Municipal bond investors will be adopting a modified barbell strategy when looking at this week's upcoming deals, traders said.
Primary issuance is expected to rise to $5.5 billion this week, up 23% from last week's $4.493 billion, with taxable issuance dominating some of the larger deals, like the $750 million Dignity Health deal, according to data from TM3 and The Bond Buyer. About $4 billion of tax-exempt debt is anticipated.
Based on last week's secondary market trading, market participants expect that the new issues, particularly the tax-exempt offerings, will be popular, with particular interest in the short and long end of the curve, as investors take what is often referred to as a "barbell strategy." However, unlike traditional barbell buying that prioritizes zero to two year and 10- to 15-year durations, the focus has been pushed further along the maturity schedule, said a New York based trader. Instead, the 10-year range has been particularly popular along with the 30-year end of the curve, said the trader.
"I like to call it Barbell 2.0," the trader said.
That trend was particularly noticeable in last week's secondary trading activity, where traders pointed to as a way of indicating future primary results. Traders argue that secondary activity has been largely dominated by the primary calendar, with portfolio managers only making large position changes in order to make room for incoming deals.
"By that logic, if you saw a lot of activity in, say, the 10-year range last week, the 10-year range in the primary will probably be interesting this week," said a Southwest based trader.
Looking at last week's trading data, the 10- to 15-year range was the most active, along with the 35- to 40-year range, showing shifted barbell focus, or "Barbell 2.0" as the one trader referred to it as. The trades were collected from the top 25 most actively traded general obligation, revenue and taxable credits from last week, according to Markit.
The duration interest has shifted outward because the traditional front end of the strategy, the zero to two year range, has already been over valued thanks to scares of rising interest rates, said both traders. Unsure of the time frame that the Federal Reserve has on rising rates, some investors have piled into short term deals, giving traders flexibility if and when more clarity emerges. That has allowed for some of the cheapest borrowing costs for municipalities, notably the $5.4 billion Texas tax revenue anticipation note in late August and the $2.8 billion California revenue anticipation note in early September.
"With the [Federal Open Market Committee] optimism permeating through the market, it's difficult to take a strong position besides the defensive one," said a third trader. "Even if you have to pay a little extra, it's better than getting burnt."
In the meantime, last week's firm tone in the market is expected to continue, promising tight spreads and low rates, traders said. Municipal scales have been on a multi-week rally even as supply has picked up. The Municipal Market Data triple-A 5% scale remained mostly unchanged on Monday, as investors waited for the week's upcoming deals to provide directionality, said traders. Yields on bonds maturing between 2015 through 2037 were unchanged as those maturing between 2038 and 2044 strengthened one basis point, according to data provided by TM3. The two-year closed Monday evening at 0.37%, the 10-year at 2.12% and the 30-year at 3.03%, according to MMD's triple-A 5% curve provided by TM3.
Much of the strength has stemmed from the tightening treasury market. Treasuries have been on a three-week rally, with the 10-year approaching the lows of early September, and last week having the biggest yield drop since early January 2014. The Treasury market continued to strengthen on Monday, with yields on the two-year note at 0.55%, a two basis point fall from Friday's close, while yields on the 10-year dropped three basis points to 2.42%. The 30-year dropped one basis point to 3.12%.
