Municipal cash prices ended up three-quarters of a point yesterday, while futures shook off most of an afternoon chill induced by Orange County, Calif., bankruptcy rumors to finish higher as well.
"We had very little selling again by retail, and mutual funds continued to be buyers," a municipal trader said. The trader pointed to a roughly $250 million bid list put out by a crossover buyer Monday afternoon that contained "a lot of 30-year discount type" of paper. "It all got purchased by mutual funds [Monday] afternoon and [yesterday] morning," he noted.
While the cash market held firm throughout the day, Orange County bankruptcy rumors circulating yesterday afternoon sent municipal futures into "somewhat of a tailspin," the trader said.
Rumors that the county might declare bankruptcy due to losses in its investment pool caused the contract to fall three-quarters of a point within roughly 30 minutes, according to Tom Doe, a vice president and senior analyst at Municipal Market Data Inc.
The March contract fell from 85 15/32 to 84 19/32. It later recouped most of that dip to finish up 1/32 to 85 5/32 on the day. The high of the day had been 85 19/32.
Concern that Orange County's leveraging strategy and losses on derivative investments may not be an isolated incident caused a flight to quality to Treasuries, Doe said.
As a result, investors sold the municipal contract to hedge against possible municipal bond price declines related to similar investment strategies.
The trader said at this point it's "difficult to assess" how Orange County's woes will effect the municipal market.
"It definitely had an impact on guys that are not intimately involved in the market ... one of the reasons why you've seen the muni contract under-perform this afternoon is you probably had some non-municipal people selling the MOB spread," he said. "You're going to get some selling just because a lot of guys have put this trade on over the last couple of months, buying munis and selling governments, and now that you've got the credit factor thrown into the whole thing, the easiest thing to do is to sell," he added.
A analyst, however, said the Orange County rumors had no impact that he could see on the cash market. Yields on high-grade issues improved by seven basis points yesterday, which makes for a 10-basis point improvement over the past two days, he said. Dollar bonds were up three-quarters of a point overall, while some lesser-quality issues finished up 1 1/4 points in some cases. Yesterday's March MOB spread was negative 466, compared with negative 448 on Monday.
"The municipal market is trading wonderfully, and has been for the last week or so," a second municipal trader said yesterday. "It seems like any offerings that are around have traded, and it seems like there's good business across the board."
In addition to a shortage of new issues, the trader said the municipal market, as well as the fixed-income market in general, had gotten oversold.
"I think when the Fed raised the funds rate by 75 [basis points] it gave everybody the confidence that they were really serious about inflation," the trader said.
While municipal bond funds did see redemptions, "I think they had more cash than they had bonds, so they had to come in and buy," he said. The market also got help from crossover buyers, he said.
"I think munis had gotten so cheap that you had the added impetus of crossover buyers coming in, and I think you just had too many dollars chasing too few bonds," the trader said.
Whether the current rally will last remains the "$64,000- question," he said.
"I mean, I'm looking at the levels here and I'm saying, 'Oh God, I wouldn't be spending my money here, I wouldn't be buying 30-year municipals at a 6.75% [yield] let me tell you that,'" the trader said, adding that he would want a 7% yield at least. "But it could [last] if there's no supply and people are looking to buy some bonds and this is what's around."
Joe Deane, a managing director and portfolio manager of the Smith Barney Shearson Managed Municipals Fund, hopes the current rally will last because he's been scooping up the discount bonds that other investors have been dumping.
"If the government does not crater, and I don't suspect that it's going to, then I think the two weeks that we saw before this were the aberration. I think we're probably fine," he said.
Deane said December and January are both big bond call months, new supply is low, and municipals are still relatively cheap to Treasuries.
He has been buying discounts because they were "getting way too cheap, and when the market starts to take off, that's what rallies the most ... We really had to grit our teeth for a couple of weeks, but we are where we wanted to be positioned, certainly starting the new year," he said.
After finishing at 83.13 for the week ended Nov. 4, the Bond Buyer's Municipal Bond Index slipped to 82.02 for the week ended Nov. 11 and to 81.03 for the week ended Nov. 18. The index climbed to 81.27 for the week ended Nov. 25, and was up to 84.12 for the week ended Dec. 2.
In competitive action yesterday, a Goldman, Sachs & Co. group won $45 million Delaware general obligation bonds with a true interest cost of 5.9216%. A $2 million balance was reported yesterday afternoon, and pricing was said to reflect a seven- or eight basis-point improvement in the high-grade sector. Merrill Lynch & Co. had the cover bid with a 5.97239% TIC. Serial bonds were reoffered to investors at yields from 4.10% in 1995 to 6.50% in 2014.
In negotiated action yesterday, a Bear, Stearns & Co. group priced and repriced $150 million New York City Industrial Development Agency civic facility revenue bonds for the USTA National Tennis Center Incorporated Project. The offering was FSA-insured.
At the repricing, yields on serial bonds were lowered by five basis points, while term-bond yields were lowered by 10 basis points. The final offering featured a top yield of 6.75% in 2014.
Lehman Brothers yesterday priced $100 million New York State Research and Development Authority Facilities AMT revenue bonds. Lehman did not reprice the deal, and declared it "all done" yesterday afternoon. The deal included a 2029 bullet maturity priced as 7 1/8s to yield 7.20%.
Also yesterday, J.P. Morgan priced and repriced $91-million Illinois Development Financing Authority Ambac-insured revenue bonds. The deal was comprised of a 2015 bullet maturity with a 6 3/4% coupon, and the yield was lowered at the repricing by more than four basis points to 6.841%.
The 30-day visible supply of municipal bonds yesterday totaled $3.22 billion, up $125.2 million from Monday. That comprises $1.322 billion of competitive bonds, up $8.7 million from Monday, and $1.89 billion of negotiated bonds, up $116.4 million from Monday.
Standard & Poor's Corp.'s Blue List of Municipal Bonds yesterday was down $6.3 million, to $1.2 billion.
Sharon R. King and Sean Monsarrat contributed to this column.
