GDP report lifts municipal futures, also long bond; cash tags along.

Weaker-than-expected economic growth in the second quarter sent long-term Treasuries and the muni futures contracts soaring on Friday, dragging a sleepy tax-exempt cash market higher in the process.

"We've seen some selling, but not much going away business." one taxexempt trader said. "Pre-res have done real well, but it's been pretty quiet."

The September muni futures contract closed up nearly 1 3/8 point at 90.26, off a high of 92.12 and a low of 90.19. The Treasury market also enjoyed a robust day, with the benchmark 30-year long bond ending the session up almost 1 1/2 points at 86.13, to yield 7.38%.

Light-to-moderate trading was reported in the tax-exempt cash market, with dollar bonds quoted up 5/8 to 3/4 and high-grade issues rising five basis points.

"There was a rally today, but we didn't participate as much as we probably should have," a veteran taxexempt trader said. "The muni market has been in a stupor and it's hard to get out of. There is still not a lot of impetus. Still, it's a more positive way to end the week than the way we began it."

The Commerce Department gave fixed-income players reason for optimism when it reported Friday morning that gross domestic product grew at an annual rate of 3.7% in the second quarter. The GDP was actually in the range of most economists' predictions, but contradicted rumors circulating late last week that growth would be as high as 6%.

Any fears in the fixed-income market of skyrocketing GDP proved to be unfounded, with some market analysts and economists suggesting that Friday's data could persuade the Federal Reserve to rethink another tightening of monetary policy.

"Overall, it looks like the underlying actual demand for goods and services was not very strong" in the second quarter, said Carol Stone, senior economist at Nomura Securities International. "It is a real possibility we could have an unchanged policy" when the Fed's Open Market Committee meets on Aug. 16.

The final sales component of second quarter GDP only grew 1.5% after rising 2.2% in the first quarter, Stone noted: "A pretty sluggish pace for underlying demand." The housing sector data and preliminary indications on consumer spending in the third quarter from the Johnson Redbook also suggest that the economy is not overheating, she said.

However, last Wednesday's durable goods numbers "suggest there is some life in the economy." Stone added.

With several key indicators scheduled for this week, including the National Association of Purchasing Management report today and the July employment report on Friday, any predictions about the Fed's intent are purely speculative and many Fed watchers still believe a tightening is imminent, However, there was a growing sense on Friday among some market participants and economists that another tightening, once a foregone conclusion, might be avoidable.

"The market is trading as if they believe it, but it's too early to tell," said James Kochan, head of fixed-income asset management at Robert J. Baird & Co. "While [second-quarter GDP] was a piece of good news, I don't think it's enough to tell us that the Fed will stand pat."

Kochan predicted "very choppy" trading this week because of the slew of economic indicators on tap and warned that "at these levels, the market is vulnerable to a sell off."

The negotiated calendar this week features a $470 million offering of variable-rate hospital revenue bonds from Harris County, Tex., Health Facilities Development Corp. J.P. Morgan is the lead underwriter on the transaction, slated for sale tomorrow. Sometime this week, Smith Barney Inc. is expected to lead a $375 million sale of highway bond and bridge trust fund revenue bonds by the New York State Thruway Authority. Also, the Sacramento, Calif., Municipal Utility District plans to sell $141 million of electric revenue and refunding revenue bonds through a syndicate led by Goldman, Sachs & Co.

Standard & Poor's Corp.'s Blue List reversed a three-day climb Friday, declining $50 million to $1.88 billion from $1.93 billion. The Blue List had a daily average of $1.75 billion in July compared with $1.87 billion in June. Through the first seven months of 1994, the measure of dealer inventories averaged $1.76 billion. For all of 1993, it averaged $1.58 billion.

The Bond Buyer's 30-day visible supply jumped $880 million on Friday to $4.33 billion from $3.45 billion on Thursday. The measure of future supply has been under $5 billion for five straight days and on 83 occasions so far this year. In all of 1993, it was under $5 billion 78 times.

The 30-day visible supply had a daily average of $5.29 billion in July, with the competitive component at $3.33 billion. That compares with a June daily average of $3.65 billion. Through the first seven month the year, the measure of future supply averaged $4.85 billion. For the full year 1993, it averaged $5.96 billion.

Last week, with much of the municipal market content to sit tight, Denver Airport caused some rumblings when it announced it may forsake a planned $190 million refunding set for mid-August.

"We had a plan to do a current refunding of some 1985 bonds but it looks like it might not be financially beneficial," said Patricia Schwartzberg, manager of revenue for the city and county of Denver.

A pending report on the airport's baggage system could play a part in whether or not the refunding gets sold, Schwartzberg said, but added that "the decision has not been finalized."

Despite the news, traders said there was not a lot of secondary market activity on Denver airport bonds last week.

In dollar bond trading on Friday, MTA MBIA 6s of 2024 were quoted 6.24% bid, 6.20% offered; Burke County, Ga. 6 3/8s of 2024 were quoted 99 1/8-1/2 to yield 6.44%; Florida Board of Education 5.88s of 2024 were quoted 6.28% bid, 6.16% offered; and Dude County aviation 6.20s of 2024 were 98 3/4-99 1/8 to yield 6.31%.

Late Friday, the New York State division of budget projected continued balance in the state's 1994-95 budget in its first quarter update.

"There are no significant changes in the projections we issued shortly after budget enactment," budget director Rudy F. Renko said in a prepared statement.

General fund spending is still projected to be $34.24 billion and spending from all governmental funds $63.27 billion, the press release said.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER