New Jersey’s Transportation Trust Fund Authority to Bring US$950m Blockbuster Bond

While U.S. municipal bond issuance has generally faced pressure from the effects of geopolitical headwinds and slowing global growth, demand for the asset class has remained intact.

Prices of U.S. government debt rose somewhat Monday after IHS Markit noted contraction in Germany’s economy in September, driven by a deeper downturn in the nation’s manufacturing sector, as well as a loss of steam in its service industry.

IHS Markit said its Flash Germany Manufacturing PMI read 41.4, signaling “the sharpest decline in business conditions across the goods-producing sector since the depths of the global financial crisis in mid-2009.”

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In response, the yield on the 10-year German Bund had fallen roughly 6 basis points to -0.58% early in the New York trading session.

Meanwhile, uncertainties over whether the European Central Bank’s (ECB) latest stimulus measures will be effective in helping to accelerate growth in Germany and across the broader euro area, appear to be met with skepticism about the path of monetary policy at other central banks, including the U.S. Federal Reserve.

The Federal Open Market Committee (FOMC) last week cut the target range for the federal funds rate by 25bps to 1.75-2%, amid weaker business fixed investment and exports since its July meeting, as well as below-target inflation.

Market participants honed-in on Fed members’ divided views on the decision, with chair Jerome Powell, vice chair John Williams, Michelle Bowman, Lael Brainard, Richard Clarida, Charles Evans and Randal Quarles in favor, while James Bullard preferred to lower rates by 50bps, and Esther George and Eric Rosengren each wanted to maintain the target range at 2-2.25%.

Analysts at J.P. Morgan noted that overall, “the message from the Federal Reserve seemed divergent and paints an unclear picture on whether we will have zero, one or multiple cuts ahead.” They added that given “the lack of clarity about the Fed’s next move, in addition to other market uncertainties, investors should prepare for more volatility ahead.”

Indeed, prices of U.S. Treasuries have risen recently on the back of reports that Saudi Arabian oil facilities has been attacked, as nervous investors generally fled to safe haven assets. The yield on the 10-year U.S. Treasury note was last bid at around 1.69% after reaching as high as 1.90% at the market close on Friday, September 13.

Munis Show Resilience Despite Gyrating Rates

Against this backdrop, tax-exempt municipal bonds were unable to keep pace with the drop in government debt yields, with the 10-year muni / Treasury ratio last up at around 89% — an 8% rise week-over-week.

Interest among fixed-income investors has also continued to subside somewhat, although certain deals have received decent demand.

The Bay Area Toll Authority’s (BATA) federally taxable revenue bonds, for example, were priced to yield between 2.025-3.552%; and Florida Aviation Authority airport facilities’ revenue bonds sold with 1.39-3.32% yields.

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For the week ended September 18, Thomson Reuters/Lipper U.S. Fund Flows posted net inflows into muni bond funds (for the 37th straight week) of around US$307m, down from US$880 in the prior week and well-below their weekly average of US$1.16bn since August 7, 2019.

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Also, prices of certain exchange-traded funds (ETFs), such as the iShares National Muni Bond fund (NYSEARCA: MUB) and the Vanguard Tax-Exempt Bond fund (NYSEARCA: VTEB), have continued to slide– having lost around 0.78% and 1% since their most recent 52-week peaks, respectively.

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Supply Slows

In the meantime, muni bond issuers continue to print new deals, albeit fresh deals have diminished slightly, with the 30-day visible supply calendar last a little more than US$12.5bn.

According to Barclays, issuance in the week ahead is slated to come in at around US$8.5bn, down from the prior two weeks’ roughly US$10bn and US$11bn, respectively, bringing year-to-date issuance to US$266bn and net supply to -US$11bn.

Among the larger deals on the near-term radar, the New Jersey Transportation Trust Fund Authority (NJTTFA) is on tap with US$950m worth of program bonds, including a US$150m remarketing of its Series 2014 bonds.  

NJTTFA said it will apply the bond proceeds towards financing various state transportation projects, with the reoffering set to convert the Series 2014 bonds from floating-rate notes to fixed-rate bonds.

The transaction, which is being lead-managed by Wells Fargo Securities, is scheduled to price Tuesday.

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Analysts at Janney Montgomery noted that although the NJTTFA is funded by transportation-related taxes and fees, including a US$0.414 per gallon tax on gasoline, bondholders have no lien on these revenues.

Janney continued that debt service payments are subject to annual legislative appropriation, which earns ratings that are a notch below the state’s GO rating. Furthermore, unlike many states, “New Jersey is dependent on appropriation-backed debt, with general obligation bonds accounting for only 20% of the state’s general fund supported debt.” Moreover, NJ’s credit is “clouded by structural fiscal imbalance and poorly funded pension plans.”

Janney also cited a recent report by Moody’s Investors Service, which noted that NJ was responsible for US$113.8bn in adjusted net pension liabilities, the fourth largest among states in FY2018.

For its part, Moody’s assigned a ‘Baa1’ rating to NJTTFA’s latest bond sale, one notch down from New Jersey’s ‘A3’ general obligation rating.

Including the current issue, New Jersey state will have US$15.3bn Transportation System and Transportation Program bonds outstanding, with the NJTTFA authorized to issue up to US$12bn additional Transportation Program Bonds through fiscal 2024 to support the state’s US$16bn transportation capital funding plan.

Moody’s lead analyst Baye Larsen noted that the stable outlook on the deal is based on the state. She added that New Jersey’s ‘A3’ general obligation rating is “well-positioned for the next 12-18 months due to solid economic performance and improved budget flexibility in fiscal 2019. However, in the longer term, the state’s credit profile could continue to weaken as large long-term liabilities grow and the state’s budget is challenged by growing pension contributions in a low revenue growth environment.”

NJTTFA’s offering will be joined in the week ahead by other municipal issuers, including from the Texas Water Development Board, the State of Mississippi, and the New York State Environmental Facilities Corporation.