This week's primary calendar may be sprinkled with high-quality issuances, but none are big enough to move the Municipal Market Data triple-A scale, traders agreed.
The $345 million of Wake County, North Carolina general obligation public improvement issue that priced this morning was one such deals. The triple-A rated bonds priced right on top of Monday's MMD scale through its 10-year maturity, but weakened on durations from 2026 to 2034, according to a pricing wire provided by Ipreo.
Spreads on the 12- to 20-year maturities ranged from 15 to 37 basis points above MMD, leaving the market to question whether the long to intermediate end of the MMD curve may weaken thanks to Wake County's "scale moving name."
At the close of market, it seemed that MMD had been shielded from any impact from the deal. For its final read, MMD's triple-A 5% scale remained unchanged from Monday for all maturities while its 10-year benchmark closed four basis points weaker at 2.405%, according to data provided by TM3.
The Municipal Market Advisor's triple-A 5% echoed MMD sluggish sentiments, recording no yield changes on the two- and 30-year, while the 10-year weaken one basis point. The two-year closed at 0.30%, the 10-year at 2.12% and the 30-year closed at 3.28%, according to MMA.
Had the newly issued bonds been heavily traded on once the deal went live into the secondary market, traders agreed that the weakness in the intermediate to long end of the curve would have impacted the MMD scale. The activity would have overcome the deal's smaller size as it proliferated into the market.
RISING RATES
While the deal weakened on the long end, traders were confident the softening had nothing to do with the credit, but rather the looming threat of rising rates.
"[Wake County] is among the strongest economic bases in the state because of the research component attached to the saturation of universities in the area and the stability provided from its proximity to the state capital," a New York based trader said. The weakening "is not a reflection of credit quality, but rather demonstrates a fear of rising interest rates on the long end."
The weakness probably was intensified by an optional call in September 2024, which made the maturities beyond 10 years vulnerable, said a Midwest based trader.
"The longer dated non-call paper we're seeing to have a more difficult time in this market," the Midwest trader said. "A call is a bit of a defensive structure, you're protecting yourself against rising rates."
RALLY IN PUERTO RICO
The commonwealth of Puerto Rico extended a rally that began last Tuesday. Yields on the commonwealth's 8s in 2035 have tightened 39 basis points since that time to yield 8.93% in round lot trading on Tuesday from 9.32% on Aug. 12, according to data provided by Municipal Securities Rulemaking Board's disclosure website EMMA.
Investor confidence has been buoyed by an extension of Puerto Rico Electric Power Authority's letters of credit, provided by Citibank and Scotiabank, through the end of March 2015, giving PREPA flexibility to attempt to straighten out its finances.
However, some think the rally may be overdone, as a debt restructuring affecting PREPA bond holders is still seen as likely, even though the extension provides breathing room to make payments on the LOCs.
PREPA followed the commonwealth on Tuesday with prices strengthening to new highs, since crashing to the mid-30s earlier this year. The public corporation's 7s of 2043 climbed to 54.25 cents on the dollar from 47.45 last Wednesday, before the LOC announcement Because of the inevitable restructuring, traders refer to PREPA in terms of price, the best indicator of their eventual recovery rate.
The rest of the secondary market, however, was mixed on Tuesday and largely sluggish. Yields on Illinois State pension funding GOs 5.1s of 2033 weakened to 5.27% from 5.25% on Tuesday, while Golden State Tobacco 5s of 2033 strengthened to 6.93% from 6.94%, according to data provided by Markit.
Meanwhile, the Treasury market weakened slightly on Tuesday, with the yields on the two-year and 10-year each rising one basis point to 0.43% and 2.40% respectively. The 30-year rose three basis points to 3.22%.
