With a yield of around 3.41%, the first maturity of the Los Angeles Unified School District's $350 million deal underscored how pricey the tax- exempt short-term market had become, according to at least one portfolio manager.
"I typically try to buy paper at 68% of Treasuries," said Todd Pardula, who is in charge of two California money market funds with Mountain View, Calif.-based American Century Investments. At 65% of Treasuries, Pardula found the $8.2 million first maturity from the deal underwritten by PaineWebber Inc. too rich.
The market's richness has been most stark in the California market, where a $2 billion note deal from the state is not due until September. But on June 30, investors say $3 billion worth of previously issued California notes mature.
"We lost $3 billion of supply at the end of June that needs to be reinvested," said Pardula, who manages a $450 million and a $175 million fund.
As a result, yields on variable-rate demand notes in California have plummeted. In the general market, yields on daily floating paper reached 3.37%, an increase of 90 basis points from the week before, according to Municipal Market Data. For weeklies, rates were comparable at 3.39%, up from the 3.25% of last week. But California dailies posted an increase of just 1.98% and weeklies 2.63%.
Contributing to the situation is the fact that some California note deals have been converted into derivatives, putting a further crimp in the supply.
"The universe of funds that buy these synthetics is not as great as those (which could have) bought the notes outright," Pardula said.
Pardula does not believe that the upcoming $2 billion revenue anticipation note deal, underwritten by San Francisco-based BancAmerica Robertson Stephens, will be turned into derivatives.
In Florida, Robyn Fiel, who manages a $157 million Florida money market portfolio at St. Petersburg-based William R. Hough & Co., found the first maturity for a $37.3 million offering from Jacksonville for a stadium project attractive.
The paper maturing on Oct. 1 was too short a maturity for some investors, but Fiel said that with a 3.55% yield, she found the deal appealing, especially since the rate was almost identical to some commercial paper she has found recently.
"It seemed to me a little cheap to the market," Fiel said.
On Wednesday, she was gearing up for a $75 million offering from Florida, of which approximately $1.7 million will be money-market eligible.
"Lately, the way it's going with serials is that with at least the first two maturities it's been a sealed bid, so you really have to sharpen your pencil if you really want the bonds," Fiel said.
