Municipal bond prices were driven down nearly a point yesterday on strong economic reports, a weak Treasury market, and heavy bid-wanted volume from dealers. "I think everybody started to run toward the revolving door at the same time," said a municipal bond analyst. In light to moderate secondary activity yesterday, yields on high-grade issues rose seven basis points overall, and more in spots. Dollar bonds ended down nearly a point overall.
In debt futures yesterday, the December municipal contract closed down 1 14/32 to settle at 83 2/32. Yesterday's December MOB spread was negative 429, compared with negative 417 on Monday.
In the government market, the 30-year bond closed down nearly a point to yield 8.05%. The bond market plunged in reaction to the release of the National Association of Purchasing Management's October index, which climbed to 59.7% from 58.2% in September. The index's prices paid component jumped to 79.9% from 77.1% in September.
"NAPM shows that the economy is leaving the Fed in the dust," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc. Even though the Fed has raised rates rapidly this year, "they've been caught flatfooted by this recent surge in growth," he said.
Wesbury said the bottom line is that the economy appears to have "accelerated into the fourth quarter rather than moderating or slowing down."
The economist thinks the Federal Reserve is sure to tighten at its Nov. 15 Federal Open Market Committee meeting. The tightening, however, is unlikely to go beyond 50 basis points, he said.
Taken together, the information the market has received since the Fed's last FOMC meeting in September suggests the Fed made a mistake by not tightening then. Now expectations for more than a half-point tightening have increased, Wesbury said.
However, the same forces that kept the Fed from tightening on Sept. 27 are likely to limit any November increase to only 50 basis points, Wesbury said. He described those forces as "mainly a shift in personalities and philosophy" at the Fed.
Fed vice chairman "Alan Blinder and [Fed governor] Janet Yellen are clearly more dovish than the old Fed, and it appears that they have converted [Fed governor] Lawrence Lindsay to that camp, or at least he's drifting that way," Wesbury said.
He added that it's not so much that Blinder and Yellen are anti-tightening, as it is that they believe growth is more important than inflation control, at least in the early stages of the recovery.
"And I think that argument is going to win out, in addition to Alan Blinder's argument that the recent tightening hasn't had enough time to affect the economy yet," he said.
Wesbury doesn't share Blinder's belief that the tightenings need more time. Yesterday's NAPM figures represented "the highest numbers basically since 1987," he said, adding that the growth seen in the report's price component was "pretty amazing."
"So these levels of the purchasing managers' index are not to be sneered at," Wesbury said. "In fact, the numbers from late 1987 [to] early 1988 signaled a continuation in increases in interest rates leading the Fed to push the Fed funds rate all the way to 9 3/4 by early 1989."
Numbers seen since the September FOMC meeting are setting the stage for even further increases beyond whatever the Fed does in November, Wesbury said.
"In my view, the Fed must get to 6% on Fed funds to have any impact on growth, and will most likely be close to 7% by the end of 1995," Wesbury said.
In negotiated action today, Goldman, Sachs & Co. is expected to price a $190 million New York State Medical Care Facilities Finance Agency deal. The offering was tentatively scheduled for yesterday. The underwriter said yesterday's poor market played no role in its decision to delay.
In competitive action, a Merrill Lynch & Co. group won $120 million of Ohio Public Facilities Commission higher education capital facilities bonds with a net interest cost of 5.9820%. The AMBAC-insured offering consisted of serial bonds reoffered to investors at yields ranging from 5.10% in 1998 to 6.20% in 2007. Bonds from 1995 to 1997 as well as 2008 and 2009 were not reoffered to investors.
A Merrill Lynch group also won $40 million of Ohio Public Facilities Commission mental health capital facilities revenue bonds with an NIC of 6.0334%. The MBIA-insured bonds were reoffered to investors at yields ranging from 4% in 1995 to 6.40% in 2009
The 30-day visible supply of municipal bonds yesterday totaled $3.66 billion, up $850 million from Monday. That comprises $1.80 billion of competitive bonds, up $191 million from Monday, and $1.86 billion of negotiated bonds, up $659.5 million.
Standard & Poor's Corp.'s Blue List of municipal bonds was down $39.6 million yesterday, to $2.15 billion.
