Sellers showed no mercy Friday, pushing prices down 1/2 to as much as one point for the second session in a row, souring near-term prospects as the market braced for $3.9 billion of supply this week.
Municipals sold down 1/2 to as much as one point Thursday and the weakness carried over into Friday's session as the market fell freely from lofty heights gained over the last two months.
"There was no hint of a bounce at all and everybody ducked," said one trader Friday. "The bid is so weak you don't want to test it. Traders are thinking hard about what losing five basis points means right here - on a $10 million trade that's a $250,000 loss."
Adding to downward pressure, the Chicagoland business barometer rose to 59.2% in July on an adjusted basis from 55.7% in June, the Purchasing Management Association of Chicago reported.
In addition, the Commerce Department reported new orders for manufactured goods surged 2.3% in June while inventories were trimmed 0.1%, personal income was unchanged, and spending increased 0.5%.
An index reading below 50% signals a slowing economy, while a level above 50% suggests expansion.
Tax-exempt trading was muted as prices slipped down and, by early afternoon, traders said that action had all but ceased and cash bond prices stood 1/2 to slightly more than one point lower, depending on the name.
For example, in secondary dollar bond trading, Jacksonville Electric Authority 5 1/2s of 2014 were quoted at 94 1/4-3/4 to yield approximately 5.97% on the bid-side. The same bond was quoted at 94 3/4-95 1/8 to yield 5.93% Thursday and was originally priced to yield 5.982% at the market's height Tuesday. Los Angeles Department of Water and Power 6s of 2032 were quoted at 98 1/2-7/8 to yield 6.10%, compared to Thursday's closing level of 99 1/4-1/2 to yield 6.05%.
In the debt futures market, the September municipal contract settled down 18/32 to 98.29. The MOB spread widened to negative 190 from negative 173 as municipals fell further the the Treasury contract.
Looking ahead, the market will take on a sizable amount of new deals this week, and several market players said they expected underwriters to cheapen prices under the gloomy market conditions.
"The new issues are likely to make matters worse," one trader argued. "They're going to get done cheaper than you would think and that will further reprice us lower."
The negotiated new-issue calendar features several sizable deals this week, including $1 billion of New York City Municipal Water Authority water and sewer refunding revenue bonds, to be priced by Smith Barney, Harris Upham & Co.; $550 million of Southern California Metropolitan Water Distict water revenue bonds, to be priced by Bear, Stearns & Co.; and $300 million of Lower Colorado River Authority, Tex., refunding revenue bonds, to be priced by a syndicate led by Goldman, Sachs & Co.
The competitive slate is dominated by four sizable deals: $250 million of Florida State Board of Education public education capital outlay bonds; $125 million of Los Angeles Department of Water and Power revenue bonds; $219 million of Port Authority of New York and New Jersey various revenue bonds; and $310 million of Puerto Rico public improvement general obligation bonds.
The market also faces several key economic reports this week, including leading economic indicators for June, to be released Tuesday, followed on Thursday by jobless claim figures for the week ending July 25. On Friday the Labor Department reports on unemployment in July, the week's most important economic report.
Bid-wanted flow was limited as market players avoided trading into weakness.
In the short-term note sector, yields were unchanged to five basis points higher in light action.
In late trading, Iowa Trans were quoted at 3.05% bid, 3% offered, Los Angeles Trans were quoted at 2.80% bid, 2.75% offered, and New York City Trans were quoted at 2.78% bid, 2.75% offered. Wisconsin notes were quoted at 2.91% bid, 2.88% offered and New York State Trans were quoted at 2.86% bid, 2.83% offered.
In the prerefunded bond sector, yields were quoted up 15 basis points over Thursday and Friday's trading sessions.
In late action Friday, prerefunded bonds, callable in 1995, were quoted at 4.87% bid, 4.80% offered.
In follow-through business, PaineWebber Inc., freed $174 million of Virginia Public Building Authority state building revenue bonds from syndicate restrictions.
Merrill Lynch & Co. freed $157 million of Kentucky state property and building commission revenue and revenue refunding bonds from syndicate restrictions.
MWRA Mulls Refunding
Officials at the Massachusetts Water Resources Authority confirmed on Friday that the authority is considering a large refunding in early September.
Although uncertain of the exact size of the refunding, one official speculated it would range from $375 million to $525 million.
"If the municipal market continues to improve, though, the deal could be much larger," the source added. The timing of the refunding could be decided within the week, according to the source.
Patrick M. Fitzgibbons contributed to this column.