Anemic Activity Is Shaken Off, As Tax-Exempts Continue Firm
Tax-exempt bonds finished yesterday with a strong, positive tone, despite the low volume of securities changing hands, participants said.
Prices were either flat or up 1/8 point, but there was no erosion in any of the various sectors, sources reported. New-issue volume was extremely light compared with last week, totaling about $25 million.
"We got a little pop out of Treasuries," said the head of a New York trading desk. But "it's gotten to the point where Monday's worse than Friday," he added, referring to the very slow trading.
The relative lack of supply is working in the market's favor, particularly given the perceived cash levels waiting to come in. "There's an incredible amount of money out there," another trader said. "And the new-issue calendar shows there is not that much out there, so everyone's bullish."
A third major reason for the positive tone is the downward trend in the long-term interest rates. The feeling in all fixed-income markets that the Federal Reserve will ease monetary policy has grown into full-blown conviction, market participants said. A fourth reason is the competitive yields versus the Treasury market, one source said.
"Even the high-grade New York market is getting 6.75%, versus a 7.80% on the long bond," he said. "We are very attractive. It is frightening how low yields are, but we're in good shape."
Looking forward, past tomorrow's expected $750 million-plus of new issuance, sources were hopeful that economic data would be disturbing enough to shake the market up.
"The market is looking forward to the employment report," said one trader. "And money supply. All of a sudden we're money watchers again. There's a lot of numbers which can [bring back] the volatility, which is what we need."
In sparse new-issue business, Dean Witter Reynolds Inc. won the largest deal of the day yesterday -- a $19 million Scottsville, Ariz., general obligation issue -- with a net interest cost bid of 6.2571%.
The bonds were aggressively priced with a 5.4% yield in the 1996 maturity and scaled out to 6.5% maturity in both the 2010 and 2011 serials. The nearer maturities were priced at significant premiums of about 112 and carried very fat coupons by today's standards. The 1996 through 1999 serials pay 8.5% coupons, the 2000 serial carries an 8.2% coupon.
The Street, still strongly putting away bonds from last week's splurge, barely noticed the biggest deal of the day, primarily because Arizona bonds tend to stay in the state thanks both to a high senior citizen population and a proliferation of single-state bond funds.
"It looks high priced, but it's a specialty state; that's what you expect," said the head of one Wall Street trading desk. "There's not that much issuance in Arizona."
Moody's Investors Service rates the deal Aal, while Standard & Poor's Corp. assigns an AA. Other managers in the competitive group include Prudential Securities Inc., Donaldson Lufkin & Jenrette, A.G. Edwards & Sons, and NCNB Capital Markets.
Steve Young, first vice president and maager of Dean Witter's Southwest municipal region, said buying interest was coming from trusts, mutual funds, and retail accounts, in that order.
The 2000 through 2003 maturities were oversubscribed, Mr. Young added, because "Scottsdale is one of the best trading names in the Arizona market."
The only other new-issue activity has been a smattering of bank-qualified deals, which underwriters reported were put away without much ado. The issues were extremely small: A $1.85 million Ridge Fire District -- Brookhaven, N.Y. -- sale, won by Roosevelt & Cross at a net interest cost of 6.6213%; and a $1.62 million Jamestown, R.I., general obligation deal won and priced by co-managers Bank of Boston and Tucker Anthony Inc.
Both deals are rated A by Moody's.
The short-term note market mirrored the bond market and shed a few basis points through a quiet day.
In late secondary trading, Los Angeles notes were quoted at 4.42% bid, 4.35% offered, while March New York State Trans were quoted at 5.20% bid, 5.15% offered. Pennsylvania paper improved nicely to 4.48% bid, 4.45% offered, and Texas notes were quoted at 4.39% bid, 4.35% offered in late cash trading.
Yesterday's debt futures trading saw the December municipal contract settle up 1/8 to 94.21. The MOB spread held steady at negative 171. [Tabular Data Omitted]