Municipals ended nearly 1/4 point higher yesterday ahead of today's Federal Open Market Committee meeting during which the Federal Reserve is widely expected to tighten monetary policy.
"It's just a question of how much now," one trader said, adding that he'd like to see a 50-basis-point hike in both the federal funds rate and the discount rate.
David Blitzer, chief economist at Standard & Poor's Corp., said the most likely outcome is a 25-basis-point increase in the fed funds rate and a 50-basis-point increase in the discount rate.
The second most likely outcome is a 50-basis-point jump in each, he said, adding that lease likely is no action.
"It's a possibility but I think it's pretty slim," Blitzer said of the no-action alternative. He said it's possible that the Fed could wait until tomorrow to act.
Another trader said the market wants a 50-basis-point increase in the fed funds rate, but he doesn't think it's forthcoming.
"If [Greenspan] does 50, he may be accused of caving in to the market's wishes," the trader said.
Apart from last week's inflation figures, which brought favorable news for the bond market, all the other economic numbers point to increased growth, he said.
In addition, for some time not the market has been factoring in a 25-basis-point increase in fed funds to 4%.
"I think that 50 would be something to hang your hat on," the trader said.
Overall yesterday, dollar bonds ended 1/4 point higher, though more strength was exhibited in spots. High grade issues were up slightly through the long intermediate maturity range. Activity was light.
In late secondary dollar bond trading, Florida Board of Education 5 1/8s of 2022 were quoted at 6.39% bid, 6.33% offered. RTA AMBAC 6 1/4s of 2024 were at 6.51% bid, 6.48% offered.
Municipals yesterday got carry-over help from the Treasury rally that occurred late last week and also from a lack of available supply, one trader said.
This week's calendar is thin and few bonds were for sale yesterday, he said.
"There were very few bonds out for the bid [yesterday] from mutual funds," he said.
"Munis are in a pretty good technical position," another trader said.
In debt futures, the June municipal contract closed nearly 1/2 point higher at 90 1/2. Yesterday's June MOB spread was negative 421, up from negative 419 Friday.
The 30-year Treasury bond ended up almost 1/2 a point to yield 7.44%. Helping governments was news that industrial production grew 0.3% in April. A decline in auto production partially offset gains in most other sectors.
Yesterday's industrial output reading, which was in line what analysts' expectations, marked the indicators's eleventh straight monthly gain.
On a broader note, intermediate and long-term municipals have been outperforming Treasuries since roughly April 7, said Richard A. Ciccarone, executive vice president and director of Tax-Exempt Fixed Income Research at Kemper Securities.
One reason is that, as Ciccarone and others have predicted, retail investors began to see value in municipal bonds after getting hit by the new tax rates.
The pickup in retail buying is probably the reason intermediate-term municipals have performed even better than long-term tax-exempts. Intermediates probably are also doing better owing to their use as a defense against higher interest rates, he said.
A drop is supply is also helping to drive up municipals bond prices, Ciccarone said, adding that new supply so far this year is down roughly 30% from last year.
As for the upcoming July 1 call date, Ciccarone doesn't see investors rushing to buy in June in advance of the call.
During the past two years, "municipals became extremely expensive in the month of June rather than the month of July," Ciccarone said. He said he doesn't expect prices to be as strong this June as they were last June, when buying occurred before the call rather than after as expected.
While June demand is expected to be "less exuberant" than last year, June performance is still expected to be strong, given the municipal market's diminished supply, Ciccarone said.
In other news, Standard & Poor's Blue List fell $57.2 million yesterday to $1,898.5 million.
The 30-day visible supply of municipal bonds for today totals $4,092.4 million, up $175.7 million from yesterday. The companies $1,705.1 million of competitive bonds, up $45.5 million from yesterday, and $2,387.3 million of negotiated bonds, up $130.2 million from yesterday.