Mass of Triple-A's Digested Easily; Tax-Exempts Rise Almost 1/4 Point
Tax-exempt prices marched 1/8-point to 1/4-point higher yesterday while issuers sold $775 million of bonds through 22 new issues.
Much of the new issuance was rated triple-A, either naturally due to the credit quality of counties in Virginia and Maryland or thanks to bond insurance.
The largest deal of the day, however, was double-A rated Rhode Island's competitive sale of $164.63 million of general obligation consolidated capital development bonds, which was won by J.P. Morgan Securities. The bonds had a maximum yield of 6.45% in the 2009 and 2010 maturities.
An underwriting official at J.P. Morgan late yesterday said the account has a balance of about $55 "We still have a balance, but I think everyone in the account believes that we will do well," he said.
Other market participants said the Rhode Island bonds were slightly aggressive in the short end, but no one doubted the market would soak it up. "There's a tremendous amount of cash out there," one trader noted.
The optimism for the deal's outlook is due to bullishness on the part of institutional buyers, the J.P. Morgan official said. Property and casualty insurance companies, bank trust departments, and investment advisers nationwide - or "cash-flow" buyers - were expressing interest in Rhode Island and the large slate of very pricey triple-A paper, he said.
Most of the bonds were in the shorter end of the yield curve; almost half of the $164.63 million were evenly spaced from the 4.7%-yielding 1993 maturity to the 5.60%-yielding 1998 serial, all of which had 6% coupons. The deal was rated Aa by Moody's Investors Service and AA-minus by Standard & Poor's Corp.
The natural triple-A bonds were seized by buyers as soon as they were offered. Arlington County, Va., sold $94.5 million of general obligation bonds through a competitive group led by Merrill Lynch & Co., and only $14 million were left late yesterday.
The Merrill group won the deal at a true interest cost of 5.967% and put the maximum yield at 6.30% on the 2010 and 2011 maturities. The rest of the deal was scaled from 4.25% in 1992 to 6.25% in 2009, with the 1999-2002 serials not re-offered.
An official at Merrill Lynch recited the same roster of buyers coming in, with the addition of both national and in-state bond funds. The deal's showing and the market's strong undertone were both attributable to a future supply shortage, he said. "The lack of supply now and the fact that there's no substantial supply for the next few months has everyone bidding."
The other "natural" triple-A borrowing drew the same hungry interest. Montgomery County, Md., sold $70 million of unlimited tax consolidated public improvement bonds and the balance practically vanished. By late yesterday, the BT Securities-led syndicate reported less than $5 million remained in the account. The pricing almost exactly mirrored the Arlington County deal, yielding 4.30% in 1992 and going out to a maximum yield of 6.30% in 2011.
The dramatic aspect of both Montgomery and Arlington is the price improvement demonstrated over last week's levels. Participants said the two deals represent a yield decline of more than five basis points across the yield curve - in just one week.
"That's a huge high-grade move," said one analyst. "They're really going for it."
In other new issues, insurers did their part to add to the triple-A paper available to the Street, but demand still allowed strong pricings.
Merrill Lynch repriced a $46.66 million San Diego County certificates of participation issue, knocking off five basis points from the 1997 through 2003 serials and bringing the maximum yield down to 6.20%. A 2019 term maturity totaling $35.4 million was not reoffered, according to a source in the underwriting syndicate. Municipal Bond Investors Assurance Corp. insured the entire deal.
In addition, a Smith Barney, Harris Upham & Co. negotiated syndicate preliminarily priced a $24.61 million Polk County, Fla., utility revenue issue with Financial Guaranty Insurance Co. insurance. The maximum yield of 6.65% is on the $5.95 million term of 2011. Serials were priced from 4.75% in 1993 out to 6.10% in 2003. Another term, $7.83 million maturing in 2008, yields 6.50%.
The 2008 is the only noncallable maturity, but it has a mandatory sinking fund beginning in 2004. The other bonds are callable in 2001 at 102.
MBIA insured another new issue, the $45 million Pittsburgh GO deal, which a Lazard Freres & Co. group brought with a maximum yield of 6.66% in the 2016 term maturity. The underwriters were able to reprice the term two basis points lower, from 6.68%, party because Moody's raised the underlying Pittsburgh credit rating, to A from Baal.
On the West Coast, Grigsby Brandford Powell Inc. and Merrill Lynch won Seattle's $11.84 million limited tax GO sale. The noncallable issue was priced at par with 5.1% coupons in 1995 going out to a maximum yield of 5.6% in 1999.
Rated A1 by Moody's and AA-plus by Standard & Poor's, the deal was expected to sell quickly due to the low issuance in Washington State.
Secondary Market
Participants reported secondary market trading was extremely light as accounts focused on the new issues, although 1/4 point gains were held on to in certain areas of the market. In general, prices increased 1/8 point.
New Jersey Turnpike Authority 6.90s of 2014 were quoted at 99 7/8-100 to yield 6.89%. Triborough Bridge and Tunnel Authority 6 5/8s of 2017 were quoted at 99-99 1/4 to yield 6.69%. New York LGAC 7s of 2021 were quoted at 99 3/8-5/8 to yield 7.03%. East Bay California 6 1/2s of 2016 were quoted at 98 5/8-3/4 to yield 6.60%.
The short-term market also registered gains. In late secondary trading, Los Angeles notes were quoted at least five basis points lower in yield, at 4.35% bid, 4.30% offered. March New York State Trans were quoted at 5.10% bid, 5.10% offered. And Pennsylvania paper improved about 10 basis points, to 4.40% bid, 4.35% offered. Texas notes were quoted at 4.35% bid, 4.30% offered in late cash trading.
Yesterday's debt futures trading saw the December municipal contract settle up 1/8 to 94.25. The MOB spread narrowed to negative 168.
