The Metropolitan Transportation Authority's $226.6 million of transportation revenue bonds were in heavy demand on Thursday because their variable rate offered an attractive hedge against interest rates, market participants said.
"I think as yields drive lower and the concern that those yields will eventually move up grows, especially since we're on the cusp of the Fed possibly raising interest rates in 2015, the attractiveness of variable rate demand will start to measurably go up," said Dan Heckman, senior fixed income strategist at U.S. Bank.
Citigroup won the bid for the $99.56 million section of the deal, and priced them with one maturity in 2041.
"The bonds were out for bid based on a spread to 67% of one-month LIBOR," a spokesman for the MTA wrote in an email, referring to that part of the deal. "A total of 11 bids were received, with the winning bid submitted by Citigroup Global Markets. The winning bid was a spread of 0.35%, and after factoring in the remarketing discount, the resulting [true interest cost] was 0.355%."
Morgan Stanley won the bid for the $84.45 million section of the deal that had one maturity in 2019, and RBC Capital Markets won the bid for the $42.575 million section which it priced at 0.48% for the single 2018 maturity.
"We successfully bid out all 3 parts of the transaction this morning," the spokesman wrote in an email.
A trader in Chicago said the deal is attractive because variable rate issuance has remained low. The volume of both short and long variable rate issuance totaled $10.2 billion this year through Aug. 30, compared with $185.14 billion fixed rate issuance during the same period, according to data provided by The Bond Buyer and Ipreo.
Heckman said that for money market funds and players who want to get some variability to hedge against interest rate increases "the timing of the issue is very good".
"I did not participate the MTA deal because I'm full on the name, but I certainly like the floating rate structure as a hedge against higher rates," Fred Bacani, Head of Fixed Income & Trading at Veritable LP in Newtown Square, Pa, said in an interview. "The spread over the floating rate is attractive given the short maturity and lack of credit spread in that part of the yield curve, while investors are protected by the high fail rate."
Heckman said US Bank has liked New York credits in general this year.
"The spreads have been very attractive and the state is doing well, and was recently upgraded by Moody's," he said. "I think there's always a little bit of concern because the Transit Authority is a little more heavily indebted, but when we have seen disruptions in services by the transit authority by a strike or a hurricane, it pointed out the demand and need for mass transit especially in New York area. The competitive advantage that service provides from a cost/convenience standpoint is really hard to replace or duplicate. Given the monopoly of that service people feel very comfortable about that credit and the future of that credit."
The bonds are rated A2 by Moody's Investors Service, AA-minus by Standard & Poor's and A by Fitch Ratings.
L.A. Harbor Shows Talk of Muni Sell-Off Was 'Overblown'
The $337.3 million Los Angeles Harbor Department revenue and refunding bonds came priced aggressively as municipal bonds sold off on Thursday, leading market participants to believe municipal bonds' reaction to the spike in Treasuries' yields earlier this week may have been overblown.
Traders said the L.A. Harbor deal showed issuers are confident the sell-off will not reduce investors' appetite for bonds this week. The $203.3 million tranche of the three-part deal was subject to the alternative minimum tax. The Chicago trader said this means the bonds were marketed toward institutional investors, not the retail investors that typically boost California deals' success because tax-exempt investments are more attractive to protect against the state's high taxes.
Even though the biggest tranche was marketed to a limited portion of the market, bonds maturing in 2018 onward had 5% coupons. On Wednesday, the FirstSouthwest lowered the coupons on La Porte, Texas, Independent School District's longer maturities to 4% from 5% because of the sell-off, a source close to the deal told The Bond Buyer.
"Here's the thing with the L.A. deal, the big tranche is AMT, that's obviously not going to go to retail," the trader in Chicago said. "I'm not seeing the weakness in the MMD reflected in this deal. I think the market's reaction to the [Municipal Market Data] scale yesterday might have been overblown, and that California credits are as strong as ever. This deal was priced aggressively because [the deal team] is comfortable they will work out the balances."
Yields for the $203.3 million L.A. Harbor revenue and refunding revenue bonds part of the deal ranged from 0.16% with a 2% coupon in 2015 to 3.62% with a 5% coupon in 2044. There is a sinking fund on a 2044 term bond and an optional par call in 2024.
"3.26% is not a lot to grab," a trader in New York said. "But that means they are sure there will be buyers. Even without retail, even with the sell-off, they're confident investors will pay that premium."
The non-AMT $89.1 million refunding revenue bond portion of the deal had yields ranging from 0.12% with a 5% coupon in 2015 to 3.28% with a 5% coupon in 2044. This section has sinking funds on term bonds in 2039 and 2044, and also has an optional call at par in 2024.
The non-AMT $44.89 million revenue bonds' yields ranged from 0.12% with a 2% coupon in 2015 to 3.28% with a 5% coupon in 2044.
This section also had sinking funds on 2039 and 2044 term bonds, and the same optional par call in 2024.
Wells Fargo Securities priced the bonds, which carried ratings of Aa2 from Moody's and AA from S&P and Fitch.
The $122 million San Mateo County Community College general obligation refunding deal was also priced aggressively, according to trader, with 5% coupon on almost all of its bonds on the long end. The only bond that did not have a 5% coupon past the 2023 maturity was the final 2038 maturity that was priced at par.
Yields on the GOs ranged from 0.11% with a 2% coupon in 2015 to par with a 2.25% coupon in 2038. There is a sinking fund of the 2031 and 2038 term bonds, and an optional call at par in 2024.
The bonds were rated triple-A by Moody's and S&P.
Yields on municipal bonds maturing in eight to 30 years rose by up to two basis points, according to Municipal Market Data's triple-A scale. The front end of the curve held steady.
Yields on the two-year held steady at 0.30%, according to data provided by Municipal Market Advisors. The 10-year's rose by two basis points to 2.13%, and the 30-year's by three basis points to 3.29%.
The 30-year Treasury rose by six basis points to 3.21%, the 10-year by four basis points to 2.45%, and the two-year note by one basis point to 0.54%.
Jobless Claims Steadies Market:
The jobless claims report Thursday gave traders more confidence Friday's employment number won't be strong enough to ignite another sell-off, though some investors were still concerned.
The report showed claims came in at steady levels. Jobless claims rose by 4,000 for the last week of August to 302,000. This number falls in line with analysts' predictions, which estimated claims would total between 290,000 and 310,000.
"Yes, a strong employment number could trigger another sell-off," the trader in Chicago said.
A second trader in New York said Treasuries' dramatic reaction to Tuesday's ISM manufacturing index report means if a strong employment situation number is shown, Treasuries will sell-off again and it will bleed into the municipal market.
"Now that there are not as many headlines about global crises coming out, the market is paying more attention to the economic data being reported," the trader said. "It was always strange, rates being so low when the economy is becoming stronger."
A third trader in New York agreed, saying even though Treasuries had strengthened by the end of the day on Wednesday after it was announced Russian President Vladimir Putin was outlining cease-fire plans with a Ukraine leader, Treasury yields were still notably higher than they were last week.
"If they hike up anymore, they will drag munis with them," he said. "Low supply has kept munis in check so far, but supply should pick up next week and more people will be back at their desks."
A trader in Virginia said a sell-off in munis is possible if a strong employment number is reported, but he doubts it will happen.
"I don't think it will happen unless supply starts to grow, it's hard to justify some kind of massive sell-off," he said.
