For New York's largest issuers, playing a little hard to get may not be a bad idea.
This week's warm market reception to New York City's general obligation deal was surprising, mostly because of where the popularity largely came from: institutional buyers. Ordinarily, a headline deal with a name like New York City would appeal to retail buyers, confident in the name behind the credit, something to which they can attach a face, or at least a skyline.
Rather than shrugging off the deal as expected, institutional buyers were the ones that oversubscribed nearly every maturity offered, allowing the underwriter to reduce rates and increase the size 8.8% to $980 million.
The popularity was a shock to market participants. Normally large New York issuers, like the City GO, water and sewer department, and DASNY, are bought at a discount thanks to their frequency in the market place. That saturation of the debt has given them an affectionate nickname among traders: "belly button paper" - something that everyone already has and that no-one is keen on getting another.
Many large investment firms have New York state specific funds, addressing the demand created by high state income taxes. While there is always a demand for New York municipal bonds, the large issuers are often excluded from that appetite as investors look to maintain diversity within their portfolios.
The frequency and constant availability of the large issuers usually -- with Wednesday as the exception -- make those bonds undervalued by institutional investors, who would rather invest in New York counties, municipalities and school districts that tap the market less regularly.
To demonstrate institutional's usual ambivalence to large New York issuers, traders pointed to the comparison of New York water and sewer department Los Angeles's. From a purely credit perspective, traders agreed that both issuers were nearly identical: double-A rated, servicing major metropolitan cities.
However, their spreads were markedly different in the bond's 30-year maturities, a product often unique to the institutional buyer. Despite the similarities, yields are consistently higher on the New York City water and sewer department, making the cost of borrowing on the long end of the curve higher for the East Coast city, according to data provided by Markit.
While strong technical exist in favor of buyers for the large New York issuers, that preference does not carry over to retail, as demonstrated in the comparison of 10-year maturities for New York and LA's water and sewer departments, which are almost the same. In fact, the New York department was actually stronger than LA's during the back half of 2013.
Wednesday's popularity in retail could be explained by the beginning of a significant rally in municipals that continued through Friday. In the "flight to safety" both the municipal and Treasury market contracted dramatically, following news of both PREPA's creditor negotiations and escalating threats of war in eastern Europe.
According to Municipal Market Data's triple-A 5% scale, those impacts were most felt on the long end of the curve. Bonds maturating between 2038 and 2044 fell six basis points, bonds between 2028 and 2037 fell five basis points, and between 2022 and 2027 fell four basis points, according to the MMD scale. Bond maturing between 2018 and 2021 fell between two and three basis points while the front end of the curve remained unchanged.
According to Municipal Market Advisor's triple-A 5% scale, the 30- and 10-year fell five and four basis points respectively to 3.25% and 2.09% while the two-year note remained unchanged.
The Treasury market held steady on Friday afternoon after rallying significantly in morning trading. The 30- and 2-year head at 0.42% and 3.13%, while the 10-year rose two basis points to 2.35%.
