Municipals suffered sharp declines for the third straight session yesterday as downward momentum continued to build.
Traders said the market opened with a small anticipation that prices would rebound from big declines Thursday and Friday. The hopes were dashed by sellers who pushed Treasury prices down and municipals followed suit. Debate about whether the market was making a trend reversal based on recent economic strength continued, making for ever increasing uncertainty.
The declining markets picked up speed yesterday after the National Association of Realtors reported that existing home sales grew 2.6% in September to a seasonally adjusted annual rate of 3.9 million units, the highest rate this year.
Tax-exempt traders said bonds were quoted down 1/4 to 3/8 point soon after the housing report was released, and were down 1/2 point by noon, eastern ime. Traders reported significant bid-wanteds from sellers. By session's end, prices were quoted down 1/2 point on average, but other bonds fell as much as one point.
"A lot of traders are failing to recognize the new levels, so we're seeing some bonds play catch-up," a trader said. "We still haven't got that big down-heave we usually get, and that's what we're waiting for at this point."
For example, bonds from last week's $425 million Florida Board of Education deal took the steepest dives when they were freed to trade Thursday. Yesterday, the 5 1/8s of 2022 were quoted at 96 3/4-97 1/4 to yield 5.34%, down 5/8 point on the day, but on Thursday they were quoted 97 3/8-98 to yield 5.30%.
In other dollar bond trading yesterday, New York City 5 1/2s of 2015 were quoted down 1 1/8 points at 5.80% bid, 5.73% offered; Valdez, Alaska 5 1/2s of 2028s were quoted at 98 3/4-99 to yield 5.58%; and Atlanta Water and Sewer 4 3/4s of 2023 were at 5.30% bid, 5.27% offered.
The Treasury market appeared to stabilize late in the day, closing off its lows, with the long bond quoted down 15/32 to yield 6% near the end of trading. That helped the December municipal futures contract, which settled down 8/32 to 104.08, but hit a low of 103.28. The MOB spread narrowed to negative 459 from negative 462.
In the short-term note sector, yields were one to as much as 13 basis points lower on the day, traders said. Tax-exempt money market funds are currently cash-heavy, providing a strong bid to the market, traders said.
In late secondary action, California Rans were quoted at 2.75% bid, 2.70% offered; New York City Tans were quoted 2.76% bid, 2.70% offered; and Pennsylvania Tans were 2.70% bid, 2.65% offered.
Despite the small rebound in the government market, supply promised to continue to drag the tax-exempt market down.
Reflecting the Street's inability to sell bonds to hesitant buyers, The Blue List rose $14 million, to $1.92 billion. The measure of dealer inventory has now risen for four consecutive days and is at its highest level since the $2 billion of Oct. 6.
The Bond Buyer calculated 30-day visible supply yesterday at $7.96 billion, up $850 million from Friday. That's the highest total for 30-day visible supply since July 26 when it reached $7.98 billion.
The competitive component of the 30-day visible supply is at $4.41 billion, the highest level ever. It's exceeded the negotiated component for eight straight days. Through Oct.25, competitive issues have accounted for 49% of total visible supply, up from 39% in August and September and 30% for the January-July period.
The gloom of market skeptics was tempered by a host of other professionals who insist that yields will move lower over the long-run, despite the signs of economic strength and the technical problems in the municipal arena.
"In both the Treasury and municipal bond market, the adjustment merely served to put yield levels back with in the trading range which has prevailed for much of September and October," said George D. Friedlander, managing director of fixed income high-net worth portfolio Strategy at Smith Barney Shearson.
"We continue to be bullish regarding the overall trend of the fixed-income markets and the supply/demand structure of the municipal bond market should become very favorable, over time," Friedlander said. "However, with yield levels hovering at or near 20-year plus lows, some investors could see a period of market nervousness as a reason to delay new purchases.
"On the other hand, even the slightest back-up in rates could cause some yield hungry investors to breathe a sigh of relief and jump back in. To us, these patterns smack of trading range."
New Deals
Goldman, Sachs & Co. tentatively priced $199 million Detroit, Mich., Water Supply System revenue and revenue refunding bonds.
Serials were priced to yield from 3.40% in 1995 to 5.20% in 2009. A 2013 term, containing $30 million, was not formally reoffered to investors and priced as convertible inflos. A 2015 term was priced as 6 1/2s to yield 5.25%; a 2019 term, containing $59 million, was priced as 4 3/4s to yield 5.35%; and a 2023 term, containing $55 million, was priced as 5s to yield 5.40%.
The bonds are insured by the Financial Guaranty Insurance Co. and rated triple-A by Moody's Investors Service, Standard & Poor's Corp., and Fitch Investors Service.
Goldman as senior manager also priced and repriced $90 million housing revenue bonds, FHA insured mortgage loan, for the Battery Park City Authority in New York City.
At the repricing, the 2023 term bond yield was raised by five basis points.
The final scale included $84 million Series A serial bonds priced at par to yield from 4.30% in 1998 to 5. 10% in 2004. A 2013 term, containing $25 million, was priced at par to yield 5.65% and a 2023 term, containing $48 million, was priced at par to yield 5.75%. There were also $6 million Series B federally taxable bonds, priced at par to yield 5.40% in 1998. The bonds are rated triple-A by Standard & Poor's. Volume at a Glance Long-term Municipal Issues ($ Bil.) (Private Placements Included) 237.15 188.83January 18.39February 18.98March 29.88April 22.02May 28.62June 30.85July 24.52August 25.37September 23.56 Year YearOct. 1-25 14.96 To Date Earlier (*) Municipal forwards are included accordingto the contract date, not the delivery date.
