Prices adopted a weaker bias yesterday, faced with a growing new issue calendar and investors who have been reluctant to buy bonds at the current levels.
Last week's uncertainty turned into negativity yesterday as about $900 million in additional new deals were suddenly positioned to enter the primary sector this week.
"All these deals are coming and they're going to have to come cheap to get done." said one trader. "It looks like we are going to have to backup, unless the deals are snapped up."
Secondary prices took on a weaker tone in light trading, but higher long-term Treasuries prevented actual price losses.
Governments climbed as grain prices declined, but the tone was tentative ahead of today's producer price report and Wednesday's consumer price report, both for June.
The markets generally expect favorable numbers, but any jumps in inflation have the potential to rock prices, traders said.
By session's end, municipals were quoted unchanged, although dollar bonds eked out some small gains.
Debt futures were lower and traders blamed MOB sellers for the decline.
The September municipal contract declined as much as 9/32 and then regained some ground by noon, eastern daylight time, when it was quoted down 5/32. But sellers reigned during the afternoon and it settled down 7/32 to 102.10.
MOB Hits Low Point
The MOB spread widened to negative 399, an all-time low, from negative 382 Friday, as the Treasury market trounced municipals.
The MOB sellers were described by market participants as disappointed bulls who had hoped for increased investor demand after massive July 1 bond calls and payments.
Dealers instead have been faced with a general slowdown of demand over the past two weeks as interest rates hit cyclical lows.
Just when and where buyers will re-enter the market is the question at hand. Market players will closely watch the results of today's new issue sales, eager for a signal of a new direction.
Some market players speculated that yields will rise because of the supply pressure. They said that buyers are likely to return to the market at the lower prices, using post July 1 cash to buy bonds.
Supply has jumped enough, they said, to make a good argument for higher yields over the short-term.
The recent price run-up has attracted some sizable deals from issuers eager to borrow at low interest rates.
For example, Goldman, Sachs & Co. announced it will price $590 million Salt River Project Agricultural Improvement and Power District, Ariz., electric system revenue bonds this week. The bonds could be priced Wenesday.
Looking further. ahead, The Bond Buyer's 30-day visible supply jumped another $1.89 billion yesterday, to $8.19 billion from $6.3 billion on Friday.
That's the highest level since June 8, when 30-day visible supply totaled $8.6 billion. Since July 6, when it was $4.48 billion, the 30-day visible has grown $3.71 billion, an 83% increase.
Despite the current increase in supply, most prominent market observers said that issuance will decline over time and buyers will reenter the market with cash.
Supply and demand factors should be in the market's favor, they said, and prices should avoid the painful fall suffered last August in under similar circumstances.
"There is a lot of cash on the sidelines and the July 1 bond call/maturity date certainly added to that pool of cash," said George D. Friedlander, managing director of fixed income portfolio strategy at Smith Barney, Harris Upham & Co. "However, the impact of this pent-up demand has apparently been deferred, for now.
"It should become a greater factor, however, once the market adjusts to current rate levels," Friedlander said.
As far as the economy goes, most forecasts call for continued weakness, good news for bonds, unless inflation increases.
"The underlying market pattern seems to indicate that very sluggish economic growth indicators will buoy bond prices and possibly push yields even lower, at least in the short run," according to Kemper Securities Inc.'s most recent market forecast.
Municipals also remain a good buy compared to other securities and offer shelter from what promise to be higher taxes, Kemper said. For example, the real rate of return for municipals is still much higher than for corporate securities of similar quality.
An insured 20-year municipal bond priced to yield 5.50% has a taxable equivalent yield of 8.59% or a real rate of return equal to 5.09%, adjusted for 3.5% inflation, Kemper said. A similar 30-year corporate taxable bond yields only 7.10%, or 3.60% after adjustment for inflation.
S&P Rates Power Project
Standard & Poor's Corp. yesterday assigned a BBB-minus rating to a $144 million Central Valley Financing Authority sale of cogeneration project revenue bonds for the Carson Ice-Gen Project.
Fitch Investors Service on Friday also assigned a BBB-minus rating to the transaction.
The investment grade ratings are considered a breakthrough because they are tied to a financing for an independent power project.
Only a handful of taxable offerings for independent power projects have obtained investment grade ratings. The Carson Ice-Gen Project is believed to be the first tax-exempt deal to do so.
Such stand-alone deals depend on the creditworthiness of the project for bond security, rather than on backing from a public or private utility. The Sacramento Municipal Utility District helped form the Central Valley authority -- a joint-powers agency that will sell the bonds -- and SMUD will be the chief customer for the power output.
The sale is planned later this month through an underwriting group led by Goldman Sachs.
Secondary Markets
Secondary activity was dull again yesterday, dominated by scattered customer lists in the $5 million to $10 million range and broker bid-wanteds.
Some bonds have been sold to permanent investors, reflected by a drop in the The Blue List of dealer inventory, which fell $49 million yesterday, to $1.69 billion.
In secondary dollar bond trading, prices were quoted mostly unchanged, but some bonds eked out 1/8 point gains, traders said.
In late action, SCPPA MBIA 5s of 2022 were quoted at 92 1/4-1/2 to yield 5.54%; MBTA MBIA 5 1/2s of 2022 were quoted at 98 3/8-5/8 to yield 5.61%; and Pennsylvania COP AMBAC 5s of 2015 were quoted at 92 5/8-7/8 to yield 5.58%.
Orange and Orlando FGIC 5 1/2s of 2018 were quoted at 99-1/2 to yield 5.57% and Washington Public Power Supply System MBIA 5.70s of 2017 were quoted at at 99 3/8-3/4 to yield 5.75%.
In the short-term note sector, yields were mixed on the day, but the losers outnumbered the winners as some yields rose as much as 20 basis points.
In late trading, New York State notes were quoted at 2.50% bid, 2.45% offered, while Wisconsin notes were quoted at 2.65% bid, 2.60% offered.
