Detroit Water and Sewer bonds rallied as they became free to trade on Thursday, and Illinois bonds followed, a sign of investors' demand for yield in a low-supply environment.
Detroit 5s of 44 dropped by 35 basis points in yield to 4.50% in secondary trading by 3:00 pm eastern time, according to data provided by EMMA.
Trading on the Detroit bonds was so high the Michigan Finance Authority, which had issued the bonds on behalf of the Detroit Water and Sewerage Department, was Thursday's top traded issuer, according to data provided by Bloomberg. Trading on all bonds from the Michigan Finance Authority was 14,896.3% above its 100-day average. Traders said the action had little to do with the quality of the credit.
"I think it's probably just a reach for yield," a trader from Chicago said. "Yields are getting really tight so it's hard to find it anywhere."
Yields have been tightening over the course of the year, with the benchmark 10-year AAA general obligation bond dropping by 69 basis points in yield to 2.10% as of Wednesday from Jan. 2, according to Municipal Market Data's AAA scale.
This week's low volume has made yield even more scarce, traders said. Issuance is expected to total $2.5 billion, compared with $3.5 billion last week, according to The Bond Buyer and Ipreo.
"There's no other product out there, cash builds up with investors, and folks are thinking 'if we don't get bonds now they will even more expensive than this next week'," a second trader in Chicago said.
A trader in New York said primary institutional investors and asset managers are buying the bonds. He said that because it is a high yield, risky trade crossover buyers probably bought the bonds on the syndicate.
"At this point, I don't know if [the crossover buyers] would be willing to chase the levels," he said. "They may be better sellers at this point. Usually when you have a big rally after the bonds have priced those crossover buyers wait for levels to back up again."
The second trader in Chicago also noted that the Detroit Water and Sewage Department differs from the city itself because it hasn't declared bankruptcy.
"Their revenues are carved out," he said.
Detroit's Success Spurs Illinois Selling:
The success of the Detroit deal has also made investors more confident in how bonds from states and municipalities that have financial troubles will perform.
This can be seen in the Illinois general obligation bonds' recent trading, according to a third trader in Chicago. He pointed to the Illinois 5s of 2032 that were trading at 4.25% on Wednesday, the day after the Detroit bonds were priced. This is approximately 25 basis points lower than the 4.498% the bonds were trading at on May 1, according to data provided by Markit.
"Specifically, Illinois paper is trading tighter than it has been," he said. "The Detroit deal has made people more confident [in distressed municipalities]."
The markets' confidence in paper associated with Detroit and with Illinois is likely to continue through next week, when the Illinois Finance Authority is scheduled to issue $18.5 million and the Michigan Finance Authority is expected to sell $91.4 million, according to The Bond Buyer's 30-day visible calendar.
"The momentum from this week's Michigan Finance Authority deal should carry into next week," the second trader in Chicago said. "It's absolutely a borrowers' market, the market is outperforming credit right now."
Beyond Detroit
Yields for all municipal bonds strengthened across most of the curve on Thursday, according to MMD's triple-A scale. Yields fell by two basis points for bonds maturing in five to 10 years, by three basis points for 11 to 14 year maturities, and by four basis points for bonds maturing in 15 to 30 years.
The Treasury market also rallied with the 30-year falling by three basis points to 3.08%, and the 10-year by two basis points to 2.34%.
The first trader in Chicago attributed the Treasury market's strength to concern over geopolitical tensions in Russia and the Ukraine.
Money Market Funds:
Tax-exempt money market funds lost more than half of the previous week's inflows, as total net assets fell by $2.22 billion and settled at $257.04 billion in the week ended Aug. 25, according to The Money Fund Report, a service of iMoneyNet.com.
The outflows came on the heels of inflows of $1.05 billion in the week before.
The average, seven-day yield for the 418 weekly reporting tax-exempt funds was steady at 0.01%, while the average maturity was 35 days.
The 1,008 weekly reporting taxable money funds, meanwhile, grew by $15.87 billion to $2.369 trillion in the week ended Aug. 26, up from the $10.90 billion that arrived last week.
The average, seven-day yield for the taxable funds remained at 0.01%, while the average maturity remained at 43 days.
Overall, the combined total net assets of the 1,426 weekly reporting money market funds increased by $13.65 billion in the week ended Aug. 26 to $2.626 trillion, up from last week's $11.95 billion of inflows
