Plenty of bonds, little appetite; Penn P&L bonds repriced, all sold.

Municipals ended 1/4 to 3/8 point lower yesterday as bid lists continued to flow while appetites for bonds remained small.

"It's pretty illiquid at the moment." a municipal trader said. "Everybody seems to be on the sidelines."

While he didn't stop to total them. the trader estimated that 12 to 14 bid lists circulated yesterday.

A municipal analyst said yields on high-grade issues rose two basis points over all, with the market holding the line through 10 years "and giving up ground on the long end." Dollar bonds lost 1/4 point over all. and as much as 3/8 point in spots. The analyst estimated that bid lists totaled "a couple hundred million."

In debt futures yesterday, the December municipal contract lost nearly 1/4 point to 89 14/32. Yesterday's December MOB spread was negative 383, compared to negative 387 on Tuesday. The 30-year Treasury bond closed down 3/8 point to yield 7.56%

On the new issue front yesterday, the $115.5 million Lehigh County Industrial Development Authority offering for the Pennsylvania Power and Light Co. proved to be the highlight.

The offering consisted of a single 2029 maturity of pollution control revenue refunding bonds, which were repriced to yield 6.40%. Senior manager CS First Boston negotiated the MBIA-insured offering. The bonds are callable beginning Sept. 1, 2004, at 102, declining to par in 2006. At the repricing, the yield was raised by five basis points. No balance remained by midafternoon.

The Lehigh County offering was "a little bit long for our tastes right now," said John Mooney, assistant vice president and portfolio manager of SunAmerica's $190 million Tax Exempt Insured Fund. "The [yield] curve's pretty flat right now."

Mooney said a comparable amount of yield can be gained by remaining within a maturity range of 15 to 20 years.

"You are not really picking up a whole lot of extra income for the additional interest rate risk," he said.

A source familiar with the offering said Pennsylvania P&L chose the 2029 maturity because it wanted to lock in the lower borrowing costs now available for the longest period possible. Going into the 2030s would have posed a bigger marketing challenge, the source said. Yesterday's offering was a refinancing of a 1984 issue that carried a 10 5/8 coupon.

The source added that the five extra basis points of yield were added at repricing because of difficult market conditions.

Patricia M. Dolan, a managing director at Prudential Investment Advisors, also passed on the deal.

"I haven't been very interested in buying much of anything," Dolan said. "All bonds are worth a price at any given time. But I just am pretty cautious about the market right now, and I'm not buying any long maturities."

Dolan is now looking for value in the secondmy market, and she says she hasn't found much of it. The municipal market has been trading in a range for several months now, Dolan said. The market is poised to break out of that range, and the break will be most likely toward somewhat higher rates, she said.

"There's never been a Federal Reserve tightening that lasted less than two years," Dolan said.

Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson, thinks the central bank should act as quickly as possible to raise short-term rates.

"My view has been that they need to get to 6%," Wesbury said. "If I were on the Fed, I'd be raising them right away." The economist said he believes the Fed should act well before its Nov. 15 Federal Open Market Committee meeting.

Wesbury noted that on Aug. 16, the day of the last tightening, the spread between two-year and 30year Treasuries was 122 basis points. Yesterday, the spread had widened to 137 basis points. Clearly, the hoped-for flattening of the yield curve has not materialized, he said.

The economist added that investors apparently found cause for concern in yesterday's economic news, which included a 2.5% drop in productivity.

With a decline in productivity, inflation fears get a little worse," Wesbury said. Those inflation fears are sparked "because a decline in productivity suggests less efficiency in the production process," he said.

Wesbury also pointed to Tuesday's auto sales figures, "which soared in August from July, indicating that slow sales numbers were due to supply problems." The economist also cited Tuesday's Johnson Redbook data, which showed strong retail sales so far in the month of September.

In light of recent economic indicators, "the arguments about a slowly growing economy have lost a lot of oomph," Wesbury said. The currency front also is contributing to inflation fears, with the dollar losing ground particularly against the German mark in the past few weeks, Wesbury said.

"From my point of view, the bond market has priced in an increase in inflation of about 1%," he said. Given the recent numbers and current sentiment, Wesbury expects the market to price in another 1/2% to 1%.

The economist said the Treasury market has been trading in a very narrow range. The inflation fears that have tended to exert an upward pull on rates have been counterbalanced by evidence of a slowly growing economy, he said.

Now, however, "we've lost the evidence of a slow growing, highly productive economy," Wesbury said.

The economist said the government's long bond has been trading in a 7.35% to 7.65% range since June 15. The bond has broken out of the range on only four occasions. Wesbury note that yesterday's closing yield of 7.56% is flirting with the top end of the range.

"If we break out, I think we can easily head to 8%," he said. Wesbury noted that the producer price index, the first of two key inflation figures, lies ahead on Friday. He expects a 0.4% increase in both the overall and core rates. Other economists expect a 0.3% rise in the core rate, which excludes food and energy, he said.

In other news yesterday, the 30day visible supply of municipal bonds totaled $1.86 billion, up $184.6 million from Tuesday. That comprises $1.27 billion of competitive bonds, up $69.2 million from Tuesday, and $594.7 million of negotiated bonds, up $115.4 million.

Standard & Poor's Corp.'s Blue List of municipal bonds rose $109 million yesterday to $1.7 billion.

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