How the market reacts to this week's limited primary offerings will be pivotal to traders determining whether the market is due for a correction or if new lows in yield are here to stay for the short-term future.
An estimated $5.85 billion is predicted to hit the primary calendar this week, a 24% fall from last week's reported $7.69 billion, according to data collected by Ipreo LLC and The Bond Buyer. While volume is down, demand may be as well.
"The key is that last week's inflows were almost negative," said a New York-based trader. "We're concerned the market's run a long way. MMD has been adjusted and market feels okay but tentative."
Whether or not the market is due for a correction from the impressive rallies over the past few weeks will be determined by how the week's limited supply places, said the trader. If the deals struggle to sell out or have to widen spreads to attract buyers, it will signal to investors that scales probably see a pull back from October's tightening, the trader said.
"How supply is perceived this week and next week will be a period of caution and concern," said the New York trader. "We've run far and fast and might be ready for that correction."
NEW YORK OFF THE MAP
The week's largest deal will be off the table for most municipal investors, so that transaction may be a poor indicator of demand.
Nearly a fifth of the expected $5.85 billion in volume stems from a deal that typical municipal investors won't have access to - the Three World Trade Center Tower Project.
This week's $1.63 billion deal issued by the New York Liberty Development Corp. will providing financing for Manhattan's newest skyline installment, but will only be available to qualified investment buyers, according to bond documents. Priced by Goldman, Sachs & Co. the unrated deal will effectively exclude all retail ordering and more traditional municipal buyers. Excluding that deal, volume will be $4.23 billion for the week.
All three of the deal's tranches are expected to price Tuesday: the $1.080 billion Class One tranche maturing in 2044, the $300 million Class Two tranche maturing in 2041, and the $250 million 2044 Class Three tranche maturing in 2044, according to bond documents. The bonds are secured by a mortgage on the building, tenant leases and rents.
While the deal won't be a gauge of wider municipal interest because of its qualified investor letter requirement, it will give those who can buy something else: yield.
"There is a lot of attention and people are excited about it," said a second New York based source close to the situation. "Definitely high yield buyers both in the muni space and other asset classes will be interested in the deal. It's going to offer yield that is very difficult to achieve in the muni market right now for something that is triple tax exempt."
While few investors will be able to get involved, many will be watching the deal's pricing on Tuesday to see how price discovery pans out for the unrated deal.
"We'll be watching it from an arm's length because it's not open to the public," said the first New York based trader. "It's very intriguing and interesting, but there's not much we can do other than just watch and get price discovery."
The deal's liquidity in the secondary market will depend on whether it requires a "traveling letter," affirming that not only the primary but also all secondary market buyers are qualified investors.
If the deal doesn't require a traveling letter, the first trader expected it to be very liquid in secondary markets, whereas if it does require the letter it would be completely illiquid.
"If it requires a traveling letter then you take out retail in its entirety and it becomes a whole different animal and not one that's really based on municipal broad-based distribution," the first trader said.
SLIDING SCALES
The initial pricing, however, will be determined off of Monday's Municipal Market Data triple-A 5% scale, which tightened in the long end on Monday. Yields on bonds maturing between 2022 through 2044 fell two basis points, as yields on bonds maturing in 2020 and 2021 firmed one basis points, according to MMD data provided by TM3. Yields on bonds maturing in 2015, and 2017 through 2019 were unchanged as those maturing in 2016 rose two basis points.
Treasuries tightened on Monday as well, with yields on the two-year and 30-year falling two basis points each to 0.39% and 3.03%, respectively, compared to Friday's market close. Yields on the 10-year fell three basis points to 2.26% from Friday's market close of 2.29%.
