according to data provided by Tm3. The deal has two maturities with yields at 3.51% with a 5% coupon in 2038 and 3.60% with a 5% coupon in 2041.
There are sinking funds on term bonds in 2037 and 2041. The bonds can be called at par in 2024, and are rated Aa3 by Moody's Investors Service, AA-minus by S&P and AA by Fitch.
The trader in Chicago said that many of the competitive triple-A deals that were priced on Tuesday came to aggressive for a rising yield market, and that they may have some trouble getting done. He pointed to the low yields on the Fairfax, Virginia GOs as an example of this.
The $208.5 million Fairfax County, Va., bonds were auctioned and priced to yield from 0.15% with a 1.50% coupon in 2015 to 2.27% with a 3% coupon in 2026. Citigroup won the bid for the bonds, and they have an optional call in 2024 and are rated triple-A by the three major rating agencies.
"Fairfax is a competitive deal so by nature it will be priced more aggressively than a triple-A negotiated deal, and because it is decently sized at $208.5 million people usually push the envelope a bit," the first trader in New York said. "I would not be surprised if the balances sit around a little bit, and in a place like Citigroup they will be able to work down the balances. At this point there is probably a less supply of high grade bonds, like triple-A bonds in the market, so Citi will probably be will to sit on these levels for a bit and if they don't get done, it will cheapen them up in the secondary."
Hennepin County
Elsewhere in the primary Bank of America Merrill Lynch won the bid for the two-part $181 million Hennepin County, Minnesota GOs. The $81 million GO refunding bond portion of the deal was priced with yields ranging from 0.13% with a 5% coupon in 2015 to 2.54% with a 4% coupon in 2027.
The $100 million GOs had yields from 0.36% with a 5% coupon in 2016 to 2.89% with a 5% coupon in 2039.
The bonds were rated triple-A by S&P and Fitch, and can be called at par in 2022.
