Friday's quiet primary ended a sleepy week that left investors looking under every rock and finding little in the way of supply, let alone yield.
With just $2.53 million on the calendar for potential sale for the week starting Aug. 25, no relief is in sight for investors on the hunt. Coupled with unrelenting inflows, the imbalance between supply and demand has created an environment with spreads so tight, yields between sectors have been virtually nonexistent, said a trader based in New York.
Demonstrative of the non-distinguishing spread environment, The Washington Health Care Facilities Authority deal came cheap on Friday morning, pricing in line with a general obligation deal despite being a hospital system and clearly within the healthcare sector.
Comparing the deal to Municipal Market Data's triple-A 5% scale, a $67.245 million term bond was priced to yield 3.65% on a 5% coupon in 2044, just 29 basis points above double-A rated GO bond, and 12 basis point below the scale's single-A bond scale, according to data provided by TM3.
Along with Puerto Rico, the healthcare sector normally occupies the most yield rich corner of the municipal market, making the deal's close pricing to the double-A general obligation scale atestament to the market's starvation for yield. A hospital system deal like Washington's is based on the securitization of future revenues, a far less safe promise of debt service than the unlimited taxing power a general obligation bond typically carries, the New York trader said.
Positive performance for eight straight months has helped the municipal asset class to maintain its allure among investors, with money flowing in nearly every week in 2014, said a second New York based trader.
Inflows contracted 15% to $448 million in the week ending Aug. 20 from $648 million the week before, according to Lipper FMI data. Assets of all weekly reporting municipal funds increased to $297.2 billion from $296.0 billion. The four-week moving average inflow fell to $383 million from $442 million.
Consistent inflows aside, the balance of supply and demand alone is not solely to blame for the tightening of spreads. Record low benchmark interest rates have been equally to blame, said the first New York based trader. Once rates increase, the trader predicted that spreads would balloon out to provide the normal premiums to investors willing to takes risks outsides of GO bonds.
Wednesday afternoon the Federal Open Market Exchange minutes revealed that the economic outlook has rebounded better than anticipated, leaving the Federal Reserve to contemplate raising rate sooner than previously aniticpated.
Municipal investors responded to that news by clamoring over the short end of deals, bidding on Thursday's San Diego Transportation deal 12 to 17 basis points cheaper than the previous day's triple-A MMD scale ahead of the optional call in 2024.
The markethas mostly shrugged off the news. Since Tuesday's market close, the day before the FOMC news, the MMD triple-A 5% scale's two-year note has only strengthened two basis points to 0.30% as of market close on Friday. The 10-year weakened two basis points to 2.14% and the 30-year strengthened one basis point to 3.12%.
The Municipal Market Advisor triple-A 5% scale on Friday remained unchanged from Thursday in the two-year and 30-year, while the 10-year weakened one basis point. The two-year closed at 0.30%, the 10-year at 2.13% and the 30-year at 3.30%.
Responding to the FOMC announcement, the Treasury market's two-year note weakened three basis points to 0.49% on Friday from closing Tuesday at 0.46%. In the same time period, the 10-year remained steady at 2.40% and the 30-year has strengthened six basis points to 3.15% on Friday from 3.21% at Tuesday's close.
