Municipals ended 3/8 to 1/2 point higher yesterday as new issues inc]udi.s Ca]ifornia's $700 million general obligation deal gamered strong demand.
"There's just some follow-through from what we saw [Tuesday] afternoon," one trader said, adding that Tuesday's advances in municipal futures were helping to provide a better bid for the cash market yesterday. Also contributing to yesterday's gains were scant selling from mutual funds and a light forward calendar.
A second trader cited "a steady amount of buying" and limited supply around yesterday, but added, "I don't see customers in here screaming to buy bonds either,"
Dollar bonds ended yesterday's active session up 1/2 point, while yields on high-grade issues improved by three basis points overall, a municipal analyst said.
"There's a tremendous demand for high-grades," the analyst said. "They're kind of in scarce supply."
Cash is also abundant, the analyst said. "There's a lot of cash around, and people have to start putting cash to work after a while," he said.
In the government market yesterday, profit takers drove the 30-year bond down 3/8 to yield 7.35%. In debt futures, the September municipal contract ended unchanged at 91 21/32. Yesterday's September MOB spread was negative 398, compared to negative 395 on Tuesday.
On the new issue side, the analyst cited California's benchmark $700 million competitive offering and Massachusetts $328 million negotiated deal as two deals that made good. Late in the day, a $122 million balance remained on California offering. Yesterday's roughly $246 million New York State Dormitory offering was also said to have fared with well with zero balance by day's end.
"It was a very, very good deal," a source familiar with the dorm deal said, adding that yields were lowered by as much as six basis points. The issue included a top yield of 6.42% in 2024.
Hal Geiogue, California's assistant state treasure, said he was pleased with the bids received for the $700 million in bonds.
"I think it went well," Geiogue said yesterday," We got below 6% on [true interest cost] ."
Geiogue noted that less than a basis point separated Merrill Lynch & Co.'s winning TIC of 5.8957% from Lehman Brother's cover bid of 5.8988%. CS First Boston, the third and final bidder, had a 5.9251% TIC, Geiogue said.
"As an indication, this is better than in May when we did our last GO sale," Geiogue said, adding that the winning bid then carded a 5.94% TIC.
David F. Andersen, a managing director and head of Merrill's syndicate desk said the California offering "had very good institutional demand presale."
The offering also attracted good retail demand despite the large amount of California paper already in the market owing to the state's recent revenue anticipation warrant and notes sales, Andersen said.
For Reid Smith, an assistant vice president at the Vanguard Group of Investment Companies, yesterday's deal proved attractive enough to snap Vanguard out of a two-year hiatus from California general obligation and GO-related paper.
"We participated," Smith said, adding that he bought a total of about $118 million of insured bonds in the 2019 and 2024 maturities to split among its long-term funds. Smith earlier said he believes the California credit has hit bottom and is en route to what he described as a "long, slow recovery."
"I don't think it was oversubscribed," Smith said, adding however that "California got an excellent deal today." The offering got help from both favorable market conditions and from aggressive bidding by bond insurers. Smith said the aggressiveness resulted in such low premiums on the insured bonds, that it made sense to take the insurance even though he envisions little default risk.
"We would have bought it without insurance," he said. Ambac insured the 1995, 1998, and 2000 to 2002 maturities. FGIC insured the 1996, I997, and 2003 to 2006 maturities, as well as the 2008, 2009, 2011 to 2015, and 2019 maturities. MBIA insured the 2016, 2020 and 2024 maturities. The bonds were not formally reoffered in the long end, though the longest 2024 maturity was sold to one institution at a yield of 6.20%, less 1/4, he said.
Jack Haley, who manages Fidelity Investments three California tax-exempt bond funds, which total roughly $1.3 billion, said the California offering fared well because it was an insured deal of sufficient 'size that offered investors a decent coupon. It also benefited from a dearth of California supply in the past two months, and the favorable market conditions that followed Tuesday's key rate increases by the Federal Reserve.
Haley maintained however, that since the most of the offering was insured, it cannot be viewed as an adequate test of the state's credit quality. Haley passed for structural reasons, because "most of the bonds were structured as par bonds or only slight discounts."
Frank Lucibella who manages the $500 million John Hancock Tax Exempt Income Fund and the $250 million John Hancock Managed Tax Exempt Fund, also passed on the offering.
"I have not been doing much in California," Lucibella said, "I just think that the situation there isn't fully resolved."
In negotiated action yesterday, the Massachusetts Housing Finance Agency priced $328 million of insured rental housing bonds. The Ambac-insured deal is subject to the alternative minimum tax.
The deal was reoffered to investors at a top yield of 6.75% in 2028.
At the repricing, yields were lowered by 20 basis points on the Jan. 1, 1995 maturity, and by 10 basis points on the July 1, 1995 maturity as well as the 1996 and 1997 maturities. Yields were lowered by five basis points on the 1998, 1999, 2008, 2009, 2019 and 2028 maturities, and by 2.5 basis points on the 2014 maturity
In the short-term market yesterday, Goldman Sachs submitted the winning bid for $687 million of short-term GO certificates sold by the state of Illinois. A spokeswoman for the state's Bureau of the Budget, said Goldman's bid was 4.06921% and that there were a total of five bidders.
In other news, the 30-day visible supply of municipal bonds yesterday totaled $4.27 billion, down $172.7 million from Tuesday. That comprises $2.842 billion of competitive bonds, up $92.3 million from Tuesday, and $1.44 billion of negotiated bonds, down $265 million from Tuesday.
Standard & Poor's Corp. Blue List of municipal bonds declined $102.6 million yesterday to $1.72 billion.