Municipals idled ahead of today's employment report as participants waved goodbye to a summer that saw a lot of wheel spinning and little progress made.
"It's been one of those summers where you saw a lot of volatility but we didn't go anywhere," one trader said, adding that "zero" was happening yesterday as the Labor Day weekend, apathy, and anticipation of the August employment report strangled activity. For example, municipals yesterday were trading at levels either the same or slightly better than the previous week's levels, the trader said.
"There's not a lot of conviction either way," the trader said. "No one really chases it up or down."
High-grades ended yesterday's "very quiet" session unchanged, while dollar bonds ended unchanged to 1/8 higher, a municipal analyst said. A second trader described what he called a "stealth rally" yesterday, during which he was "quietly losing bonds at higher prices."
"There must have been Sept. 1 redemptions, and I think there's very little supply," he said.
In the Treasury market, the 30-year bond ended unchanged to yield 7.44%.
In debt futures yesterday, the December municipal contract was down nearly 1/8 point to settle at 90 3/8. Yesterday's December MOB spread was negative 397, compared with negative 398 on Wednesday.
Looking ahead, the first trader does see a few reasons for being constructive on the market.
For one thing, while it's possible that more monetary policy tightening could still loom, the trader believes "the majority of the rate increases are behind US."
The market is also in good shape technically, he said.
"There is just no paper," the trader said. Fund managers may get a good bid to sell some of their paper, they are loath to take advantage of it because they can't replace the bonds, he said. With virtually nothing to swap into, there's nowhere left to go but cash. Most of the funds are currently comfortable with their cash positions.
The 30-day visible supply of municipal bonds hit a low for the year yesterday, totaling $1.60 billion, down $905.8 million from Wednesday. Yesterday's visible supply was the lowest since Dec. 30, 1991, when it was $993.1 million.
The $1.60 billion figure comprises $1.079 billion of competitive bonds, down $245.6 million from Wednesday, and $516.4 million of negotiated bonds, also a low for the year and down $660.2 million from Wednesday. Also yesterday, Standard & Poor's Blue List of municipal bonds was down $39.5 million, to $1.71 billion.
James Kochan, head of fixed-income asset management at Robert W. Baird & Co., agreed that yesterday's session was short on excitement.
"Just watching the grass grow is more exciting than this," Kochan said. "Everybody's sitting around and waiting."
However, things could improve for the fixed-income market, provided today's employment number doesn't do too much damage, he said.
"If we can just get through this number, I think we're in fairly good shape. But that is a big if," Kochan said.
An increase of 300,000 or more in nonfarm payroll employment would probably prompt a fairly substantial selloff, while an increase of 250,000 jobs would be neutral, he said. An increase in the low 200,000 range would probably help the market, Kochan said.
"It's a coin flip," the analyst said, when asked which scenario he expects. He added, however, that "this economy is growing at pretty healthy pace."
While a 300,000 nonfarm jobs increase is consistent with the way the economy is growing, Kochan fears the market has convinced itself that growth is slower, and participants may react quite negatively to such a figure.
As for yesterday's National Association of Purchasing Managers index, Kochan said it continues the theme established earlier this week by the index of leading economic indicators and the Chicago Purchasing Managers report.
While the reports overall point to "a little bit of a slowdown taking place," portions of the reports raised inflation concerns, he said. For instance, while six of the 11 leading economic indicators were down, the price component "was up big," he said.
The market knows that inflation is a lagging indicator. What it needs to know now is that the economy is slowing down, Kochan said. If today's report doesn't show a slowdown, "that's a classic prescription for another Fed tightening," Kochan said.
If today's employment report triggers a selloff, municipals, as they typically do, will probably outperform Treasuries, Kochan said. If the market rallies, municipals, which have been getting rich lately especially in the short end, should underperform, he said.
Turning to next week's new issues, a $115 million Lehigh County (Pa.) Industrial Development Authority pollution control revenue refunding bond deal for the Pennsylvania Power & Light Co. project will be negotiated through CS First Boston. The offering is the week's biggest so far. On the competitive side, Austin, Tex., is scheduled to sell $41.8 million of bonds on Thursday.
