Contrary to conventional economic theory, extra supply of municipals this week has created increased demand and tighter rates, agreed traders. To demonstrate the increased demand, traders pointed to the spread difference between the city of Chicago's two separate deals.
The city issued two tranches of second lien wastewater transmission revenue project bonds, one last week on Sept. 10 and one this week, which issued its final pricing today. The identical credits priced with different spreads to the Municipal Market Data triple-A 5% curve, noted a trader based in New York, pointing to the dramatically different primary market environments.
"After a period of very little supply, new issue supply actually rallies the market," said the trader. "It forces the dollars to get put to work and make investors commit money, even though it goes against elementary economic theory."
This week's supply market has buoyed investor interest, with the largest calendar expected in three months, as previously reported. This week's expected $6.02 billion is almost double last week's $3.46 billion, giving municipal bond buyers more choices.
Rather than swamping demand and pushing yields higher, the increased supply drew funds into the market, tightening borrowing rates and yields even further, said traders. As example of the strength, this week's city of Chicago deal priced with an even slimmer spread to last week's nearly identical deal.
The $292.405 million wastewater negotiated deal was brought by Bank of America Merrill Lynch Tuesday and received intense demand, quickly becoming three times oversubscribed in many maturities, with particular interest in the 2034 to 2039 range, as previously reported. It was repriced Wednesday at yields ranging from 0.64% on a 5% coupon in 2017 to 3.92% on a 5% coupon in 2044, according to data provided by Ipreo.
The pricing represented a slim spread to the MMD triple-A 5% scale, especially for a deal rated A3 by Moody's Investors Service and AA-minus by Standard & Poor's. On the long end of the curve, the 20 year bond priced 83 basis points over the curve, the 25 year priced 75 basis point above the curve and the 30 year priced 72 basis points above the curve, according to data provided by Ipreo and TM3.
The deal was notably cheaper than the nearly identical $371.05 million wastewater deal that had priced last week, the New York based trader said. Last week's deal spread was 93 basis points above the MMD curve on the 20-year, 88 basis point above on the 25 year and 98 basis point above on the 30-year, according to data provided by Ipreo and TM3.
Even though last week's supply environment was significantly less than this week's, demand for this week's deals has been more tangible, the trader said.
"Demand ran towards the supply," the trader said. "[This week we're] in a market that has more options and supply, yet inflows are coming in and they're looking at a product that they haven't seen in a while."
FOMC SHRUG
The muni market shrugged off today's biggest economic headline, from the Federal Open Market Committee.
A bulk of the news concerned the Federal Reserve officials raising their median estimate for the federal funds rate at the end of 2015 to 1.375%, compared with 1.125% in June - an action that has little impact on the municipal market, agreed traders.
"FOMC doesn't have a reachable effect on the market right now," said a second New York based trader.
The rate will be at 3.75% at the end of 2017, the Fed predicted Wednesday for the first time, as it included that year in its Summary of Economic Projections. That is the same as Fed officials' longer-run estimate. The median estimate in June for the long-run fed funds rate was also 3.75%.
Earlier in the week traders were focused on how the FOMC meeting results would affect rate volatility, trader said. The concern began on Monday and was felt through the week's tight pricing on primary market deals, said the second New York trader.
"By the time the results were released, traders were just waiting to see if they were right or wrong," the trader said. "It didn't end up introducing any rate volatility, so the market reverted back to its reliance on technicals to direct pricing."
As a result, municipal scales were largely flat on Wednesday. The MMD triple-A 5% curve closed completely unchanged on Wednesday, according to data provided by TM3. Meanwhile the Municipal Market Advisors triple-A 5% scale reported little change, with the two-year and 10-year flat at 0.31% and 2.22% respectively. The 30-year closed one basis point stronger at 3.36%.
The yield on the two-year Treasury fell one basis point to 0.55% . The 10-year yield fell two basis points to 2.60% and the 30-year fell one basis point to 3.36%.
