Market Close: Secondary Activity Continues to Follow Primary

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The week's heavy primary calendar is expected to be the main driver of secondary market activity, a trend witnessed in the municipal markets for several weeks now, traders said.

Monday's secondary activity was light as the market held its breath waiting for the week's heavy hitters — California and New York City — to price bonds later in the week. No deals over $100 million priced on Monday, but volume is expected to pick up, with over $7 billion scheduled to tap the market this week.

As the new deals enter the market, secondary trading of the outstanding debt of the same issuers can be expected to follow, said a New York-based trader. After nine months of inflows, portfolios have become saturated, making it necessary to make room for new deals by selling out of old positions. Often, fund managers simply sell older deals from issuers that are entering into the primary that week, the trader said.

Traders expected state of California and large New York issuers to be the most actively traded on the secondary market this week, as portfolio managers look to make room for the marquee deals.

Last week was no exception to that rule, as the state of Massachusetts picked up the largest number of trades across various tranches, according to data provided by Markit. Of the top 25 general obligation debt securities traded, Massachusetts accounted for 13, pulling in a total of 161 trades, according to Markit.

The activity was tied to the state's $880 million general obligation issuance that closed on Thursday after a three-day retail order period Sept. 15-17 and institutional pricing on Sept. 18, according to data provided by TM3.

Fitch Ratings and Standard & Poor's rate the bonds AA-plus, while Moody's Investors Service assigns an equivalent Aa1.

The flurry of activity probably came from portfolio managers selling the general obligation debt in order to make room to buy the new paper, said the trader.

State of California paper ranked a distant second on the list of last week's secondary market leaders, with four of its securities on the top-25 most activity traded general obligations, according to data provided by Markit. The securities totaled 72 separate block trades.

Monday's primary was light, but one of its largest movers was the Dormitory Authority of the State of New York, indicating funds are probably looking to make room for tomorrow's New York City sales tax asset revenue deals, according to a second New York-based trader.

DASNY's state sales tax revenue bonds 5s of 2043 strengthened Monday, falling to 3.40% in round-lot trades from 3.41%, according to data provided by Markit.

The commonwealth of Puerto Rico weakened on Monday, with its GO 5s of 2041 rising to 7.29% from 7.28% in round-lot trading.

Municipal scales were sluggish on Monday, waiting for the week's larger deals for directionality, traders said.

Bonds maturing between 2015 through 2022 were unchanged as debt maturing in 2023 strengthened one basis point, according to the Municipal Market Data triple-A 5% curve provided by TM3.

Bonds maturing in 2024 through 2044 tightened two basis points.

According to the Municipal Market Advisors' triple-A 5% scale, the yield on the two-year was unchanged from Friday's close at 0.31%, while the 10- and 30-year each strengthened one basis point.

The 10-year ended Monday at 2.21% while the 30-year closed at 3.34%.

Treasuries strengthened most dramatically on the front end Monday, in contrast to the muni scales.

Yields on the two-year note tightened five basis points from Friday's close to 0.54%, while the 10-year strengthened four basis points to 2.55%. The 30-year fell two basis points to 3.27%.

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