After Busy Week Market to Idle And Watch for Possible Fed Ease
The tax-exempt market is likely to mark time this week, waiting for Thursday's jobs data, after another week of record supply and lower yields.
Municipals have enjoyed a month where prices have risen and yields have fallen, despite a deluge of new bond deals, totaling $7.2 billion, a 1992 high.
A jump in jobless claims last Thursday renewed hopes for another ease in monetary policy, boosting prices and sending yields still lower.
"The feeling is that it's just a matter of time until the Fed eases," said the head of a Wall Street-based trading desk Friday. "A really weak employment number could be the thing that finally breaks the market out of this range we've been in for so long."
Traders have experienced resistance right around 7.80% on the 30-year government bond, and although market players have punched through that level on several occasions, selling has always brought the market back.
Market players will get another opportunity to break into a new price range Thursday, when the June employment report will be released.
Steven Ricchiuto, chief economist at Barclay's DeZoete Wedd, said he expected only a moderate increase of 75,000 in non-farm payrolls.
Mr. Ricchiuto acknowledged that the increase is on the lower end of predictions for the figure, but added the figure will boost both Treasury prices and, in turn, municipals.
The National Purchasing Managers's report will also be released and could have an impact on prices.
Mr. Ricchiuto said he expected the report to shrink in June to 55% from the May reading of 56.3%. The report is scheduled to be released Wednesday.
July 1 Bond Calls
Market players have attributed increased investor demand for new deals and secondary product over the last month to the anticipated influx of cash from between $6 billion and $12 billion of bonds scheduled to be redeemed on Wednesday.
Although many participants say that investors have already included the redeemed funds as a part of their short-term portfolio, others believe demand will continue to increase, pushing tax-exempt prices higher.
In 1982, The Bond Buyer's revenue bond index rose significantly thanks to inflation and high interest rates. The index hit its all-time high, peaking at 14.24% on January 14.
Since many bonds issued during that period carry a first-call date of 10 years, a host of issuers have expressed the desire to redeem the high-yield bonds in favor of the current low interest rates.
Thomas Degenaars, vice president at the New York-based municipal firm of Reinoso & Co., said that the Street has been anticipating the date for quite some time.
However, he said that the market may not be immediately affected.
"Because the announcement falls on the Wednesday of a holiday week, we may not see the results of the redemptions right away," he said. "But the next couple of weeks should be very interesting."
Mr. Degenaars said that the currently ravenous demand for bonds will increase in the near future.
"When you see a deal as large as Texas Muni Power get priced on a Friday, you get a pretty good impression that demand is great," he said. "Issuers and investors do not want to miss the boat."
He also said that the call for bonds will be even greater as the new-issue calendar moves into its yearly summer sabbatical, when fewer deals are priced.
Some investors, however, were less cheerful about the short-term results of the current paucity of bonds and speculated about how much lower yields can get before investors balk.
Another market player said he was starting to see some "sticker shock".
"It's all well and good that all these deals are getting such a warm reception," the participant said. "But I am starting to see the beginnings of hesitance from investors on these levels."
Friday's Market
In a surprise move, Goldman, Sachs & Co. priced and then restructured $468 million of Texas Municipal Power Agency refunding revenue bonds Friday.
Late in the session a Goldman Sachs underwriter said the deal received a "so-so" reception from investors and the Street.
"There was more Street involvement than we had earlier expected," the source said. "The non-callable portion of the loan was heavily over-subscribed by institutions, and it appears there was good interest in bonds maturing in 1996, 2003, 2007, and 2008."
Generally, new issuance is light Friday, but the officer said the power agency decided to market the bonds to capture low interest rates.
Yields were the same at the repricing, but a 2009 serial maturity was added to the scale.
The final reoffering included serials priced to yield from 4.35% in 1994 to 6.30% in 2009. A 2012 term, containing $102 million of the loan, was priced as 5 3/4s to yield 6.375%.
Bonds from 1999 to 2012 are backed by the Municipal Bond Investors Assurance Corp. and triple-A rated by both Moody's Investors Service and Standard & Poor's Corp. The remaining securities are rated A1 by Moody's and A-plus by Standard & Poor's.
In follow-through business, Lehman Brothers, senior manager for $405 million Pennsylvania general obligation bonds, reported an unsold balance of $93 million.
In the secondary market, prices were unchanged to 1/8 point higher in spots in light trading.
Personal income rose 0.3%, or $14 billion, in May to a seasonally adjusted annual rate of $5 trillion, while spending was up 0.5%, but the news posed no threat to prices.
In secondary dollar bond trading, prices were quoted unchanged to 1/8 point higher in spots.
In late action Friday, New Jersey Highway Authority 6 1/4s of 2014 were quoted at 98 3/4-7/8 to yield 6.35%, Intermountain Power Agency 6s of 2012 were quoted at 95 3/8-5/8 to yield 6.41%, and New York City Municipal Water Authority AMBAC 6.20s of 2021 were quoted at 981/8-1/4 to yield 6.34%. Triborough Bridge and Tunnel Authority AMBAC 6 1/4s of 2012 were quoted at 99 3/8-1/2 to yield 6.30%.
The short-term market was busy on Friday, according to traders, and the tone of the market continued firm.
Late in the session, New York City Tans 3 1/4s maturing in April were quoted at 2.56% bid, 2.52%% offered; Los Angeles Trans 3 3/4s were quoted at 2.88% bid, 2.85% offered; San Bernadino Co. Calif. Trans 3 3/4s were quoted at 3.00% bid, 2.95% offered; and New York State Trans 3.65s were quoted at 2.85% bid, 2.80% offered.
Upcoming Supply
After six consecutive months of record issuance, volume in 1992 totaled $106.7 billion Friday, 42% higher for the same period last year when issuance was calculated at $75 billion.
This week, $2.8 billion of new securities will be priced, according to preliminary figures compiled by The Bond Buyer Friday.
This week, the new-issue slates feature few sizable deals. In the negotiated sector, Goldman Sachs will senior manage $375 million Metropolitan Transit Authority commuter facilities revenue bonds. Morgan Stanley & Co. will price $262 million East Bay Municipal Utility District, Calif., water system subordinated revenue refunding bonds, and $175 million of Northern California Power Agency revenue bonds, to be priced by a Bear, Stearns & Co. syndicate.
The competitive sector is dominated by $100 million of Ohio general obligation bonds, to be sold tomorrow.
