Market Post: San Diego Short End Tightens Up

Anxious to hedge themselves against rising rates, the market aggressively pursued the San Diego Transportation deal that priced Thursday morning, allowed for a reprice to make the spreads in the short end even tighter.

The Southern California town's Regional Transportation Commission brought $350 million to the negotiated markets on Thursday with Citigroup as the underwriter. Holding a triple-A rating from Standard & Poor's and Fitch Ratings, the market still clamored over the small yields, some of which were even tighter than Municipal Market Data's triple-A 5% scale.

The deal was priced to yield 0.24% on a 3% coupon in 2016 to 3.33% on a 5% coupon in 2048, according data provided by Ipreo. Wednesday's MMD scale had yields ranging from 0.30% on a 5% coupon in 2016 to 3.15% on a 5% coupon in 2044, according to data provided by TM3.

The deal features an optional call in April 2024, explaining the especially tight pricing up to the 10-year maturity, said a Midwest based trader. The optional call is often thought of as a defensive structure to hedge an investor against rising rates, added the trader. After Wednesday's FOMC minutes suggested rates may be rising sooner than previously anticipated, if the economy improves quicker, the trader was not surprised by the intense popularity of the maturities ahead of the call.

San Diego's spreads to MMD were the tightest in maturities ranging from 2017 to 2021 where yields were between 12 and 17 basis point lower than Wednesday's MMD triple-A 5% scale.

The deal's small size may prevent the aggressive pricing from impacted today's MMD scale, said the trader. If the newly issued bonds trade heavily in the secondary market, however, the short end's strength will likely tighten the MMD scale. The activity would overcome the deal's smaller size as it would proliferate through the market.

So far on the Thursday the MMD scale was mixed. Bond maturing between 2015 and 2020 and 2025 through 2029 were steady, as those maturing 2021 through 2024 weakened up to one basis point. Meanwhile, bonds maturing between 2030 and 2044 strengthened up to one basis point.

The Treasury market strengthened modestly after reacting strongly on Wednesday to the FOMC minutes. The two-year note fell one basis point to 0.47% while the 10- and 30-year strengthened two basis points each to 2.41% and 3.20% respectively.

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