A huge jump in the Commodities Research Bureau's index pummeled Treasuries, and sent municipals 3/4 point lower yesterday.
"Just Treasuries," one trader said, citing what he judged had weighted municipals down. The 30-year Treasury bond closed down 1 3/8 points to yield 7.43%. The CRB Index rose more than 4 1/2 points yesterday.
Yields on high-grade issues rose seven basis points overall, and more in the long end. Dollar bonds were down 3/4 points to more in spots. Activity was moderate.
In debt futures, the June municipal contract settled down nearly a point at 90 30/32s. Yesterday's June MOB spread was negative 406, compared to negative 419 on Friday.
Several players yesterday pointed cited the rise in the CRB index for yesterday's bond market losses. In addition to a substantial run-up in coffee and cocoa prices, grain prices have also been influenced by recent dry weather in the Midwest.
"It's one of the driest May's in history," said Brian Wesbury, chief economists at Griffin, Kubik, Stephens & Thompson Inc. "Dry weather is not good for crops."
Lower crop production means higher prices and increased inflation, Wesbury said. The economist added, however, that the surge in the CRB Index was not solely responsible for yesterday's losses."
"I think if it was just the CRB we wouldn't be as worried about it in the bond market as we are today," Wesbury said.
The Journal of Commerce's commodities index reached a 3 1/2-year high on Friday when it hit 101.8, Wesbury said. The index has not been that high since Nov. 30, 1990, when it reached 101.4, he said.
Wesbury said he believes the index is an even more reliable inflation barometer than the CRB because it's not subject to weather variables. "It's a raw industrial commodities index," he said.
Also contributing to bond market troubles was the dollar's continued weakness against other major world currencies, and the easy monetary policy the Federal Reserve began in late 1991 or early 1992.
Recent actions by the Fed to raise interest rates came too little, too late, Wesbury said.
James Kochan, head of fixed income asset management at Robert W. Baird & Co. thought yesterday's Treasury sell-off on the rise in the CRB index was overdone.
"I think we overreacted quite dramatically here today," he said.
The sell-off was probably exacerbated by some dealer community selling ahead of today's and Wednesday's Treasury auctions.
"In a sense, the market is providing the buyers of two-year and five-year notes with a bit of a gift," Kochan said.
Despite yesterday's losses, "there's no lack of demand for municipals," said Robert W. Chamberlin, a senior vice president and director of municipal research at Dean Writer Reynolds Inc.
The market has seen minimal new issue supply, and demand from retail continues to be strong, Chamberlin said.
Those positive features aside, the municipal market has been hit by external forces related to the use of Treasury bonds as hedging tools for various other markets, he said.
The Treasury market has been hit in the past three months, in part, because of the unwinding of leveraged positions around the world, Chamberlin said.
Moving to the new issue side, the market today expects $196 million Metropolitan Pier and Exposition Authority, Ill., bonds through Smith Barney Shearson. Overall, however, action is expected to be light.
"It's going to be a reality dull new issue week," a trader said.
Elsewhere, the 30-day visible supply of municipal bonds today totals $3.70 billion, down $125.7 million from yesterday. That comprises $1.57 billion of competitive bonds, up $26.5 million from yesterday, and $2.13 billion of negotiated bonds, down $152.2 million from yesterday.
Standard & Poor's The Blue List rose $46.3 million yesterday, to $1,528.6 million.
MTA Calls Meeting
In other news, the Metropolitan Transportation Authority called an emergency board meeting for today at 12:30 p.m. to authorize the sale of $160 million in New York City Transit Authority revenue anticipation notes.
"The money is necessary to cover MTA New York City Transit's operating expenses for the months of May, June and July," a release from the authority said. "Normally, state subsides would cover these operating expenses. However, the delay in the passage of the state budget has interrupted the authorization of these subsidies."
The meeting will be held the MTA Headquarters, 347 Madison Ave., New York City.
