Municipals bond prices ended mostly unchanged in light activity yesterday.
"I just think the bears are picking up people in their camp every day," a municipal trader said, adding that he judged the market unchanged to slightly lower. A municipal analyst viewed yesterday's market as "up a smidge or down a smidge," and said that few lists of any size were seen.
In the Treasury market, the 30-year bond closed up more than 1/4 point to yield 7.77%. In debt futures, the December municipal contract settled 1/4 point lower at 87 17/32. Yesterday's December MOB spread was negative 377, compared to negative 372 on Wednesday.
The bigger-than-expected jump in the August producer price index on Sept. 9, combined with last Friday's unfriendly reports on industrial production and capacity utilization have intensified worries that interest rates are headed higher, the trader said. The market is locked in the all too familiar guessing game of when the Federal Reserve will tighten short-term rates, and by how much, he said.
"There's not a compelling reason to do anything right now," he said.
The trader said that mixed signals given by recent economic figures have created an uncertainty "that has caused players to adopt the wait-and-see attitude as opposed to committing to the market at these levels."
Players see any uptick as a reason to sell, he said. Notable among would-be sellers are those who, heartened by the August consumer price report that followed PPI, bought bonds ahead of last Friday's numbers.
Overhanging the market is also the specter of industry layoffs, the trader said. After two good years, municipals volume has dropped off dramatically this year, and a large number of bankers are competing for a few deals, which does little to enhance morale, he said.
The municipal analyst said that frustration exists because traders are paid to make money for their firms, and if in attempting to make money they lose it, they are first on the list to go.
Even if a portfolio manager liked the market, with no money around, he or she has to sell something to make room, the trader said. A manager wanting to sell a discount bond to make room for a current coupon bond can count on some pain, the trader said, much of it attributable to the de minimis rule enacted last year.
"What you have to do is bite the bullet," the trader said, "You get dinged for the de minimis calculation."
Clark Wagner, chief investment officer at First Investors Management Co., said he's "slightly negative" on the municipal market.
"Rates are going to head higher, short-term rates in particular," Wagner said.
"The Fed's going to have to tighten sometime this year, maybe next Tuesday, maybe in November," he said. Asked about the chances for a tightening on Tuesday, Wagner said "it's tough to call." He estimated the odds at fifty-fifty.
In other comments yesterday, Patricia M. Dolan, a managing director at Prudential Investment Advisors, said the municipal market will continue to lose a significant amount of high-coupon housing bonds to prepayments and current refundings in the fourth quarter and through 1995. Prices of such bonds should start to erode soon, if they haven't done so already, she said.
Behind the trend lies the Tax Reform Act of 1986, which allowed fewer housing bonds to be issued, Dolan said. While $18 billion of housing bonds was issued in 1984, and more than double that amount, $37 billion, was issued in 1985, in 1986 issuance fell to $10 billion, she said.
Evidence of the trend can be seen in new housing issues, which this year jumped 29% through August, compared to the same period last year. That increase comes despite a year that has seen overall issuance including housing bonds drop by 42%.
With new housing bond yields averaging 6.75% now, issuers that sold 9% bonds with 10-year calls in 1984 and 1985 will likely grab the opportunity to refinance the older issues at lower yields this year and next. Dolan believes the trend will accelerate in 1995.
As those older, higher coupon issues are refunded, mutual funds heavily concentrated in that area will likely see their distribution yields decline, she said.
Turning to new issues, a Merrill Lynch & Co. group won $200 million of Connecticut special tax obligation bonds, bidding a true interest cost of 6.0312%. The FGIC-insured offering consisted of serial bonds, priced to yield from 4% in 1995 to 6.30% in 2014. A $92 million balance was left by day's end.
"We're pleased to receive 6% in today's market," said Mildred McNeill, an investment officer with the state. McNeill said Lehman Brothers had the cover bid with a 6.03490% TIC; followed by Bear, Stearns & Co. at 6.0470%; and CS First Boston at 6.0593%.
Also yesterday, a PaineWebber Inc. group won $135 million Build Illinois (Sales Tax Revenue Bonds) with a true interest cost of 6.269% The offering consisted of serial bonds priced to yield from 4.30% in 1996 to 6.40% in 2014. A 2017 term, containing $20 million, was priced to yield 6.45%. A 2020 term, containing $30 million, was priced to yield 6.50%. A $17 million balance was left by late day.
Six bidders including PaineWebber participated in the offering, a state spokeswoman said. Lehman Brothers had the cover bid at 6.275%, followed by Bear, Steams & Co. at 6.280%; CS First Boston at 6.287%; Merrill Lynch at 6.289%; and Dillon, Read & Co. at 6.298%.
"Given market conditions, it's priced about where we expected," said Mike Colsch, deputy director of the Illinois Bureau of the Budget.
While competitive deals are planned well in advance, Illinois has been "fairly fortunate on the last few deals to hit the market on good days," Colsch said.
Illinois will be back in the market the week of Oct. 3 with $150 million of GO college savings bonds. First Chicago Capital Markets and Merrill Lynch will be co-senior managers for the zero-coupon bond deal, along with nine co-managers. Many of the firms chosen for the deal participated in a $169 million Illinois college savings bond issue sold last October.
James Montana, Gov. Jim Edgar's chief legal counsel and point man for the state's bond underwriter selection, said the firms were chosen for the new deal based on their performance in previous college savings bond deals. He said that campaign contributions had nothing to do with the selection process.
Merrill Lynch made a $3,000 contribution to Edgar's campaign in late February after signing on to Wall Street's voluntary ban on contributions, which took effect last October. A firm spokesman has said Merrill Lynch made a commitment to the Edgar campaign in the summer of 1993, but did not deliver the check, which was dated Oct. 20, to the campaign until the end of February.
The spokesman also said the contribution was not made to obtain bond business.
First Chicago Capital Markets' parent, First Chicago Corp., made $10,950 in contributions to the Edgar campaign through its state political action committee between April 28 and May 23. First Chicago officials have said the contributions were made independent of the capital markets group and were made strictly for corporation's banking arm.
Colsch said Merrill Lynch and First Chicago Capital Markets turned in the most orders for the state's last three college savings bond issues.
Elsewhere yesterday, the 30-day visible supply of municipal bonds totaled $2.91 billion, down $306 million from Wednesday. That comprises $1.622 billion of competitive bonds, down $83.7 million from Wednesday, and $1.286 billion of negotiated bonds, down $223 million from Wednesday.
Standard & Poor's Blue List of municipal bonds rose $58.5 million yesterday to $1787 billion.
Karen Pierog contributed to this report.
