Municipal bonds ended a quiet session little changed to 1/8 point higher in spots as participants remain poised for another tightening move by the Federal Reserve.
"I think the Street kind of expects the Fed to raise interest rates," one dealer said.
"The expectation is that they're trying to rein in inflation," the dealer added.
A lack of activity and limited new issuance in the tax-exempt arena this week leaves municipals looking to Treasuries for direction and gives dealers ample opportunities for Fed watching. While another tightening move by the Federal Reserve is largely expected, participants remain devided Some believe the U.S. central bank will raise interest rates this week following today's Federal Open Market Committee Meeting. Others speculate that the move won't come until after the September employment report on Oct. 7.
"You have general agreement the Fed is going, to tighten; it's just a matter of when" said Christopher Dillon, a market strategist at J.P. Morgan & Co.
Monday's 30-day visible supply stood at $ 2.47 billion, down $ 33.2 million from Friday. Meanwhile, Standard & Poor's Blue List of bonds held in dealers' inventories totaled $ 2.01 billion, reflecting an increase of $ 8.8 million.
August existing home sales were in line with expectations and as a result had little impact on yesterday's market activity.
Existing home sales slipped 1.8% on August to a seasonally adjusted rate of 3.9 million, according, to the National Association of Realtors. July's 0.3% decline was revised to a 0.3% increase.
Few bid lists were circulating in the market yesterday Monday. Dealers estimated that the lists totaled less than $ 100 million.
A number of the lists were composed of lower-coupon bonds. Some dealers attributed this to an increase in tax swapping as fund managers seek to reposition portfolios to perform better in a rising interest rate environment.
In a tax swap, an investor sells one security and simultaneously purchases another with the proceeds, usually for about the same price.
If an investor expects interest rates to rise, he would sell lower-coupon bonds in favor of high-coupon securities, with other similar credit characteristics. This is because the higher-coupon bonds offer more opportunities for appreciation as interest rates increase.
Meanwhile, some of the lower-coupon bonds are beginning to garner interest from bottom-fishers and contrarians.
"We are starting to see some interest in those types of securities. A few accounts are starting to fish in what others might deem the morning trash," J.P. Morgan's Dillon said.
At a media luncheon last week, Smith Barney Shearson's Joe Deane expressed his contrarian sentiments.
"The absence of positive news - that's normally what creates the bottom of the marketplace," said Deane, a portfolio manager and co-head of the firm's tax-exempt mutual fund area.
Although the market is expecting rising inflation and interest rates, "somewhere down the road, we could get a positive number," Deane said.
"Nobody is prepared for good news," the portfolio manager added.
"As people are throwing them out the window ... the only thing we're buying now are discounts," Deane said Monday. "We're building in the opportunity to participate in the upside of this market."
In sparse new-issue action yesterday, a CS First Boston group placed the winning bid for $ 77.615 million of New Jersey Housing and Mortgage Finance Agency revenue bonds with a true interest cost of 4.205%.
The bonds, which have a mandatory one-year put on Sept. 29, 1995, are not subject to the alternative minimum tax. The bonds were reoffered at a 4.20% yield. The bonds carry a long-term rating of Double-A from Moody's Investors Service Inc. and a short-term rating of VMIG-1.
Today, strong demand is expected to greet Minnesota's offering of $ 120 million general obligation bonds to be sold via competitive bid.
A lack of supply could garner aggressive prices for the double-A rated bonds, which are expected to carry yields on the long-term securities in the 6.20% range, similar to those available on long-term triple-A rated GOs, dealers said.
The bonds are rated Aa-1 by Moody's and AA-plus by Standard & Poor's Corp.
In the negotiated sector, Lehman Brothers is expected to price $ 173 million of New York State Medical Care Facilities Finance Agency during today's session.
Yesterday, the December municipal futures contract rose about 1/8 point to 87 20/32. The December MOB spread narrowed to negative 373, from negative 376 Friday.
