Muni traders are turning to the secondary market for supply as primary issuance falls.
Last week's secondary market was dominated by California credits, ranging from the state's general obligation down to local school districts, according to data provided by Markit.
California GO 5s of 2043 topped the list of most actively traded GO credits, with 34 individual trades recorded, according to Markit. The commonwealth of Puerto Rico followed close behind, with the island's 8s of 2035 recording 29 trades. Of the top 20 GO credits, California accounted for 11.
Traders said the popularity of secondary trading activity in California probably resulted from the light primary calendar week, as institutions bowed out and retail was the predominant player. The primary market contracted sharply last week, with just $2.27 billion scheduled to close, roughly half of the primary volume of the previous week. This week, traders are expected to get a measure of relief, with just over $3 billion expected to arrive.
"It was a pretty quiet institutional week with very little new issuance, and when that happens you see very little large secondary transactions as well," a trader based in New York City said.
Most secondary trading in past the several weeks have come on the heels of primary transactions, the New York based trader said. Portfolio managers are making room for the new deal by selling or flipping newly purchased bonds, the trader said.
This cycle of secondary in lockstep with the primary has been a recent development as accounts have become saturated after nine months of consistent inflows into the municipal market, the New York trader said. As inflows came into the market, the new cash allowed funds to maintain current portfolio positions while collecting new debt in the primary market. However, as these accounts have become full, traders have needed to redeploy funds in order to add new paper, the trader said.
Traders said the interest in California paper in last week's secondary was a testament to retail's heavy involvement in the state's debt. California has the highest concentration of retail investors, and traders attributed the interest in the state's paper last week to retail investors rearranging their portfolios as institutional players slowed down.
NEW MARKET CYCLES
Municipal market cycles predicated on inflows and outflows is a relatively new concept for the public finance investor, the New York based trader said. In the past six or seven years, most cycles have been determined by credit based events that have dictated fund flows, such as banking analyst Meredith Whitney's forecast of muni defaults, the Detroit bankruptcy filing, and downgrades of Puerto Rico's debt to junk, the trader said.
These new flow cycles have largely outweighed the traditional seasonal cycles in recent years. Ordinarily, the two largest events of the calendar year were outflows during tax season and inflows at the end of the year, said the trader. However, the headline events have made the seasonal factors less important in predicting fund flows.
As the primary market has continued to dry up, some traders have predicted the current cycle may be coming to a close.
"Funds are completely populated and need to sell in the secondary to make room for new deals," a Midwest based trader said. "With all the new economic data pointing to rising interest rates, it's plausible to things that the current cycle of inflows may be turning around in the not too distant future."
SLOW PRIMARY
Monday continued the summer's theme of sparse inventory with a desolate primary and slow secondary. According to Ipreo no deals over $10 million closed either in the competitive of negotiated markets.
The secondary markets experienced marginal strengthening with typical credits leading the market, said the Midwest trader. Buckeye Tobacco Settlement Financing Authority's TURBO 5.875s of 2047 strengthened two basis points to yield 7.51%, while California State various purpose GO 5s of 2043 tightened four basis points to 3.45% from 3.49%, according to data provided by Market.
The Chicago, Ill., O'Hare International Airport revenue bonds 5.25s of 2034s weakened three basis points, however, to 4.26% from 4.23%.
Municipal scales were sluggish as well. The Municipal Market Data triple-A 5% was largely unchanged at the close on Monday, with bonds maturing between 2015 through 2025 and 2029 through 2044 unchanged, while bonds maturing between 2026 and 2028 strengthened one basis point, according to data provided by TM3. The 10-year benchmark closed at 2.471%, according to the MMD triple-A 5% scale.
The two-, 10-, and 30-year all closed unchanged at 0.30%, 2.13%, and 3.29%, respectively, according to Municipal Market Advisors.
Treasury markets weakened slightly in the front and belly of the curve during trading on Monday. The two-year note rose one basis point to 0.53% compared to 0.52% on Friday's market close. The 10-year also softened one basis point to 2.47% from 2.46% on Friday. The 20-year held steady at 3.23%.
