The taxable portion of the $1 billion Hawaii general obligation deal will generate more interest than the tax-exempt part, traders said.
Non-traditional muni investors have started looking at taxable municipal bonds as an alternative to corporates, they said. A trader in Chicago said these munis offer investors who traditionally buy corporates a spread over corporates and carry less risk.
The taxable portion of the Hawaii deal, scheduled to come to market Thursday, totals $224.8 million and is rated Aa2 by Moody's Investors Service, and AA by Standard & Poor's and Fitch Ratings. The 10-year triple-A benchmark general obligation bond was trading at 2.39% on Friday, according to Municipal Market Data. Muni bonds held steady across the curve Monday, MMD said.
The 10-year AA benchmark U.S. Corporate bond was trading at 3.08% as of 2:59 p.m. New York time on Monday.
"It makes sense, if you can get a bond rated the same, at a better value with less risk, why not buy it?" a trader in New York said. "That's what investors want and why everyone will buy into the taxable Hawaii deal. The tax-exempt part will just get mostly muni guys."
The trader in Chicago also said the Hawaii deal, the biggest muni deal on the calendar for this week, will do well because of its size.
"Most taxable deals are smaller," he said. "[Hawaii] is a decent size, and with a name like Hawaii and a state issuer it should prove to be really attractive to buyers."
The taxable part of the deal is coming in three parts that are $25 million taxable GOs, $5.89 million taxable GO refunding bonds, and $193.87 million taxable GO refunding bonds.
The tax-exempt portion totaling $775.2 million consists of $575 million GOs and $200.2 million GO refunding bonds.
The tax-exempt portion will hold a retail order period on Wednesday and all the bonds will be available for institutional investors on Thursday.
JPMorgan is the managing underwriter of the deal.
Buy High Grade Before It's Too Late, Traders Warn
More traditional municipal market traders are honing in on investment grade paper this week, according to traders.
This is the time to invest in high-grade bonds in the secondary, but market participants have to act soon, traders said.
They said the sell-off last week pushed yields up to the point where it now is an attractive time to invest in municipal bonds, and market participants might actually be able to get the bonds at decent prices.
Municipal Market Data's triple-A benchmark general obligation bond's yield increased by 10 basis points to 2.17% on Friday, from Oct. 31, as the market stabilized after the employment situation report was released. The 30-year benchmark's yields rose by six basis points to 3.07% during the same period.
A trader in the Midwest said it's the time to push into high grade paper now because levels have not been this high for a while.
"It's the time for guys who did not spend all their cash on new issues last week to get into the secondary," a trader in the Midwest said. "High grade now offers more value, and now is the time to pay for that value instead of spreads."
A trader in New York said this opportunity won't last for long.
"The market is already steadying, and if you look at this year the trend is for yields to just continue to fall," he said. "People better snatch the bonds when they can."
Over the course of the year the benchmark 10-year yield dropped by 62 basis points from Jan. 2 to 2.17% on Friday, according to MMD. The 30-year yield fell by 113 basis points to 3.07% during the same period.
Yield Hunger Is Not Dead
The push for buying high-grade paper before the market starts to strengthen again does not mean all investors are completely shunning high-yield. The Missouri Health and Education Facilities Authority 4s in 2045 issued to fund Mercy Health last week are the most actively traded Cusip in the secondary, according to EMMA.
The bonds were among the most actively traded last week too after they became free to trade. While there are some block trades on the bonds, it's mostly retail that's buying the name, according to traders.
The trader in New York said people are purchasing the bonds because of the yield they carry.
The bonds are strengthening though, with their high yield dropping by approximately nine basis points to 4.20% on Monday from Friday, according to EMMA. This is 13 basis points lower than the yield when the bonds first traded on Nov. 5.
The trader in the Midwest predicted the bonds would start trading at or close to par very soon.
Treasuries
Treasuries began weakening on Monday with the two-year note yield increasing by four basis points to 0.55% from Friday's market close. The 10-year yield grew by four basis points to 2.36% and the 30-year rose by five basis points to 3.09% over the same time.
Editor's note: Bond markets are closed Tuesday for Veterans Day.
