The bid list parade continued yesterday, but municipals managed to climb by 1/8 to 1/4 point in a light to moderately active session.
"There were some bid lists, and they did fairly well on them," a municipal analyst said.
Dollar bonds edged up 1/8 to 1/4 point, while yields on high-grade issues improved by two basis points, the analyst said. In debt futures, the December municipal contract closed up nearly 5/8 point at 87 26/32. Yesterday's December
MOB spread was negative 363, compared to negative 368 on Tuesday.
A municipal trader contacted earlier yesterday afternoon said he judged that municipal cash bonds were firm but unchanged.
"The contract is up, governments are up, but our market seems unchanged," the trader said, "I think people are afraid of the traps."
The trader said players are skittish from having been caught in those traps when the Treasury market spikes up one day and gets crashed the next. Bid lists, which totaled about 10 yesterday, also continue to exert pressure on tax-exempts, he said.
"We're still seeing pressure; it might be quarter-end pressure to sell," the trader said. He said much of the merchandise for sale is longer paper and discount bonds.
"People are throwing in the towel on discounts," he said.
The government's 30-year bond rose more than 1/4 to yield 7.81% yesterday, despite news that new orders for durable goods jumped 6% in August, marking the biggest advance since December 1992. The Commerce Department said automakers, resuming production after July shutdowns, accounted for most of the surge.
Merrill Lynch & Co. economist Mary Dennis cited developments in trade talks with Japan as helping to move both the dollar and the Treasury market higher yesterday.
"There's been a lot going on with the trade talks that suggests maybe Clinton's going to cut a deal," Dennis said,"So I think a lot of it's related to that."
The talks, the tenor of which has grown more favorable in the past day, make it appear likely that the administration may at least be able to claim a partial victory in the negotiations, she said.
Kendrick D. Anderson, a group vice president and head of municipal research at Duff & Phelps, said the foreign exchange situation is "extremely critical" in determining the direction of long-term rates.
"Right now, the market in general seems to be anticipating that long-term rates are going to go up," Anderson said. However, improvement in the relationship between Japan and the United States could precipitate buying rather than selling of U.S. securities by the Japanese. Such a development "would change the whole tenor of where rates ought to be," he said.
"If that were to happen, you could get an unanticipated rally, which could change the whole dynamics of how the Fed looks at things," Anderson said. Such a scenario could trim the yield on the Treasury's long bond by 50 to 60 basis points, he said.
"It seems to be the major wildcard," Anderson said. "It's the thing that's least predictable at this point."
While the economic numbers have been pretty robust, they haven't been extraordinarily strong.
"So it's unlikely that we are going to get a number [that is] either extremely high or extremely low that will have a huge input on Fed policy or how the market perceives the strength of the economy," Anderson said.
He said he sees only a 25% chance of getting the type of formalized agreement on trade that could strengthen the dollar and make the Japanese more willing to hold U.S. securities.
"A lot of it has to do with the fact that the government there is weak," he said, "Even if you get an agreement, it's going to be hard to implement."
Turning to municipals, Anderson said that while municipals have gotten rich to Treasuries of late, he doesn't envision a correction anytime soon. One reason is the lack of new supply.
"If issue volume does not pick up, then I don't think we are going to have a break in the municipal market versus Treasuries," he said.
Another reason is that municipals are trending back toward historical levels relative to Treasuries. Municipals had grown quite cheap, and the increase in the effective tax rate this year has increased their worth to investors.
From a credit standpoint, Anderson pointed to state general obligation bonds as having shown improvement.
"We've seen evidence, especially on the revenue side, that the pickup in the economy has caused economically sensitive sales taxes and income taxes to increase for most states, so this removes some of the credit concerns that were lingering from the recession," Anderson said, adding however, that some pockets of weakness still exist.
In negotiated action yesterday, a Lehman Brothers group priced and repriced $164 million Harris County Health Facilities Development Corp., Tex., hospital revenue bonds for Hermann Hospital.
The offering consisted of serial bonds priced to yield from 4.90% in 1998 to 6.35% in 2010. A 2012 term, containing $4.8 million, was not reoffered. A $17.5 million term bond in 2017 was priced to yield 6.533%. A 2024 term, containing $120 million, was priced to return 6.625%.
At the repricing, yields from 1998 to 2001 were lowered by five basis points. The 2010, 2012, and 2017 maturities were added, and the 2014 maturity was deleted.
In other news yesterday, the 30-day visible supply of municipal bonds totaled $2.48 billion, down $40.4 million from Tuesday. That comprised $1.16 billion of competitive bonds, down $83.7 million from Tuesday, and $1.33 billion of negotiated bonds, up $43.2 million from Tuesday.
Standard & Poor's Blue List of municipal bonds declined $25.7 million yesterday to $1.99 billion.
