Prices still falling as funds continue their selling spree; contract goes up.

Municipal prices ended lower again yesterday as mutual funds continued to unload bonds.

"I would call it down 3/8 to 1/2," said a muni trader. The December municipal contract, meanwhile, was up nearly 5/8 point yesterday to settle at 82 3/32.

"I think the sheer weight of the volume of bid wanteds just didn't allow the [cash] market to get up off the floor," the trader said. That trader and others said bid lists from mutual funds accounted for most of yesterday's volume, which was estimated at between $400 million and $450 million.

The trader added that the municipal contract had been beaten down so far "that it was inevitable when Treasuries had their little rally that we would have kind of a rubber band effect."

The Treasury's 30-year bond yesterday ended up nearly 1/2 point to yield 8.11%. As for municipals, one analyst pegged dollar bonds down 3/8 point. Yields on high-grade issues rose by three basis points overall, and more in spots. Secondary activity was light, he said. Yesterday's December MOB spread was negative 469 compared with negative 473 on Monday.

Another muni trader said that while on Monday "the sound of people throwing in the towel was deafening," players were doing some bargain shopping yesterday. Few with bonds for sale, however, seemed willing to part with them at such distressed levels.

"The flip side of it is that there are not many people trading bonds into the bids that we're seeing right now. There's an awful lot of folks that just aren't going to sell," the trader said.

In the new-issue arena, market weakness is likely to be reflected in the pricing of New York City's $1.3 billion general obligation bond offering, scheduled for pricing today through senior manager Merrill Lynch & Co.

The fixed-rate portion of the offering could be anywhere from $700 to $750 million, a source familiar with the deal said.

"Yields will be a little bit higher -- people are talking now somewhere around a 7.50% to a 7.55% max yield," the source said.

Very preliminary estimates had the deal being marketed to retail investors at a top yield of 7.20% in 2021, and by Monday those estimates had been adjusted to 7.30%.

The source said that as of yesterday it appeared unlikely that the deal would contain derivatives, although that could change.

He also said there is a "substantial amount" of retail interest in the deal.

"Probably at least 20% of the issue will be done on a retail basis pre-sale -- it may even be larger," he said.

Reno Martini, chief investment officer at Calvert Asset Management Co., called the current market environment "brutal." He said, however, that CAMCO hasn't seen the kinds of redemptions that appear to be leading many funds to unload bonds. Martini oversees 15 municipal bond funds for CAMCO representing some $2.6 billion of assets.

Still, the municipal market overall has seen some "pretty good-size bid lists, so that's driven the market down," Martini said.

"I hate saying this, but it kind of reminds me of 1987 when all of these bonds came out for the bid in April and May ... and the bids got worse and worse and worse," Martini added. "I don't think we're close to that yet, but if it continues we may get there."

Martini believes rates will go a bit higher before the market finds a bottom. Predicting just how much higher rates will go before that bottom arrives, however, is the tricky part, he said.

"When it got to 8% we thought that might create another buying opportunity, but it went from 8% to 8.09% or so real quick, and we decided not to do anything," he said. Martini is now waiting to see if an 8.25% yield level on the government's 30-year bond marks the turning point, and therefore a buying opportunity.

Martini said he will re-evaluate the 8.25% yield level as a possible turning point in light of data arriving this week and next He cited two consumer confidence surveys ahead, as well as Thursday's producer price index and the Nov. 16 consumer price index.

Martini will also be watching to see what comes out of the Nov. 15 Federal Open Market Committee meeting.

"We think they definitely have to hike rates. How much is the question," he said.

The 30-day visible supply of municipal bonds yesterday totaled $4.05 billion, up $383.8 million from Monday. That comprises $1.769 billion of competitive bonds, up $350 million from Monday, and $2.276 billion of negotiated bonds, up $33.8 million.

Standard & Poor's Corp.'s Blue List of municipal bonds was down $30.9 million yesterday, to $2.16 billion.

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