Investors looking to guard themselves against the uncertainty of rising interest rate will probably find the $5.4 billion short-term Texas deal particularly appealing.
Scheduled to price Tuesday morning, the large tax and revenue anticipation note will give institutional investors an alternative to money market funds for a place to temporarily park inflows during a seasonally light primary calendar week, said a New York-based trader. The summer of 2014 has carried less supply than previous years and the week of Aug. 25 is one of the lightest weeks, with just $2.53 billion scheduled to close ahead of the holiday weekend.
"Their timing is great, filling a gap while there's no issuance," said the trader.
The deal will benefit from more than just historical seasonal doldrums, however. Investors have scrambled to hedge themselves against the possibility of interest rates rising sooner than previously anticipated after last week's release of the Federal Open Market Committee minutes from its latest meeting. Investors have piled into the short end of deals, driving yields as low at 17 basis points below the Municipal Market Data's triple-A 5% curve, as previously reported.
In Texas's case, how the funds are eventually distributed will be an indicator of market sentiment, said the New York based trader. Whether investors take the bonds to their maturity in 2015 or if they are redistributed to other holders in secondary trading will be telling of how institutional buyers view the immediacy of rising interest rates, said the trader.
"It's basically the same as a money market fund, except that with the size it gives you a lot of liquidity, something a market thrives on," said the trader.
The trader noted recent bids may indicate that buyers have been preparing their portfolios for the Texas deal.
"There's been a ton of short term selling," he said. "Accounts have had a lot of 2015, 2016, and 2017 out for the bid. Either they're preparing to buy something else, like the Texas deal, or looking to restructure and move out on the curve. We'll find out today."
The municipal market opened flat on Tuesday and strengthened marginally throughout the morning. By midday, bonds maturing through 2015 and 2017 were steady as bond maturing between 2018 and 2044 had seen tightening up to two basis points, according to the MMD triple-A 5% scale.
The Treasury market weakened during trading on Tuesday morning. The two-year note softened one basis point to 0.51%, while the 10- and 30-year each rose one basis point to 2.40% and 3.15% respectively.
