Market Post: Investors Turn to Miami-Dade for Yield

Yields strengthened on Miami-Dade County revenue 5s of 2043s, sold for Rickenbacker Causeway, Tuesday morning, when the maturity was one of the most actively traded in the secondary market.

Yields fell to a low of 4% from the high of 4.22% on Thursday when they were last traded, according to data provided by EMMA. A trader in New York said the triple-B bonds are appealing because they offer investors a bit of yield during a shortened holiday week when yield is difficult to find. The county sold the $31.6 million issuance last week.

Traders said the hunt for yield will continue this week even though municipal bonds are following Treasuries and weakening. They said yields have been driven down the past couple weeks and supply is scheduled to stay light, so even if spreads do widen, portfolio managers will still struggle to get yields on their portfolios.

"[The Miami-Dade County bonds] offer some spread, some extra yield to investors," a trader in Florida said. "As you can see over the last couple weeks we have seen a continued grind tighter in quality spreads. This signals demand for yield will continue, and triple-B especially in Florida, there is demand for it."

In August, the 10-year benchmark triple-A general obligation bond's yield fell by 20 basis points to 2.07%, according to Municipal Market Data. Volume is expected to be $2.27 billion this week, according to data provided by The Bond Buyer and Ipreo.

The Miami-Dade County bonds are also performing well because they appeal to a slightly different investor than Detroit water and sewer and Puerto Rico bonds, which also offer investors some yield.

"There is no headline risk or legacy issues to deal with [for Miami Dade County]," the trader in Florida said. "It is attractive to a client whose risk tolerance is maybe slipping from double-A, single-A to triple-B to pick up yield. Detroit or Puerto Rico are attractive to a much riskier buyer, who is willing to pick up more risk and do more homework."

He said even the insured Detroit water and sewer and Puerto Rico bonds attract buyers with more risk tolerance than Miami Dade County does.

"Detroit is still working out a lot of details, and same thing for Puerto Rico, despite insurance wrapped on them," he said. "The sales pitch to individual or professional investors would be on two different spectrums."

He said the reason long Miami-Dade County bonds are trading more actively has nothing to do with Miami-Dade County's name, but rather because investors are moving out further on the curve since the short end has become too expensive.

Yields for benchmark triple-A GOs fell 18 basis points to 1.97% for the nine-year maturity in August, while the two-year maturity dipped two basis points to 0.30% during the same period, according to Municipal Market Data.

"I think [the front end of the curve] trade is very crowded, and buyers are going to move out on the curve," the trader said. "I think investors will move to a combination of the middle and long end. Some of those investors will be purposely trying to move out or they will be forced to, to pick up additional yield."

Treasuries Sell Off, Dragging Munis with Them
The market experienced a slight bit of relief on the long end from those municipal bonds selling off slightly on Tuesday morning, following Treasuries.

Yields on bonds maturing from seven to 30-years rose by as much as two basis points, according to Municipal Market Data's triple-A scale.

The 30-year Treasury jumped by 10 basis points to 3.16%, the 10-year by eight basis points to 2.41%, and the two-year note by four basis points to 0.52%.

"Munis are following Treasuries again, if this continues through the week people may be able to buy bonds slightly cheaper," the trader in New York said.

The trader in Florida said Treasuries were selling off because market participants are back from vacation this week.

"Guys are coming back from holidays, there are fuller desks and people are taking advantage of Treasuries' very low yields," he said. "People are taking an opportunity to sell that."

He said the sell-off in Treasuries is likely exacerbated by the fact not a lot of negative headlines about the Ukraine, Iraq or Israel came out over the weekend.

"With those headlines limited, there is no reason for people to buy Treasuries until the next negative headline hits," he said.

The New York trader said the ISM Manufacturing Index's positive report released this morning may have pushed investors out of Treasuries.

The ISM manufacturing composite index rose 1.8 points to 57.1 in July, the best reading the index has shown since April 2011.

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