The municipal bond market started to regain its equilibrium early yesterday after two punishing sessions, only to stumble later in the day on jitters over today's release of October employment data.
"I think it's just pre-number nervousness," one trader said yesterday. Selling was light Thursday morning, when it "looked like the market was going to try to catch a bid," he said. On late Wednesday afternoon, - the market had started to see "decent" trading, after some benchmark double-A paper hit 7%, he noted. The 7% yields attracted a few crossover buyers and even some mutual funds, he said.
Though the market appeared poised to do better early Thursday, that promise went unfulfilled.
"Governments faded a bit this afternoon, so the [muni] bid is probably down a 1/2, but it hasn't been tested," the trader said late yesterday.
A municipal analyst yesterday said yields on high-grade issues rose three basis points overall, while dollar bonds were down 3/8 to 1/2 point in light activity. In the government market, the 30-year bond closed down 3/32, to yield 8.09%.
Bid lists totaled roughly $200 million, the analyst said. While that may seem modest compared to the amount in recent days, in markets like this, it weighs heavily, the analyst said.
"It's not breaking the camel's back, but it is bringing the camel down closer and closer to it's knees," he said.
In debt futures, the December municipal contract settled down 14/32 to 82 3/4. Yesterday's December MOB spread was negative 450, compared to negative 444 on Wednesday. The MOB spread measures the price differential between the municipal and government futures contracts. The acronym stands for "munis over bonds."
"In large part, we're underperforming in both cash and in futures," said Christopher M. Dillon, a vice president and municipal market strategist at J.P. Morgan & Co. Dillon noted that just two weeks ago, on Oct. 20, the MOB was at negative 383.
The strategist added, however, that municipals are still a lot more expensive relative to Treasuries than they were at the beginning of the year.
It's possible, though, that the recent cheapening could stir some interest among crossover buyers, Dillon said.
"You're starting to hear inquiries again," he added.
Looking ahead, Dillon expects some abatement in the bond fund bid lists that have pressured the market.
"At this point, really the tax-swapping season has in large part eased up now that most of the funds have passed their fiscal year ends," he said. "So we would tend to think that sort of selling into the market would ease up and the pressure from secondary selling would be a little less severe than it has been over the last couple of weeks."
A municipal trader agreed that bid lists have slowed.
"Mutual fund bid wanteds for the last three or four days have definitely slowed a little bit," he said.
In the primary market, next week's negotiated action will spotlight a $1.3 billion New York City general obligation deal through senior manager Merrill Lynch & Co.
Merrill began a retail premarketing effort that will run through Tuesday. This marks the first time the city has engaged in such retail premarketing.
The offering, scheduled for pricing on Wednesday, is expected to feature $750 million of fixed-rate tax-exempt bonds, $250 million insured tax-exempt adjustable-rate bonds, $100 million tax-exempt adjustable-rate bonds, $100 million insured taxable adjustable-rate bonds, and $100 million taxable adjustable-rate bonds, according to Alan Anders, director of financing policy at the city's Office of Management and Budget.
Anders added that because some additional banks have expressed interest in backing the deal, the city may increase the $100 million of tax-exempt adjustable rate bonds, which are bank supported, to $150 million. The $750-million fixed-rate portion would then be reduced to $700 million, he said.
"We are very pleased that we have this much interest from banks and from insurers," Anders said. The deal may include some derivatives.
"We're having our usual derivative process where we've solicited proposals for derivatives, and we are reviewing them this afternoon and tomorrow morning," Anders said Thursday. He said his office has received a "significant" number of proposals.
Next week's competitive slate includes Tuesday's $62.8 million North St. Paul/Maplewood/Oakdale ISD #622 general obligation bonds.
Meanwhile, yesterday's 30-day visible supply of municipal bonds totaled $3.19 billion, down $159.2 million from Wednesday. That comprises $1.24 billion of competitive bonds, down $237 million from Wednesday, and $1.947 billion of negotiated bonds, up $78.1 million from Wednesday.
Standard & Poor's Corp.'s Blue List of municipal bonds was down $2.2 million yesterday to $2.24 billion.
