After setting record lows, yields on the newly issued Texas short-term notes continued to fall in secondary trading, demonstrating that interest in the short-end of the yield curve has only continued to strengthen.
The State of Texas issued its annual tax anticipation revenue notes, or TRANs, last Tuesday and saw investors pile into the one-year maturity bonds, driving the net interest rate down to 0.1326%, the lowest borrowing cost since the state began issuing the bonds in 1987. The deal was also more than three times oversubscribed, receiving $19.6 billion orders for the $5.4 available notes, as previously reported.
After popularity in the primary, traders noted on Tuesday that how the debt gets redeployed in the secondary would be a litmus test for market sentiment towards threats of rising interest rates.
Those traders had their suspicions confirmed when yields on the bonds were driven down even further during secondary trading during the back half of the week, getting as low as 0.125% on Thursday afternoon, according the Municipal Securities Rulemaking Board's disclosure website, EMMA.
"The deal's initial pricing was incredibly low to begin with, but the trading shows you how strong the desire is to have a way to wait and see," said a New York based trader.
Trading volume on the tranche was particularly heavy as well. Wednesday's market saw $55 million of the TRANs trading, while volumes cooled on Thursday and Friday, with $16 million and $5 million traded respectively as of noon on Friday, according to EMMA.
Further contractions to record-low yields highlight the market's desperation for protection, which isn't anticipated to fade soon, traders said. Texas' continued strength throughout the week will be a benchmark for other short-term duration bonds issued in the near-term, according to one New York based trader.
Once a clearer picture of the interest rate environment emerges, the trader expected a mass secondary exodus out of the tranche.
"You're probably seeing a lot of transient buyers," the trader said. "It'll be interesting how many of the original buyers take the notes to maturity next year."
Those involved in the deal said the interest was different than in past years when the TRANs had been issued. As price discovery have evaporated with the whittling supply environment of 2014, Texas multi-billion deal offered the market a luxury it hasn't been afforded: liquidity.
Because of the oversubscription, the issuance was probably also used as an alternative to a money market fund, the trader said. While both options offer a short-term vehicle for funds, the TRANs has the advantage of convenience, as a bond is easier to trade than a money market fund to pull out of, the trader said.
The Municipal Market Advisor's triple-A 5% close Friday afternoon at 0.14%, while Municipal Market Data's same scale closed tighter at 0.12%, in line with the TRANs secondary trading yields at 0.12%.
The rest of the curve remained flat on Friday, with maturities up to 2020 steady and bond maturing in 2021 through 2044 firmed up to one basis point, according to MMD's triple-A 5% scale. The MMA triple-A 5% scale was flat across the curve on Friday.
Treasury yields continued strengthening on Friday, with the two-year note falling two basis points to 0.48%, the 10-year shrinking one basis point to 2.33% and the 30-year falling two basis points to 3.06%.
