Market Close: Short End Popularity Not Enough to Overcome Technicals

bb082214mun.jpg

The market's reaction to the prospect of rising interest rates was mixed on Thursday, with aggressive short end primary bidding as the municipal scale remained mostly unchanged.

Spooked by Wednesday's release of the Federal Open Market Committee minutes that indicate a near-term increase in interest rates, investors bid aggressively for shorter maturities of Thursday's San Diego Transportation deal, looking to protect themselves.

"It's not irrational to want to take some chips off the table right now after the market has been positive for eight straight months," said a New York based trader. "It's the first time in my career I've seen such consistent positivity in the municipal market."

The $350 million Regional Transportation Commission deal was priced to yield between 0.41% on a 5% coupon in 2017 to 2.14% on a 5% coupon in 2024, as much as 17 basis point below Wednesday's Municipal Market Data triple-A 5% curve.

However, maturities after the optional call in 2024 priced with a positive spread to MMD. After the call, the deal was priced to yield between 2.28% on a 5% coupon in 2025 to 3.33% on a 5% coupon in 2048, according to data provided by Ipreo.

With the threat of rising interest rates, investors have flocked to structures that provide protection in the short end, like San Diego's call option, said a New York based trader. The structure allows funds to safely park their money as they wait to see what the interest rate environment will look like.

The short end of San Diego's deal was so popular among investors that nearly all tranches up to the 10-year picked up bids in the secondary market to drive down yields even further, according to the Municipal Securities Rulemaking Board's disclosure website EMMA. Yields on the 5s of 2019 fell to 0.73% from the initial offering yield of 0.94%, according to EMMA.

TECHNICALS REMAIN STRONG

Even with the aggressive bidding in the primary market and secondary trading, the San Diego deal was unable to tip the MMD triple-A 5% scale. Given the lack of issuance this week, demand outpaced supply too much for the transportation deal to make a dent, market participants agreed.

The market strengthened only on the long end of the curve, according to MMD's triple-A 5% sale. Bonds maturing through 2029 were unchanged, while those maturing in 2030 through 2037 tightened one basis point, and bonds maturing between 2038 and 2044 picked up a two basis point contraction.

The Municipal Market Advisors' triple-A 5% scale reported even less improvement. According to MMA, the two- and 10-year both remained unchanged at 0.30% and 2.14% respectively, while the 30-year fell one basis point to 3.30%.

The Treasury market, however, remained sensitive on the short end to the news of potentially rising interest rates. The 2-year remained unchanged at 0.48% after weakening on Wednesday in response to the FOMC minutes. The 10- and 30-year, which are less sensitive to the rate changes, weakened slightly. The 10-year rose two basis points to 2.41% while the 30-year rose one basis point to 3.19%.

MUNI MONEY MARKET FUNDS GROW

Tax-exempt money market funds grew by $1.05 billion to $259.26 billion in the week ended Aug. 18, according to The Money Fund Report, a service of iMoneynet.com.

The inflows followed the departure of $310 million last week and $2.68 billion the week before.

The average, seven-day yield for the 418 weekly reporting tax-exempt money market funds remained at 0.01%, while the average maturity held steady at 35 days.

The total net assets of the 1,010 weekly reporting taxable money funds grew by $10.90 billion to $2.353 trillion, up from the $10.50 billion that arrived last week.

The average, seven day yield for the taxable funds held at 0.01%, while the average maturity remained at 43 days.

The combined total net assets of the 1,428 weekly reporting money market funds increased by $11.95 billion to $2.612 trillion in the week ended Aug. 19, which is up from inflows of $10 billion in the prior week and accounts for the fourth consecutive week of inflow activity among all funds.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER