Sentiment in the primary market was mixed this week, leaving an unclear picture of how traders view the interest rate environment and where they think it will head. Between a highly popular short term California deal and a century bond, the market received mixed signals on what to expect this fall.
Continuing the theme of uncertainty surrounding rising interest rates, traders piled into Wednesday's State of California revenue anticipation notes maturing in June 2015. The deal was five times oversubscribed, and the popularity allowed the$2.8 billion deal to be priced aggressively, at a record low 0.107%. Yields strengthened even further in secondary trading on Thursday, getting as low as 0.09%, according to data provided by Municipal Securities Rulemaking Board's disclosure website EMMA.
Traders stalking the short end of the curve probably found the pattern familiar; just weeks ago the State of Texas netted record low yields on its tax revenue anticipation note deal thanks to oversubscription. Yields on the Texas deal tightened in the secondary, just like California's.
The continued interest in short term liquid debt instruments both in the primary and secondary indicate that the market has not made up its mind regarding predictions for interest rates, and instead are more in favor of taking a hedging approach. Traders said both deals attracted l buyers outside of the usual money market funds, as institutional buyers of longer duration bonds hopped in, weathering the uncertainty until a clearer picture emerges.
An explanation of the interest in Cleveland Clinic's century bond, however, eluded traders. As the popularity of shorted durations signaled uncertainty, investors also jumped into what could be thought of as the ultimate indicator of certainty: a century bond.
Even with the market demonstrating a "wait and see" attitude towards interest rates, Barclays managed to place a $400 million century bond for the Cleveland Clinic Health System on Thursday afternoon, a maturity never before used in non-profit healthcare financing. The deal was priced to yield 4.838% on a 5% coupon in 2114, a 170 point spread to Wednesday's Municipal Market Data's triple-A 5% scale.
"Nothing says optimism like a century bond," said a Midwest trader. "Optimism or municipal bubble, depending on which side of the table you're on."
Amid mixed signals, some traders said it was difficult to gauge the market as a whole.
"It's hard to get a solid litmus test as to what's really going on," a Southwest based trader said.
The Treasury market weakened on Friday in the long to intermediate ends of the curve. The 10- and 30-year both rose seven basis point to 2.54% and 3.34%, respectively, while the two-year note fell two basis points to 0.56 compared to Thursday's market close.
Following Treasuries, the municipal market echoed weakness on Friday with increasing degree along the curve, according to the MMD triple-A 5% scale. The two-year note held steady at 0.32%, while the 10-year and 30-year weakened three and four basis points respectively to 2.26% and 3.20, according to the MMD scale.
The Municipal Market Advisors's triple-A 5% scale reported similar softening, with the two-year unchanged at 0.31%, the 10-year up three basis points to 2.22% and the 30-year up four basis points to 3.37%.
