CPI for August waylays bonds; new issues get reserved hello.

A surprise jump in consumer prices knocked municipal bonds yesterday, and new issues received a tepid response from investors, despite an acute lack of supply.

The consumer price index advanced 0.3% in August on gains in all categories except energy and other goods and services." The core rate, less food and energy prices, also rose 0.3%.

Analysts were quick to note that the jump in inflation was caused by one-time seasonal factors and that inflation pressure remained subdued overall.

In an indication of modest economic strength, retail sales edged up 0.2% in August, to $173.5 billion, with the help of strong auto sales.

The Treasury 30-year bond fell nearly one point after the news, adding more losses as the day went on Municipals failed to react immediately, but bond prices eroded amid bid-wanteds throughout the day, closing down 1/2 to % point on average, traders said.

In the debt futures market, the December municipal contract settled down 25/32 at 104.22. Recent buyers of the MOB spread quickly took profits as the government market retreated further than municipals. MOB buyers have suffered painfully in the past few weeks as municipals failed to regain significant ground against Treasuries.

The MOB spread narrowed to negative 457 from negative 476 Monday, as governments fell further than tax-exempts.

Several traders said they expected the market to bounce back from the losses and continue its trek higher, in much the same way as it has in the past couple of weeks.

Reflecting underlying strength, bonds from the $631 million South Carolina Public Service Authority revenue refunding issue were released from syndicate restrictions and held up well against the rest of the market.

The FGIC 5s of 2025 were quoted at 5.33% bid, 5.31% offered. They were originally priced to yield 5.32%. The uninsured 5 1/8s of 2032 were quoted at 5.48% bid, 5.46% offered. They were originally priced to yield 5.47%.

Some traders said that because so many market players anticipate a correction from the record highs a downtick could quickly build momentum.

"I think it's uglier than people admit," a trader said. "People are conditioned to think "this is no sweat, it'll bounce," but there's a different psychology here.

"Everybody is looking over their shoulder, waiting for a correction and that could feed on itself." the trader said. "There's a lot more money to be lost in a bull market and it could get ugly real fast."

Other market players noted that buyers were in for bonds at the lower levels, but demanding even more price concessions. That might suggest, they said, that the buyers may be able to hold out for lower prices, forcing a bigger sell-off.

"Buyers want bonds, but they want to take your pants off," another trader said. "They may not have as big a need for bonds as we thought for now.

New Deals

Yesterday's new deals were termed successful, but prices were not raised to the aggressive levels seen during last week's rallies as the market dropped.

"We're seeing some of our customers pull in their horns, thinking this is a place to sit back and reassess things," said one underwriter. "People are starting to think about what kinds of coupons to buy, and they don't seem to be under a lot of pressure to buy bonds here."

Bond funds have had plenty of opportunity to stock their shelves with fresh inventory as rates collapsed, enticing a rush of issuers to refinance old debt.

Long-term municipal bond volume through Sept. 13, 1993 totaled $200.02 billion. During the record year of 1992, new issue volume did not break through the $200 billion barrier until the week ended Nov. 20. For all of 1992, $234.99 billion of new issues were sold.

Compared with the year-ago period, bond volume to date is up 25.24% from $159.71 billion.

Topping yesterday's negotiated bill, Merrill Lynch & Co. priced $416 million Commonwealth of Kentucky State Property and Buildings Commission revenue and revenue refunding bonds for Project No. 55.

The firm said it received the verbal award at the original prices by early afternoon. Bonds in 2007 and 2008 were made non-callable and were not formally reoffered.

The underwriters said that despite overall weakness in the market, they saw institutional demand across the board.

The final Kentucky scale included serial bonds priced to yield from 2.60% in 1994 to 5.25% in 2010. A 2013 term, containing $16 million of the loan, was priced with a coupon of 5% to yield 5.30%.

The bonds are rated single-A by Moody's Investors Service and Standard & Poor's Corp., and A-plus by Fitch investors Service.

In other action, First Boston Corp. priced and repriced $379 million Nebraska Public Power District Power Supply System revenue bonds.

At the repricing, yields were lowered by about one basis point for term bonds due in 2017.

The final offering included serials priced to yield from 2.70% in 1994 to 5.15% in 2010. A 2017 term, containing $124 million, was priced as 5s to yield 5.34%.

The bonds are rated Al by Moody's and A-plus by Standard & Poor's.

Chemical Securities tentatively priced $123 million New York State Medical Care Facilities Finance Agency mental health facilities improvement revenue bonds.

Serial bonds were priced to yield from 3% in 1994 to 5.40% in 2008. A 2013 term was priced as '5 3/8s to yield 5.50%, and a 2023 term was priced as 5 3/8s to yield 5.57%.

The bonds are rated Baa1 by Moody's and BBB-plus by Standard & Poor's.

Secondary Markets

In secondary action, traders reported moderate bid-wanted flow, with some sizable blocks of bonds trading. Market sources said, for example, $20 million New Jersey 5.20s of 2000 were out for the bid and re-offered around 3.95%.

In secondary dollar bond trading, prices were quoted down 3/8 to 1/2 point on the day, traders said.

In late trading, WPPSS 5 3/8s of 2015 were quoted at 5.55% bid, 5.53% offered; Florida MPA AMBAC 4 1/2s of 2027 were quoted at 88 5/8-99 to yield 5.22%; and Jacksonville Electric 5 1/4s of 2021 were quoted at 5.36% bid, 5.30% offered.

New York State Power 5 1/4s 2018 were at 99 34-100 1/4 to yield 5.26%; Florida State Board of Education 5 1/4s of 2023 were 98 5/8-99 to yield 5.34%; and Los Angeles Convention Center MBIA 5 1/8s of 2021 were at 5.28% bid, 5.26% offered.

In short-term note trading, yields were five to 10 basis points higher on the day, traders said.

In late action, California Rans were quoted at 2.75% bid, 2.70% offered, Los Angeles Trans were at 2.79% bid, 2.75% offered. and New York State Trans at 2.50% bid, 2.45% offered.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER