Light issuance isn't stopping investors from hunting for high-yield products.
Last week Puerto Rico general obligation bonds from the commonwealth's $3.5 billion issuance offered the highest yield in the secondary market. The highly publicized bond's trading volume dropped on Tuesday as investors began to look to other types of bonds for high yield.
"Puerto Rico kind of came and went, and is not being traded over and over," a trading manager in New York said in an interview.
Puerto Rico GOs offered investors yields of 8.73% for bonds maturing in 2035 with coupons of 8% when they first hit the primary market last week. The bonds were traded so heavily that on Wednesday morning the new bonds maturing in 2035 accounted for 20% of all municipal market trades through 10:30 AM New York time, according to data provided by Bloomberg, with $415.7 million of the bonds changing hands.
Puerto Rico trading volume was 61.8% below the 100-day average on Tuesday, according to data from Bloomberg. Activity on the bonds maturing in 2035 also slowed from last week.
Yields on the 2035 bonds fell six basis points to 8.56% Tuesday. Many market participants are now looking to other sectors for high yield, traders and analysts said.
"Retail investors who are seeking high-yield in the secondary market have a smorgasbord of choices," "There are a lot of defensive bonds with short call features they can find yield in," said a senior trader based in California. "When you go into the secondary market and you buy a bond with a very short call feature, the yields go up exponentially if it does not get called."
Other than defensive bonds, investors are looking at health care bonds for high yields.
"We're focused on 25 years out on the curve in high-yield health care and high-yield senior living," a Chicago-based trader said.
"I think investors will be looking at health care credits that they deem to be fine from a credit perspective for high-yield," said a trader based in New York.
Health care bonds are even offering institutional investors yields in the primary market this week, with $92 million of the state of Connecticut Health & Educational Facilities Authority's sale of Hartford Health care revenue bonds scheduled for Wednesday.
"If investors are looking for high yield in health care this week, there is the Hartford deal," said the California senior trader. "Institutional investors looking for yield can also buy Pace University bonds. It has had a couple of downgrades, when it come to market there will be some yield there".
The Westchester County Local Development Corp. has scheduled issuance of $110 million of Pace University revenue bonds. The bonds are rated BB-plus by Standard & Poor's.
The market closed quietly Tuesday as a few of the week's heavier deals were priced. Massachusetts entered its second day of a two-week long retail-order period for its MassDirect issuance. The program, modeled after the U.S. Treasury's TreasuryDirect program, is the first of its kind to be offered at a state level.
"It's slated to run every day this week and will reprice each day," Ed Holleran, a director at TMC Bonds, said in an interview. "The deal is somewhat revolutionary in having it reprice. About 10% of the deal was received in the first day and it will be bigger today."
The first week of the issuance will feature daily repricing and allotment of bonds for three maturities. About $30 million of bonds were offered to retail Monday, which was repriced to $2.98 million by the end of the day.
The commonwealth expects to sell $250 million over the next six months through the program. GO bonds will only be offered to retail investors during the last two weeks of each month.
"There has been decent support on the first day even though some firms were looking to see how it played out first and others looked for approval from their agency to participate," said Holleran.
Issuers hope that investors become comfortable enough with the deal that they participate more frequently as the MassDirect deal continues for the next several months, Holleran said.
"Buyers will get more comfortable with the idea to invest with more transparency week after week. The deal will help build more liquidity, because there will be more people involved," said Holleran.
In the negotiated market, Clark County, Nev., priced $318 million of McCarran International Airport revenue refunding bonds. The deal is divided into two parts, with $222 million that is not subject to the alternative minimum tax.
The $222 million segment has yields ranging from 3.26% with a 5% coupon in 2025 to 4.43% with a 4.25% coupon in 2036. The other $97.1 million of the issuance is subject to the AMT and has yields ranging from 0.14% with a 4% in 2014 to 3.34% with a 5% coupon in 2024.
The non-AMT part of the issuance has an optional call at par in 2024, while the AMT portion has no call option. Bank of America Merrill Lynch was the underwriter and the issuance was rated A1 by Moody's Investors Service and A-plus by Standard & Poor's.
In the competitive market, Bank of America Merrill Lynch won the $117 million bid for the first part of Howard County, Md.'s public improvement GO issuance.q
The tax-exempt refunding bonds have yields ranging from 0.16% with a 5% coupon in 2015 to 3.59% with a 4% coupon in 2034.
Yields were steady on Tuesday, according to Municipal Market Data, with bonds maturing from 2038 to 2044 climbing as much as three basis points, while bonds maturing from 2027-2034 jumped as much as two basis points.
Treasuries were steady Tuesday, with the 30-year yield and two-year note sliding one basis point to 3.62% and 0.36%, respectfully. The 10-year benchmark was unchanged at 2.68%.
