Municipals moved higher with Treasuries Friday as the market contemplated a perplexing May employment report.
"It's been pretty aggressive bidding and there have been some good trades in here today," one municipal trader said, adding that bonds were up 3/4 to a full point.
Later in the day, a municipal analyst pegged dollar bonds up 3/4 point, and had yields on high-grade issues down by five basis points overall. Trading was moderate.
The September MOB spread was negative 382 Friday, up from negative 381 Thursday. The September municipal contact closed more than a point higher Friday at 92 7/8s.
"We're in good shape," the trader said. He said he wished he had more bonds to sell Friday, adding that he gotten rid of some inventory he'd been holding onto for a while.
Another trader said municipals would have been up even higher if more bonds were available. "It's kind of a struggle because the market's really thin," he said. "Every block that went out there had a bid against it."
The largest block the trader had seen by Friday at 3:00 p.m., EDT, was $27 million of Massachusetts AMBAC 4.95s of 2005, which traded at 5.65% less 1/4 point. Also Friday, $10 million Pennsylvania 5s of 2003 traded at 5.25%.
A third trader said the rise in municipals was linked merely to government market gains. If Treasuries were to drop today, municipals would follow, he said. The municipal analyst said while Treasuries may not be the only factor, they certainly exert "a strong influence."
The government's 30-year bond initially moved up on Friday's employment report, but then retrenched. The long bond later rebounded to finish 3/4 points higher.
"This is a split personality number," Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc., said of the employment report.
Non-farm payrolls came in below expectations, which was favorable for the bond market, but the unemployment component dropped, which was a negative for bonds.
Friday's report showed May non-farm payrolls grew by 191,000, a figure that includes the return of 70,000 striking teamsters. The payrolls figure came in below the 275,000 to 330,000 rise many economists had expected.
However, the unemployment rate fell to 6% in May from 6.4% in April. The payroll survey comes from canvassing existing companies, while the unemployment data comes from surveying households, Wesbury said.
By itself, the employment report was probably not enough to make the bond market do more than "tread water," Wesbury said. However, the report did help solidify the 7.25% to 7.50% yield range on the long bond.
With the market leaning toward the top of the yield range, participants saw Friday as a buying opportunity. Also, the Federal Reserve was rumored to be buying five-year and 10-year notes, which helped.
Westbury said the non-farm payrolls report combined with recently released retail sales, durable goods and housing data "at least add to credibility to the theory that higher interest rates were slowing the economy in May."
But the economist warned that he'd be "a little leery" about fully subscribing to that theory.
"One month's employment numbers do not make a trend," he said.
He pointed to an increase in hourly wages, which have grown at an annual rate of 5% in the past two months, or roughly double the gain posted last year at this time.
In other news, total new issue long-term sales plunged last week to $1.18 billion from $2.7 billion for the week ended May 27. That's the lowest weekly volume since the holiday week of Dec. 31, 1993, when only $657 million was sold.
For the week ended June 3, competitive deals dropped to $446 million, the lowest volume since the week ended April 1 when $314 million was sold. That compares with $573 million a week earlier. Weekly competitive bond sales have exceeded $1 billion only once in the past 11 weeks.
Negotiated deals fell to $735 million, from $2.13 billion.
New issue noted sales, however, jumped to $386 million in the week ended June 3 from $270 million the previous week 3. That is the highest total for weekly note sales since the week ended Feb. 18 when $3.73 billion was sold, including a $3.2 billion California note issue sold on Feb. 15.
Standard and Poor's Corp's The Blue List dropped $139 million on Friday to $1.58 billion, the lowest level since May 24's $1.57 billion.
The 30-day visible supply of municipal bonds for today totals $4.019 billion, up $182.1 million from Friday. That comprises $2.182 billion of competitive bonds, which is up $440 million from Friday, and $1.837 billion of negotiated bonds, down $257.9 million from Friday.
In California developments on Friday, Standard & Poor's assigned its SP1-plus rating to two pooled cash-flow financings scheduled this week for school districts in Los Angeles and Orange counties.
In its first-ever pooled program, Orange County is scheduled to sell today via competitive bidding $299.7 million of tax and revenue anticipation notes on behalf of 27 school districts. Moody's Investors Service last Wednesday assigned a MIG-1 rating to the financing.
Los Angeles County is scheduled to sell this week via negotiation $145.7 million of Trans participation certificates on behalf of 27 school districts and community colleges.
Standard & Poor's said both pools are structured with strong investor safeguards. For example, intercept mechanisms place revenues pledged to repay the Trans in a special note repayment account.
