Demand for municipals has been insatiable, and as the primary calendar rebounds from a dry summer, that popularity has only increased. Headline deals, like this week's California and New York City issuances, have been oversubscribed many times over, allowing for even more contracted borrowing rates. Traders expect demand to continue to chase supply and are losing hope for more attractive, higher yielding but relatively safe deals.
The demand should be no surprise: municipals have been the highest performing asset class in 2014, commanding eight straight months of positive inflows, a feat one veteran trader said he had never experienced in his more-than-20 year career in public finance.
Surely the music must end, but when? Traders have begun to wonder when the tables will turn and the impressive returns will begin to evaporate. In the meantime, investors have found nearly all maturities along the curve attractive, demonstrating a wide variety of differing strategies.
"It's impossible to find value anywhere anymore," said a New York based trader. "Short, intermediate, long , everyone has their reason to pile in."
In many other market climates, long-end value could be found as strategists prioritized front end investments, or vice versa, said the trader. With all the interest focused on municipals in recent months, however, all parts of the curve have commanded popularity, making repricing across all durations the norm, the trader said. The New York City Sales Tax Asset Receivable Corp. $2 billion deal generated enough interest for two separate repricings on Tuesday, and yields were driven down even further in secondary trading.
"It's honestly impressive, as well infuriating," said a west coast trader. "It feels like there just simply isn't value anywhere anymore."
Traders mostly agreed that the turning point will be Federal Reserve action causing interest rate to rise. That happens may happen sooner rather than later, a southwest based trader said.
"It's all hinging on the Fed and whether all of these positive indicators are in fact pointing to a successful economic recovery," said the trader. "As these positive headlines keep pouring in, it's harder and harder to believe that it's not true."
Once the economic recovery is undeniable, interest rates will be on the rise, making municipals less attractive, the trader predicted.
Friday gave municipal traders some relief after a particularly heavy week and the promise of more volume to come. No deals, either in the competitive or negotiated markets, priced as secondary volume was so low that Markit determined that no market movers had emerged.
Scales ended a weeklong rally on Friday as yields on bonds maturing between 2015 through 2022 remained unchanged from Thursday's close while yields on bonds maturing between 2023 through 2044 softened one basis point, according to the Municipal Market Data triple-A 5% curve provided by TM3.
Yields on 2-year Treasuries rose 1 basis point to 0.58%. The yield on the 10-year note rose 2 basis points to 2.53%, while that on the 30-year bond was unchanged at 3.22%.
