Municipal bond prices ended mostly unchanged yesterday in a session dominated by negotiated deals by the California Public Works Board and the West Virginia School Building Authority.
"There's very little liquidity in the Street." one municipal trader said. "If you have to unload your position in the Street, you are going to take a major bath."
In light secondary activity, dollar bond prices ended slightly lower, while yields on high-grade issues were unchanged to a touch higher in the early maturities.
In the government market. the 30-year bond was down 6/32 late in the day, to yield 8.06%. In debt futures, the December municipal contract was down 1/32 to 84 31/32. Yesterday's December MOB spread was negative 393, unchanged from the previous day.
In the primary market, a $283 million California Public Works offering featured a top yield of 7.02% in 2019, according to W. Peck Ferrin, a managing director at BA Securities, which served as senior manager on the deal.
"The reception was better than I think some expected," Ferrin said. The 2019 maturity, which had a 7% coupon, was oversubscribed "many times."
"I, as a bookrunning manager, am not going to get a bond as a takedown, and I wanted at least $25 million to $50 million," Ferrin said.
Ferrin said serial bonds in 2007, 2008, and 2009 were folded into a 2010 maturity. He cited "a lot of demand" for the 2010 maturity as well as the 2014 maturity.
While there was good demand in general for the serials, interest was slower in some maturities, and yields on those were raised by five basis points, he said.
Christian Smith, who rans two California funds for Prudential totaling $390 million, passed on the offering. While at 7% the absolute yield was beginning to look attractive, the spread was still fairly tight relative to where comparable insured paper has traded in the secondary market, he said.
Smith said he usually tracks California Public Works bonds versus insured paper of comparable maturity, and in the last few months, Cal public works debt has been trading at 30 to 35 basis points off insured paper.
"And at 7.02% I'd put that closer to 28 basis points off, so it's a bit on the tight side," the portfolio manager said. Smith would have preferred to see some noncallable or some deeper discount bonds.
"Right now, cash is king," Smith said, adding that he currently doesn't have much to spend. "And what I do have, I'm conserving."
Elsewhere in negotiated action, a Donaldson, Lufkin & Jenrette Securities Corp. group tentatively priced $134.7 million of West Virginia School Building Authority capital improvement revenue bonds. The offering consisted of serial bonds priced to yield from 4.30% in 1995 to 5.85% in 2003. Bonds in 1997, 2000, and 2004 were not formally reoffered to investors. Except for those maturities, the offering was MBIA-insured.
David Smith, portfolio manager of the $136 million MFS West Virginia Municipal Bond Fund, passed on the offering.
"It's really not structured attractively for me. It's pretty much loaded to the front end of the curve, 1995 to 2004, and it's expensive," Smith said. "I'm generally not a shorter term player, but also it was rich for down there, tOO."
The deal was seeing "mixed results," but generally seemed to be going slowly, Smith said.
"It doesn't seem to be having good investor reception," he added. The deal was expected to be repriced.
On the economic front yesterday, the Commerce Department reported that new orders for durable goods inched up 0.1% in September. The August reading was up a revised 6.4%.
The next big number on the economic calendar is tomorrow's reports on third-quarter gross domestic product and final sales.
Kathleen Camilli, chief economist at MFR Inc., said she expects a 2.6% increase in GDP, with final sales growing at 3.6%.
"The market will most likely be focused on final sales figures, which are going to be up substantially from the 1.4% rate of the second quarter," Camilli said.
Camilli said the consensus forecast for third-quarter GDP growth is 3%. "To the extent that this number prints lower than 3%, it could be modestly constructive for the bond market," she said.
It's difficult to tell, though, whether the market would ignore a weaker-thanexpected GDP figure, and just focus on the final sales figure, Camilli said.
"The point is that there has been very little appetite for bonds, and you really need to get a string of weaker-than-expected data for people to be enticed back into the market," said Camilli, adding that she doesn't expect that to happen.
"Instead, we expect upcoming data releases to show an accelerating rate of growth in the fourth quarter," she said.
The 30-day visible supply of municipal bonds yesterday totaled $3.12 billion, down $174.7 million from Tuesday. That comprises $1.499 billion of competitive bonds, down $137.2 million from Tuesday, and $1.626 billion of negotiated bonds, down $37.6 million.
Standard & Poor's Corp.'s Blue List of municipal bonds was up $85.1 million yesterday to $2.20 billion.
In credit rating actions yesterday, Standard & Poor's said the outlook for East Bay Municipal Utility District, Calif., has been revised to negative from stable.
The change was announced in connection with the rating agency's AAminus assignment to $80 million of water system subordinated revenue bonds, Series 1994, scheduled to be sold via competitive bidding Monday. Moody's Investors Service rated the bonds A1.
"If the district implements its proposed [four-year, $798 million] capital improvement plan, and maintains its present level of coverage, everything is fine and the outlook could move back to stable," Standard & Poor's associate director David Woodrow said yesterday. "If the plan places pressure on the maintenance of the 1.60 times coverage ratio, then we might have to reconsider the rating."
The negative outlook applies to the proposed $80 million bond sale, as well as to about $262 million of outstanding bonds rated either AA or AA-minus. The district also has about $130 million in commercial paper rated A1-plus and $262 million of AAA-rated insured bonds that are not affected by the rating outlook change.
The East Bay district serves about 1.2 million customers in the Northern California counties of Alameda and Contra Costa.
