Municipal bond prices ended unchanged to down by as much as point Friday.
One trader described the market as "extremely quiet and tentative" after Thursday's "turmoil," when stronger-than-expected economic statistics and a weak dollar drove the 30-year Treasury bond down 1 1/8 points. A municipal analyst said on Friday that dollar bond prices were off 1/8 point, while yields on high-grade issues rose by five basis points through the intermediate range. Some traders Friday judged the market unchanged. "The bid was spotty -- I would say there's a tentative unchanged bid in the Street," said one trader, adding that he didn't see much selling Friday.
Said another market player: "It's a pretty negative tone in the market." This trader said that while the number of bid lists was not overwhelming, there were enough to demonstrate "that there's not a lot of interest in being net buyers."
Robert L. Adler, president of AMG Data Services, said municipal bond funds saw net redemptions of about $235 million for the week ended Oct. 19. He added that just under half of that amount came out of no-load funds.
"That means that there have been outflows from municipal bond funds for eight out of the last 12 weeks," Adler said, adding that long-term funds are the most affected.
Adler noted that the high-yield funds fared slightly better, ending largely flat for the week.
As of Oct. 19, AMG tracked $243 billion of municipal bond fund assets from 1,616 funds. Funds that report weekly represent $184 billion, or roughly 75% of the total, he said.
In debt futures Friday, the December municipal contract closed up 6/32 to 85 27/32. Friday's December MOB spread was negative 386 compared with negative 383 on Thursday.
The 30-year Treasury bond closed up 1/4 point to yield 7.97%.
"We've been all over the map," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc. "I think the bottom line reason that I can see for the movement today has been currency values."
The bond market got off to a weak start Friday, with the yield on the 30-year Treasury bond going up as high a 8.02% at one point, largely because of weakness in the dollar overnight Thursday that continued into Friday morning, Wesbury said.
There was a bit of a turnaround following Treasury under secretary Lawrence Summers' comments that the United States would not be adverse to intervening in the currency markets. Summers' remarks came after Treasury Secretary Lloyd Bentsen on Thursday said the United States had no plans to intervene. Bentsen appeared to modify his comments on Friday.
"It looked like the dollar firmed up after that, and it lifted bonds for a while," Wesbury said.
But the economist doesn't see a happy ending just yet. Inflation concerns that have vexed the dollar in recent days are also weighing on the bond market, Wesbury said. The bond market is likely to remain under pressure until one of two things happens, he said.
The first way to rid the market of those fears would be for the market to receive lower growth and inflation reports in the months ahead, which Wesbury thinks in unlikely.
The second way would be for the Federal Reserve to raise short-term interest rates further.
"The Fed is behind the curve, and in my view they need to raise rates at least another 100 basis points to get to neutrality in monetary policy," he said. "And until they do so, bond yields are in jeopardy."
Even though the dollar firmed a bit Friday, "inflationary fears still hang over this market like bad weather," Wesbury said.
"The dollar is begging the Fed to raise interest rates, and until they do, pressure is going to remain on the dollar and on the bond market," he warned.
Wesbury said the long bond's yield may make forays past the 8% level intermittently in the coming weeks, and if the Fed doesn't act soon, the yield could find a home there.
"The longer it takes the Fed to move rates upward, the higher bond yields will go," Wesbury said.
Turning to this week, the economist cited two important economic reports that will be released -- September durable goods on Wednesday, and third-quarter gross domestic product on Friday.
"After last's month's report of a 6% gain in August [durable goods], we're looking for a significant slowdown from that level," Wesbury said, adding that he's looking for a 1.2% gain.
"I'm going to be on the high end," he said, adding that the consensus is approximately 0.5%.
As for the GDP figure, he said estimates that started a month ago at around 2% to 2.5% are now creeping up to 3%.
"We're seeing more and more people with 3% forecasts. I'm at 3.2%, which is not overly high, but it's probably going to be a little higher than the consensus" of 2.8%, Wesbury said.
The 30-day visible supply of municipal bonds on Friday totaled $3.47 billion, up $303.2 million from Thursday. That comprises $1.46 billion of competitive bonds, down $200,000 from Thursday, and $2 billion of negotiated bonds, up $303.4 million.
Standard & Poor's Corp.'s Blue List of municipal bonds was up $58.5 million on Friday to $2.07 billion.
