Munis rally with Treasuries as investors seek out safe havens; Chicago bond deal scrutinized

By Sheri Kasprzak

New York, Jan. 6 – Municipals rallied again on Wednesday, pushed in part by strong Treasuries as military and economic strife in Asia sent investors in search of safety, market sources said.

Yields on top-rated munis were lower by as much as 9 basis points, outperforming Treasuries, which saw yields fall 6 bps to 8 bps on the day.

Stocks sank on worries over the Chinese economic situation and on rumors circulated by the North Korean government that it launched a hydrogen bomb.

The Dow Jones industrial average fell by 252.15 points to 16,906.51, and the Nasdaq closed down 55.67 points at 4,835.76. The S&P 500 rounded out the day 26.45 points lower at 1,990.26.

Meanwhile, the new-issue calendar expanded, with several large offerings announced. Among those big deals is a significant sale out of Chicago.

Chicago readies G.O. bonds

The Windy City is ready to come to market later this month with $500 million of general obligation refunding bonds.

Although high yields are likely to draw hungry investors, not everyone is a fan of this troubled issuer.

Marilyn Cohen, chief executive officer at investment advisory firm Envision Capital Management, has long warned about Chicago debt.

Even though the city recently hiked its sales tax, Cohen warns investors to stay away. Some investors, both institutional and individual, will see the hike as a positive for the city, Cohen said in an interview Wednesday, but as long as Chicago ignores its unfunded pensions, it will be a very risky investment.

“They could shoot property and sales tax sky-high, but if you’re not dealing with the 900-pound gorilla called unfunded pensions, it won’t do you any good,” she said.

“They’ll find buyers because they’re going to have to sell at a really high yield, and there will always be buyers, especially considering muni bond mutual funds are sitting around with a ton of cash, but I wouldn’t touch it with a 10-foot pole.”

Moody’s rates Ba1

Moody’s Investors Service has the city in junk-bond territory at Ba1. Standard & Poor’s downgraded the city’s G.O. debt in May 2015 to A- from A+, but Cohen said she feels S&P is “totally out to lunch.” The city has an “excellent” shot at being downgraded again this year, she said.

Cohen said despite troubled issuers like Chicago and Puerto Rico, municipals were still the “belle of the investment ball” in 2015.

“What I really admire from individual investors and professionals is that they were able to tiptoe around these sinkholes,” she noted.

Citi is underwriter

Moving to the details of the sale, Citigroup Global Markets Inc. is the senior manager for the offering, which includes $498.14 million of series 2015C bonds and $1.86 million of series 2015D taxable bonds.

The 2015C bonds are due 2020 to 2031 with term bonds due 2035 and 2038. The 2015D bonds are due Jan. 1, 2020.

Proceeds will refund or pay interest on all or certain outstanding G.O. bonds.

© 2015 Prospect News.
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