Tuesday's tightening municipal market indicated to traders that investors had "given up hope" of any yield in the near-term future.
The tightening was most dramatic in the long end of the curve, where yields on bonds maturing between 2023 through 2044 fell as much as 10 basis points, according the Municipal Market Data's triple-A 5% scale provided by TM3. Yields on bonds maturing between 2020 through 2022 fell between five and eight basis points while the front of the curve saw the least movement, with yields on bonds falling up to four basis points.
"It has a lot to do with where we are in the calendar," said a Midwest-based trader. "We're halfway through October and majority of the market thinks we're going to be range bound or even tighter for at least the rest of the year."
As traders have waited out the storm of tight spreads and a supply starved environment, many firms have been in cash, waiting for the right opportunity to purchase the right bonds, said a second Midwest trader.
However, Tuesday's strengthening indicated that the last hold-outs may have thrown in the towel, piling into the longer dated maturities as they give up hope of healthy yields, at least for 2014, said the first Midwest-based trader.
"It's depressing," said the first trader. "It was hard enough to find good bond before and now it's getting even harder with stuff trading through the scales in the secondary."
Desperate to find value, investors nosed around the secondary on Tuesday, searching for yield surrounding the upcoming New York deal, said both traders. Municipal bond participants were hopeful they might pick up basis points in other New York issuers, as potential buyers for this week's deal sold off positions hoping to make room for the new bonds.
"There's just no sexiness to it," the first trader said. "The only angle I can find is but now, because it'll only be more expensive tomorrow."
Also pumping strength into municipals was the continued firming of the Treasury market, traders agreed. Since Friday's close, treasury yields have tightened across the curve. Yields on the two-year fell eigjt basis points to 0.37%, while yields on the 10-year dropped 11 basis points to 2.20% from Friday's market close. The 30-year tightened eight basis points to 2.95%.
Traders suspected that the strength was two-pronged from the long holiday weekend: Federal Reserve Vice Chairman Stanley Fischer's speculation that the central bank may be pushing back the timing for rising interest rates, and negative rounds of International Monetary Fund meetings in Washington.
The opening of the shortened holiday week was been slow, with just the retail order period for the roughly $1 billion Dormitory Authority of the State of New York, commonly referred to as DASNY. The two-part deal offers $963.5 million in its tax-exempt serial and term bonds Series 2014A offering and $36.5 million of federally taxable bonds serial bonds in its Series 2014B tranches.
During tomorrow's institutional pricing, "buy and hold" purchasers are expected to emerge, liking pricing it through the curve, said the first trader.
The issuer - DASNY - usually attracts the typical New York based retail buyer and large mutual fund purchasers, and this week's deal should be no exception, both traders agreed.
