Investors who sold off bonds following Fed Chair Janet Yellen's speech on interest rates last week are now looking for safety closer to the intermediate part of the curve.
Cash from the sell-off is now being reinvested in bonds maturing within 10 years that still offer limited duration, 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.
"People are shortening their duration and buying premium bonds with 5% coupons," continued the trader.
While the sell-off generated some capital, many traders said that fear over interest-rate volatility is influencing investors to buy more secure bonds.
"Even though there is a lot of cash available for purchasing, institutional investors are being very cautious," said the trader. "They are not going to overpay as they may have during the past several weeks for product."
Other investors are simply waiting for more investment opportunities since this year's lack of issuance has limited buying-prospects.
"The supply has been so low that I have not seen much movement toward re-investment," another trader in New York said. "Yields have been going one way because of the low supply coming to market."
Last week's issuance totaled $3.18 billion, and this week's is scheduled to be approximately $1 billion more.
"Lots of people are watching to see where this week's new supply levels will come," said the municipal head. "It might set a better tone in the marketplace, and the market might stabilize."
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 maturing 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
Cupertino Union School District, Calif., 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.
In the competitive market, the Anne Arundel County, Md., will auction $206.1 million of general obligation bonds Tuesday. The bonds are rated AA1 by Moody's, AAA by S& P and AA-plus by Fitch.
Treasury yields were mixed Tuesday morning, with the 30-year jumping four basis points to 3.61%, while the 10-year benchmark fell two basis points to 2.76%. Two-year notes were unchanged at 0.45%.
