Tobacco second only to Puerto Rico

Tobacco has been the second best performing muni bond sector thus far in 2018, trailing only Puerto Rico. As of May 7, 2018, the S&P Municipal Bond Tobacco Index was up 4.29% year to date. This compares to a loss of 1.02% for the S&P National AMT-Free Municipal Bond Index, an outperformance of 5.31%.

New Jersey refunded $3.15 billion of tobacco bonds in April, including all of the ‘B’ rated Series 2007 Bonds. The potential refunding of this series was officially announced on March 6^th, 2018 in a notice posted to EMMA. Interestingly, this date seems to correspond to the start of a rally in several tobacco names, including the Buckeye Tobacco Settlement Financing Authority (Ohio), the Northern Tobacco Securitization Corp (Alaska), and the Tobacco Settlement Financing Corporation (Virginia). Could this be a sign that the market expects the tobacco bond refunding trend to continue?

Chart 1: TRPS Closing Bid Prices for Select Tobacco Bonds

Source: Pricing Service

Chart 2: TRPS Closing bid Yield Spread to AAA Benchmark for Select Tobacco

Source: Pricing Service