New issuance will come to a screeching halt this week and next, forcing investors to look outside their comfort zone to places like healthcare and Puerto Rico.
Monday's Robert Woods Johnson University Hospital deal demonstrated the market's willingness to overlook sector specific risk, as the deal was priced like similarly rated general obligation credit in the long end of the curve. Traders overlooked duration and credit risk just to get fresh debt in their portfolios, a Midwest based trader said.
"Pre-Labor Day week is extremely low supply, so it's hard to get a good situation," said the trader. "No one is thrilled about these levels, but as time goes by and things don't improve they're forced to buy."
The $56.235 million deal issued by the New Jersey Health care Facilities Financing Authority was priced to yield 3.50% on a 5% coupon in 2032 to 3.76% on a 5% coupon in 2043, according to data provided by Ipreo. The negotiated hospital issue was rated A2 by Moody's Investors Services and A by Standard & Poor's and underwritten by JPMorgan Securities.
While the bond was a hospital revenue deal, it priced in line with that of a single-A general obligation credit, according to the Municipal Market Data 5% scale. The 2032, 2033, and 2034 term bonds were priced between seven and eight basis points above MMD's single-A 5% scale, while the 2039 and 2043 year bonds were priced on top of it, at 3.71% and 3.76% respectively.
Spread compression and the elimination of sector specific spread differentiation is often a symptom of a supply starved market. Last week, Friday's Washington Health Care Facilities Authority deal priced in line with that of the MMD single-A 5% scale as well.
In an even riskier category, investors have also warmed up to senior living deals, a sector notorious for its high default rate after the housing market collapse. The Lutheran Village at Miller's Grant came to market on Friday afternoon priced to yield 6.3% on a 6.250% coupon in 2044, according to data provided by Bloomberg.
"It's an amazing cost of capital, especially considering its loose covenant package," the Midwest trader said.
The trader said similar deals that came to market in 2013 and even early in 2014 were much more expensive for the borrower, closer to a 7% coupon. The covenant package wasn't appealing to some investors, making the deal even more attractive from the borrower's perspective, the trader added.
"We thought there were a few holes, we would have wanted to see a stronger liquidity support agreement than they were willing to offer," said the trader. "It was still completely bought though, so some people were fine with it."
CALIFORNIA AND PUERTO RICO TOP TRADES
Secondary markets have echoed the primary's stagnant behavior in recent weeks, with last week being the slowest non-holiday week for the municipal market so far in 2014, according to Municipal Market Advisor's Weekly Outlook. Without a healthy primary's byproduct of active price discovery, traders have been reluctant to place bids in the secondary because they are unsure what accurate scales look like, said a New York based trader.
Last week's most actively traded GO credit was a toss up between California State and, unsurprisingly, the commonwealth of Puerto Rico, according to data provided by Markit. Various California State GOs accounted for eight of the top 25 tranches in terms of number of trades with maturities ranging from 2022 to 2043, according to Markit.
"It a matter of techincals," said the New York trader, explaining California's popularity. "That state's issuance has been down, but that doesn't mean that investors still don't need it."
Between the eight tranches, the Golden State was responsible for 98 trades last week.
Topping the list, Puerto Rico's 8s of 2035 were accountable for the most GO trades last week, with 59 separate transactions, according to Markit.
Most significantly, prices on the GO rose back up to 93 - the bond's original offering price. Yields on the 8s of 2035 fell as low as 8.683% during trading on Friday, according to the Municipal Securities Rulemaking Board's disclosure website, EMMA. The strong bids for the paper also are a testament to the investors hunt for yield, said a Midwest based trader.
"[Bidding on Puerto Rico's GO] shows you just how strong the bid for yield is right now," said the trader.
LIGHT SECONDARY MARKETS
Monday's market opened the week light, but strong, with yields inching lower in secondary trading, according to data provided by Markit.
Golden State Tobacco 5s in 2033 dropped to 6.93% from 6.95%, while Puerto Rico public improvement 5s in 2041 fell to 7.44% from 7.45%, according to Markit.
Reluctant to shift considerable in such a light market, the Municipal Market Data triple-A 5% remained unchanged throughout the day on Monday. All maturities held steady at their levels from Friday, while the 10-year benchmark closed at 2.390%, slightly strong from Friday's 2.403%, according to TM3.
Municipal Market Advisor's triple-A 5% scale was also sluggish on Monday. The two- and 10-year held steady at 0.30% and 2.13%, respectively, while the 30-year slipped one basis point to 3.29%, according to MMA.
In the Treasury markets, the two-year softened one basis point to 0.50% from 0.49% on Friday' market close. The 10- and 30-year each tightened one basis point to 2.39% and 3.14% respectively from Friday's close.
