The current low-yield environment makes it the optimal time to purchase triple-A rated bonds, traders said.
Even after a sell-off in the middle and long end of the curve on Thursday, they said spreads have compressed so much that the once expensive triple-A deals now don't look so rich compared with the single- and double-A issuances that are coming at increasingly aggressive levels.
A trader in Virginia pointed to the success of the triple-A rated $157.73 million Connecticut Housing Finance Authority deal as an example of the market's demand for triple-A paper. He said his group put in for the deal and only got a fifth of what it asked for, and certain parts of the curve were five to seven times oversubscribed.
"Spreads have compressed so much on a risk adjusted basis it makes sense to buy higher quality," he said. "The appetite for higher rated paper has gone up."
He said some triple-A housing and hospital deals offer more spread than a lot of single A and double A offerings.
A trader in Chicago agreed with the strategy of buying triple-A paper in the primary now, saying that with yield compression like this, spreads are closer to normal for all paper.
"Basically when the market does sell off and everything widens out a bit, you want to hold as much triple-A as you can to hedge against that volatility," a trader in New York said.
The Connecticut Housing Finance Authority came to market with a two-part sale of mortgage finance bonds, including a $96.2 million tax-free portion and a $61.5 million section subject to the alternative minimum tax. Morgan Stanley priced both parts at par.
The $96.2 million segment had a 2.85% coupon with the 2026 maturity to a 3.40% coupon to the 2036 maturity. The final 2044 maturity was not priced at par, and had a yield of 1.40% with a 4% coupon. There are sinking funds on term bonds in 2029, 2034, 2036, and 2044.
The bonds can be called at par in 2023.
The AMT $61.5 million par had a coupon of 0.20% on its first 2015 maturity, and a coupon of 3.15% on its final 2026 maturity. These bonds also contain an optional par call in 2023.
Traders also pointed to the $103 million Georgia Housing and Finance Authority deal Bank of America Merrill Lynch won the bid for on Thursday as an example of an opportunity to purchase triple-A paper, since the bonds were also priced at par to the sell-off.
The $76.7 million section of the three-part deal had a 3% coupon on its earliest 2029 maturity and a 3.65% coupon on its final 2044 bonds. The bonds have an optional par call in 2024.
There are sinking funds of term bonds in 2029, 2034, 2039, and 2044.
The $3.5 million portion of the issuance had a 0.15% coupon on the first 2015 maturity and a 1.15% coupon on its final 2018 maturity, and no optional call.
The $22.8 million part contains amt bonds, with a 0.20% coupon on the earliest 2015 maturity, and a 3.10% coupon on the last 2025 maturity.Standard & Poor's rated the bonds triple-A.
Elsewhere in the primary market the single-A rated California State and Public Works Board's three-part deal was well received, traders said.
The $107.7 million of lease revenue bonds were priced with yields ranging from 0.18% with a 3% coupon in 2015 to 2.68% with a 5% coupon in 2029.
The $81.38 million section was priced with yields from 0.65% with a 2% coupon in 2017 to 3.27% with a 5% coupon in 2029. Both of these parts have an optional par call in 2024.
The $64.5 million lease revenue refunding bonds carried yields from 0.18% with a 3% coupon in 2015 to 1.20% with a 5% coupon in 2019. These bonds have no optional call.
The deal was rated A1 by Moody's Investors Service, and A-minus by S&P and Fitch Ratings. Barclays Capital was the lead underwriter.
The $288.4 million School Board of Miami-Dade County certificates of participation were priced by JP Morgan with yields from 0.76% with a 4% coupon in 2017 to 3.16% with a 5% coupon in 2031. There is an optional call in 2024 at par, and the bonds earned ratings of A1 from Moody's and A from S&P.
Yields rose in the intermediate to long ends of the municipal bond curve on Thursday, with yields rising four basis points for bonds maturing in 12 to 30 years, according to Municipal Market Data's triple-A scale.
Yields increased two basis points for bonds maturing in 10 to 11 years , and one basis points for the nine year maturity. Bonds maturing in four to five years strengthened by one basis point. The rest of the curve held steady.
"We've had a pretty good run, and now there is some volatility," the trader in Chicago said. "We're not seeing panic, it's just the market disgusting the fact yields have dropped 20 or so basis points."
After a week of inflows, outflows returned to tax-exempt money market funds in the week ended Oct. 13 as $725.6 million trickled out the of industry and total net assets settled at $256.07 billion.
The losses were less than the $4.06 billion in new cash that arrived in the prior week, the biggest weekly total since July 7.
The average seven day yield for the 409 weekly reporting tax-exempt money funds was unchanged at 0.01%, while the average maturity remained at 42 days.
The total net assets of the 1,003 weekly reporting taxable money market funds, meanwhile, decreased by $14.12 billion to $2.382 trillion, which almost erased last week's inflow of $14.29 billion.
The average seven day yield for the taxable funds remained at 0.01%, while the average maturity remained at 46 days.
Overall, the combined 1,412 weekly reporting money market funds reported losses of $14.84 billion as total net assets declined to $2.638 billion in the week ended Oct. 14. The losses reversed inflows of $18.35 billion the previous week.
