Traders clamored over short-term California notes during morning trading on Thursday, demonstrating the market's continued demand for interest rate increase hedging strategies.
The state of California issued $2.8 billion of revenue anticipation notes on Wednesday. Maturing in June 2015, the deal was well received, pricing aggressively at a net interest cost of 0.107% on a 1.5% coupon in 2015, according to data provided by Municipal Securities Rulemaking Board's disclosure website, EMMA.
The borrowing cost was a record-low yield for the state's short-term offerings, according to the state treasurer's office. The state set its previous low last year with its $5.5 billion RAN sale, which priced at 0.21% for a May 2014 maturity and 0.23% for a June 2014 maturity.
The interest continued into Thursday's morning trading session, with 58 trades totaling $216.9 million recorded as of noon, ET, Thursday, according to EMMA. Yields in the secondary activity ranged from 0.124% to 0.09%, showing that traders are willing to pay a premium to ensure they will be protected from potential Federal Reserve interest rate changes, said a New York based trader.
"With the FOMC optimism permeating through the market, it's difficult to take a strong position besides the defensive one," said the trader. "Even if you have to pay a little extra, it's better than getting burnt."
The deal's reception and subsequent secondary activity is similar to that of this year's Texas annual tax and revenue anticipation notes, or TRANs. Issued in mid-August, the $5.4 billion note deal was more than three times oversubscribed, picking up $19.6 billion orders.
The popularity allowed the deal to be priced at its lowest borrowing cost since the state began issuing the annual notes -0.1326%, as previously reported by The Bond Buyer. Yields were driven down even further in the secondary markets, getting as low as 0.119% on August 26th, according to EMMA.
Since issuance, the bonds have remained liquid in the secondary, with large volume days posted regularly. Wednesday's trading session recorded $10 million in totally trading, down from a high of $582 million on September 4th, according to EMMA.
The Treasury market weakened slightly from its morning trading session, with the 10- and 30-year each rising one basis point to 2.52% and 3.26%, respectively. The two-year note remained steady at 0.54%.
The municipal market was largely steady across the curve, reporting weakness up to one basis point for bond maturing between 2021 through 2023 and strengthening up to one basis point for bonds maturing between 2037 and 2044.
