The New York City Transitional Finance Authority priced $700 million of bonds for retail investors on Monday at spreads traders said were attractive for longer maturities. They said pricing for shorter maturities may have been too aggressive to interest investors, after munis sold off on a positive report from the Institute for Supply Management.
Spreads on bonds maturing in three to six years are four basis points tighter to eight basis points wider than Municipal Market Data's benchmark triple-A general obligation bond. The spread on the bonds maturing in 28 years is 71 basis points wider at 3.70% than the MMD benchmark, and the 21 year maturity is 35 basis points wider at 3.10%.
"I don't think they took into account the sell-off when they priced the deal," a trader in New York said. "They market weakened all week last week, I feel like they were pricing it for the market two weeks ago and then hoping to price it more aggressively during institutional."
He said the ISM manufacturing number that caused municipal bond yields to rise even further on Monday was probably not a factor the deal team took into account.
The ISM manufacturing index for October came in 2.4 points higher than September, at 59. Analysts had forecast the number would slip to 56.
The new order index, which is considered one of the most important pieces of data, increased by 5.8 to 65.8.
Positive economic reports tend to be a negative for municipal bonds, and this report was no exception, market participants said. Traders listed the manufacturing report as the primary reason municipal bonds sold off Monday.
Municipal bonds maturing in two to five years yield rose by two basis points, according to Municipal Market Data. The six and seven maturities' yields rose by six basis points, the eight-years' yield climbed five basis points and the nine-years' by four basis points.
The yields on bonds maturing in 10 to 30 years increased by three basis points.
A second trader in New York said the TFA does have a good track record.
The Authority last issued bonds in July, and sold some before that in April in a somewhat unusual structure. In order to take advantage of the market's demand for short term paper it issued the bonds as multi-model bonds with an optional mandatory tender.
This structure provides investors with a place to put their short term cash, allowing them to lock in on the current attractively low interest rates.
The $700 million deal is issued with the same structure, and the second New York trader said he expects demand for the bonds to remain equally high or even stronger.
"The key thing with the TFA deals, and this November sale too, is the mandatory tender is out 10 years, so investors actually have a decently safe investment, their bonds won't be swiped from them in five years or less," he said.
A trader in the Midwest said interest rates are starting to rise, and hype about kicker or other unusual structures has become so great that these types of bought have started to become overbought and are not worth the price.
He said that the TFA deal, like any other deal this week, might be more difficult to get done because there is a spike in issuance with volume rising to $8.8 billion, the largest amount of weekly issuance in four months, according to data provided by The Bond Buyer.
The bonds are rated Aa1 by Moody's Investors Service, and triple-A by Standard & Poor's and Fitch Ratings.
The TFA future tax secured subordinate bonds' yields range from 0.56% with a 4% coupon in 2017 to the 3.70% with a 4% coupon in 2042 mentioned above. There are sinking funds on 2039 and 2042 term bonds.
Barclays Capital is the managing underwriter.
Secondary Weakens:
The trader in the Midwest said the sell-off in the overall municipal market has caused spreads to widen out in the secondary, pointing to several maturities in the $205.4 million Columbus, Ohio, sewer revenue bonds that were priced in the primary on Thursday and are now free to trade.
Spreads on bonds maturing in nine to 17 years widened from one to eight and a half basis points, according to data provided by Thomson Reuters as of noon. They fell for one of the three 17-year maturities, the one with a 3.30% coupon, the lowest coupon of the three, by six basis points.
Treasuries held strong, as the two-year note's yield increased by three basis points to 0.53% from market close on Friday and the 10-year and 30-year's held steady at 2.35% and 3.07% respectively.
