A better bid for bonds pushed prices up yesterday, helping municipals to outperform the Treasury market.
Government bonds headed lower after the Labor Department reported initial state unemployment insurance claims fell 17,000 to a seasonally adjusted 321,000 in the week ended Nov. 27. But the tax-exempt market opened with a flurry of trading to the upside that put municipal gains in front of the Treasury losses. After the morning action, traders said velocity slowed and new deals were scarce, but cash bond prices made solid 1/4-point gains on the day.
In late secondary dollar bond trading, Los Angeles Wastewater FGIC 5.20s of 2021 were quoted at 5.60% bid, 5.55% offered; New York Power Authority 5 1/4s of 2018 were quoted 97-1/4 to yield 5.47%; and Chicago GO FGIC 5 1/2s of 2024 were at 5.71% bid, 5.65% offered. Chicago O'Hare MBIA 5s of 2018 were quoted at 5.63% bid, 5.60% offered and Florida Board of Education 5 1/8s of 2022 were 94 1/4-1/2 to yield 5.52%.
The Blue List of dealer inventory has declined $370 million over the past six days, reflecting better selling to permanent investors from the Street. The list dropped to $1.45 billion yesterday from $1.52 billion. This is the first time this measure of dealer inventory has been below $1.5 billion since Oct. 19 when it was $1.42 billion. It's only the second time since Sept. 20 the list has been below $1.5 billion.
In the debt futures market, the March municipal contract settled up 6/32 to 101.12. Reflecting tax-exempt strength against Treasury weakness, the MOB spread narrowed to negative 425 from negative 429 on Wednesday.
The market now faces today's employment report, which could spark volatility, but some players speculated yesterday that the market's first move ahead of governments in recent weeks might be the beginning of a trend. They argued that buyers were snapping up municipals and selling Treasury securities at the same time because they were betting that tax-exempts would offer better value in the current rising interest rate environment. They cited light municipal supply and higher federal taxes as the main boosters for municipal bonds. Those bullish factors also were touted at the turn of the year, after President Clinton won the White House, but some players argued the real impact is still to come.
"What we thought was going to happen in 1993 is going to happen in 1994," one trader said. "We're seeing big money that says that taxable rates will rise further than tax-exempts, and that's what you may be seeing in this better bid today."
Buyers have been painfully scarce over the past two months, but were in evidence Wednesday on the short end. Dealers bid very aggressively for $1.3 billion of New Jersey notes and traders reported equally as strong follow-through business on the new securities. Short-term note traders said yesterday they've seen better demand over the past week, while the long end of the curve has continued to launguish.
"There has been a lot of cash around for the short-end," one note trader said. "There has not been a lot of supply, but it seems like the funds want to get short, stay liquid, and see what happens."
In short-term note trading yesterday, yields were 10 to 20 basis points lower on the day. In late trading, California Rans were quoted at 2.15% bid, 2.10% offered; New Jersey Trans were quoted 2.13% bid, 2.09% offered; and Pennsylvania Tans were 2.22% bid, 2.18% offered.
The influx of cash on the short-end raised the hopes of long bond traders that the money would move out on the curve as tax-exempts outperform the Treasury market as interest rates rise overall. Traders acknowledge that bears and buns are equally split on the prospect for rates, but that players were beginning to put their money on the line.
"This is the first sign of what might be to come," a trader said. "The tone seems much better. The market faces a lot of short-term obstacles, but yesterday seemed positive for the market down the road."
