Yield-starved investors have started picking up a bit of yield by buying kicker bonds.
"I think kicker bonds have increased in demand given the fact there is some value to the call," Fred Bacani, Head of Fixed Income & Trading at Veritable LP in Newtown Square, Pa., said in an interview.
Kicker bonds are premium bonds with a call provision, and are priced with the assumption they will be redeemed at an upcoming call day rather than their final maturity. If the issuer does not call the bonds at their call date, their yield spikes, or "kicks-up," rewarding investors for buying a bond made somewhat risky by an uncertain call.
Municipal yields have remained low this year due to 2014's lack of issuance. Supply totaled $89.34 billion as of April 30 this year compared to $122.72 billion for the same period in 2013, according to data provided by Ipreo and The Bond Buyer.
Municipal bond scarcity has driven up demand for bonds that provide a higher yield. Municipal fund flows into high-yield funds have remained positive for 19 weeks straight, according to Lipper FMI.
"Kicker bonds are a great way to pick-up yield," a trader in New York said.
He mentioned there were a large number of kicker bonds out for the bid at the beginning of this month, though those levels have dropped slightly this week.
"I am getting more requests from clients for kicker bonds, though," he said.
The bonds are also an attractive investment if interest rates rise, since they are less likely to be redeemed if rates go up. Federal Reserve Board Chairwoman Janet Yellen mentioned in a speech on May 7 that the Fed is not looking to raise interest rates in the near future, previously targeting 2015.
"Given the fact that rates have come down, we are focusing a lot on structure, callable structure notably," Bacani said. "That is an area we find value for yield enhancements. Structure is something we focus on and we are finding a lot of value in callable kicker bonds "
Secondary market trading showed mostly strengthening, according to data provider Markit.
Yields on California 5% GOs of 2043 slipped two basis points to 3.66% and California 5%GO refunding bonds of 2023 slid two basis points to 2.38%.
Yields on Florida Hurricane Catastrophe Fund 2.995% revenue bonds of 2020 fell two basis points to 2.77% and the New York City Municipal Water Finance Authority water and sewer system revenue bond 5s of 2034 held at 3.32%.
