Market Post: Housing Bonds Offer Investors Spread

Investors are buying housing bonds in the secondary because they are performing well and offer attractive spreads, according to market participants.

Housing bonds have experienced an overall yield concession this year, according to a trader in California.

A trader in Virginia pointed to the Georgia Housing and Finance Authority's single family mortgage 3.2s in 2023 as a benchmark. Yields on the bonds have fallen to 2.75% on July 22 from 3.28% when they traded in February 2012.

"There are some nice housing pieces we've seen, it's one of the only sectors in munis where you can still find some spread," the trader said. "We have been pretty active in some secondary housing names."

He said that his group is looking at housing names in Georgia, North Carolina, New York and Florida.

"[Housing] is a sector where there is still a little bit of value," he said. "That and healthcare, especially housing now because larger national healthcare names are trading super tight."

Housing bonds are attractive because they tend to lag rallies and are more defensive in down markets, the trader in California said.

"There's been a big move to lower-rated housings because they do not lockstep with any rate move," the California trader said. "When looking for spread products people tend to focus more on housings during a rally."

Municipal bond yields fell across the curve on Wednesday morning, dropping as much as two basis points for bonds maturing in three to five years, and by two to four basis points for bonds maturing in six to 12 years, according to Municipal Market Data's triple-A scale. Bonds maturing in 13 to 30 years yields declined from one to three basis points.

This is the seventh straight day munis have rallied, according to Municipal Market Data's triple-A scale.

In the primary market the state of Maryland is expected to auction a two-part deal totaling $779.7 million of general obligation bonds in the competitive market Wednesday, the largest deal of the week.

The deal has the potential to move yields on the Municipal Market Data's triple-A scale lower if it's bid on aggressively, market participants in New York have said.

"There's no mystery with Maryland; it's a good name deal," a trader in Florida said. "It'll probably be a couple of basis points off the scale."

Citigroup held a retail order period for $100 million of Maryland GOs on Monday in the negotiated market. The deal was downsized to $50.4 million on Wednesday upon entering its institutional period.

"I would imagine it is going very well," the trader in Virginia said. "It's still in middle of order period, we're seeing a bunch of scales, as aggressive as you would expect. I would imagine it fares pretty well [in its institutional sale]." The trader said Maryland supply has been very low for a long time, and the he hopes to buy and diversify holdings.

Yields ranged from 0.56% with a 2% coupon in 2017 to 1.49% with a 5% coupon in 2020. The deals are rated Aaa by Moody's Investors Service, and AAA by both Standard & Poor's and Fitch ratings.

"There are a bunch of different scales, not all are structured that way," the trader in Virginia said. "Because its competitive UBS is involved, Citibank is involved, all the normal players are in this thing. It's hard to say anything about structure at this point could wind up with some five handles at the front end."

In the negotiated market, Citigroup will issue $192 million of East Baton Rouge Sewerage Commission LIBOR floating rate revenue bonds.

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