A steep drop in producer prices boosted bonds yesterday, prompting the New York City Water Authority to jump in with a $823 million deal.
The producer price index for finished goods declined 0.2% in October, bringing the yearly rate of wholesale inflation to 0.2%, the lowest level since January 1992. The core rate dropped 0,5%, reflecting a 3.9% drop in passenger car prices.
The inflation report reversed some of the effects of recent signs of economic strength that battered the credit markets over the past two weeks.
Many traders were quick to say the report had rescued the market from its malaise. However, sellers had their say as well. The Treasury 30-year bond hit a low of about 6.09%, but was quoted back up at 6.13% near the end of New York trading.
"The government market showed a big hand, took one card, and then bluffed the rest of the day," a trader said. "It gave up a lot of ground."
Skeptics also noted the market still faces today's consumer price report, which could present an ugly surprise.
Regardless, soon after the PPI report was released, the Treasury 30-year bond climbed over one point, while the bid for municipals improved 1/2 to as much as 1 1/4 points in spots, traders said. The December municipal contract popped 1 2/32 to 102.25.
The markets came off their highs by mid-morning, and traders reported sellers amid the strength. The markets made one more push before coming off the highs again in the afternoon. Traders said a poor Treasury three-year note auction prompted some players to take profits.
By session's end, municipal dollar bonds were quoted up 3/4 point on average to one point in spots. High-grade bond yields were said to have fallen five to seven basis points on the day.
In late secondary dollar bond trading, Chicago O'Hare MBIA 5s of 2018 were quoted up 3/4 point cn the bid-side at 5.56% bid, 5.53% offered; New York State Power Authority 5 1/4s of 2018 were quoted up 3/4 at 97 1/8-3/8 to yield 5.46%; and Pittsburgh Water and Sewer FGIC 4 3/4s of 2016 were quoted up 1 1/8 points at 5.40% bid, 5.37% offered.
In the debt futures market, the December municipal contract settled up 26/32 to 102.17, down from a high of 102.27. The MOB spread narrowed to negative 459 from negative 461 Monday.
Reflecting better business flow from the Street to permanent investors, The Blue List of dealer inventory fell $183.6 million yesterday, to $1.77 billion. The list declined $210 million over Monday and Tuesday, hitting the lowest level since Oct. 21 when it totaled $1.68 billion.
Looking ahead to supply, the new issue calendars have begun to build after a respite at the end of October. The Bond Buyer's 30-day visible supply rose $1.38 billion to $6.8 billion yesterday, the highest level since Oct. 25 when supply totaled $7.96 billion.
For the first time since Oct. 14, the competitive component of supply -- $2.93 billion -- is lower than the negotiated component, which totaled $3.87 billion. Negotiated future supply is at its highest level since Oct. 5 when it totaled $4.02 billion.
New Deals
A 13-member syndicate led by Smith Barney Shearson priced the $823 million New York City Water Authority water and sewer system revenue bonds.
At the repricing, the underwriter lowered the yield on bonds in the 2019 maximum term maturity by about two basis points.
The maximum term bond, priced to yield 5.73%, beat a consensus scale level of 5.85% released to the Street on Monday, players said, thanks to the rally.
A Smith Barney official said the longer term bonds saw good demand, although they were not a "red hot riot." The source estimated between $250 million and $300 million of the offering would be relegated to the Street.
The final New York water offering included $655 million un-insured current interest bonds, priced to yield from 4.75% in 2000 to 5.55% in 2008. A 2011 term, containing $55 million of the loan, was priced with a coupon of 5.625%, but was not formally reoffered to investors. A 2019 term, containing $152 million, was priced as 5.50s to yield 5.73%.
There were also $35 million current interest bonds, insured by the Municipal Bond Investors Assurance Corp., priced as 5 3/8s to yield 5.50% in 2019, and $50 million current interest bonds, insured by the AMBAC Indemnity Corp., also priced as 5 3/8s to yield 5.50% in 2019.
Also connected to the deal were Auction and Inverse Rate Securities, or AIRS, which are essentially auction set floating rate notes and a corresponding inverse floaters.
By late in the day, Smith Barney had priced $50 million MBIA-insured AIRS, due 2008; $35 million AIRS, MBIA-insured, due 2009; and $82 million MBIA-insured AIRS, due in 2013. The derivative products were not formally reoffered.
The uninsured portion of the loan was rated A by Moody's Investors Service, A-minus by Standard & Poor's Corp., and A by Fitch Investors Service. The insured portions carry triple-A ratings from Moody's and Standard & Poor's.
In other action, Goldman, Sachs & Co. priced and repriced $200 million California Pollution Control Financing Authority revenue bonds for the Pacific Gas and Electric Co.
At the repricing, reoffering yields were lowered by two basis points.
The deal, subject to the federal alternative minimum tax, was made up of a 2023 bullet maturity, priced with a coupon of 5.85% to yield 5.90%.
The managers said they expected the issue to be rated Al by Moody's and A by Standard & Poor's. Goldman tentatively priced $81 million general obligation refunding bonds for Dekalb County, Ga.
Serial bonds were priced to yield from 3.45% in 1995 to 5.40% in 2013. A 2020 term, containing $42 million, was priced as 5 1/4s to yield 5.50%.
The bonds are rated Aal by Moody's and AA-plus by Standard & Poor's.
