Some investors who sold off short term bonds after Federal Reserve chair Janet Yellen's press conference on Wednesday have started buying intermediate bonds, even as low issuance limits re-investment opportunities.
Cash from the sell-off is being reinvested in bonds maturing within 10 years, market participants said. "In terms of re-investment there has been a lot of activity within 10 years, out in the seven- to 10-year range," said a trader in New York.
The short end of the curve began selling off Wednesday as Yellen gave a press conference in which she said the Fed may begin raising interest rates in April 2015. Strategists had previously forecast the Fed would wait until the third or fourth quarter of 2015 to start increasing rates.
Prices on bonds have fallen five straight days, according to Municipal Market Data, with yields on bonds maturing within five years jumping as much as 31 basis points from this time last week.
On Tuesday morning yields on munis maturing from 2019 to 2025 gained as much as two basis points, while longer-term bonds were steady, MMD data show. Yields according to Municipal Market Advisors were stronger on the long end and weaker within 10 years.
Strategists believe that the short end of the curve began selling off because it was too rich. Investors had begun purchasing more short-term bonds in the second half of 2013 following comments former Fed chairman Benjamin Bernanke made that the Fed would begin tapering quantitative easing in 2014, and then consider raising interest rates. Short-term bonds have historically been seen as a haven against rising interest rates because their shorter maturities make the bonds less susceptible to duration.
"People piled into the short-term sector late last year, with the expectation that it would protect them if interest rates increased," a municipal trader in New York said. This year's low issuance further increased demand for shorter maturities, and the lack of supply drove up prices to the point where strategists were questioning whether short term's expense was worth the security they offered.
"I think everyone was on one end of the canoe, and typically when that happens the majority are wrong," Dan Heckman, fixed-income strategist at US Bank, said in an interview. "That's one reason we told people to stay out of the short end."
Some strategists have been advising investors to buy intermediate bonds instead. "The ideal part of yield curve is six- to nine-year area," Heckman said. "If rates do rise, duration is not way, way out. If rates don't rise investors will benefit greatly from some kind of roll down as the bonds get closer to their maturities."
Investors are already beginning to purchase intermediate bonds, though they are only looking at more secure, highly rated bonds at this time, according to market participants. "People are shortening their duration and buying premium bonds with 5% coupons," the New York trader said.
"Even though there's a lot of cash available for purchasing, institutional investors are being very cautious. They are not going to overpay as much as they have in the past several weeks for product."
Though weak issuance is limiting buying-opportunities, many market participants remain optimistic about investors' future opportunities and drive to re-invest the new cash. "Appetite is going to be selective, but lots of deals are being priced with 5% coupons with the 10-year range," the trader in New York said.
"There is more risk in the intermediate range, but a bit more yield," a trader in California noted. "And cash is trash, so investors are not likely to raise cash by selling Treasuries on a backup, and they are not likely to sit on cash."
Last week's issuance totaled $3.18 billion, and this week's is scheduled to be about $1 billion more. Atlanta will issue a three-part deal totaling $705.6 million of airport revenue refunding bonds, including $376.4 million of subordinate-lien general revenue refunding bonds and $144.1 million of general revenue refunding bonds. The third series offers $185.1 million of alternative minimum-tax airport general revenue refunding bonds.
"There should be a fair amount of demand for the Atlanta airport deal because it is A-rated," the New York-based trader said.
Barclays Capital Inc. released a preliminary pricing wire for $484.4 million of New York City Municipal Water Finance Authority water and sewer system second general resolution revenue bonds. Yields ranged from 2.57% with a 4% coupon maturing in 2022 to 4.14% with a 5% coupon in 2039.
The bonds are callable at par in 2024. The deal rated AA-minus by both Standard and Poor's and Fitch Ratings.
"It had a fairly aggressive retail scale yesterday," the trader in New York said
The Cupertino Union School District in California will issue $100 million of general obligation bonds. The bonds are rated Aa1 by Moody's and AA-plus by S&P. Bank of America Merrill Lynch is the managing underwriter.
Both the MWFA and Cupertino USD deals held retail order periods Monday.
The Pennsylvania Turnpike Commission will issue $235.6 million of turnpike revenue bonds led by Loop Capital Markets. The bonds are rated A1 by Moody's and A-plus by both S&P and Fitch.
B of A Merrill won the bid for $206.1 million of Anne Arundel County, Md., general obligation bonds. The general improvement GOs were priced at $126.9 million with yields ranging from 0.14% with a 5% coupon maturing in 2015 to 3.86% with a 4% coupon maturing in 2034. q
The consolidated water and sewer GOs for $79.2 million had yields ranging from 0.14% with a 5% coupon in 2015 to 3.85% with a 4.5% coupon in 2044. Both bond series are callable at par in 2024.
Treasury yields strengthened Tuesday, as the 10-year benchmark and the two-year notes slide one basis point to 2.75% and 0.44%, respectfully. The 30-year yield gained one basis point to 3.58%.
