Municipal cash prices ended unchanged yesterday, as tax-exempt futures and the government's 30-year bond posted losses.
While yesterday's activity was light, municipal players noted that a number of
new issues are on deck this week, including big competitive general obligation bond offerings today. Pennsylvanla is scheduled to sell $291 million of bonds, Georgia is slated to sell $104.8 million, and Vermont is expected to sell $70 million.
A municipal analyst said market participants will help. "establish price relationships in an uncertain market." The analyst added that while municipal cash was unchanged yesterday, the tone was apprehensive ahead of today's deals.
In debt futures yesterday, the December municipal contract was down 1/32 to 83 1/8. Yesterday's December MOB spread was negative 493, compared to negative 489 on Friday. In the government market, the 30-year bond was down 12/32 to yield 7.97%.
In addition to this week's new deals, one trader pointed to a hefty amount of economic reports ahead, culminating with November employment figures on Friday.
"It could be a wild one," the trader said. "We've really made a big run over the last week, and you know markets don't always go straight up, and they don't always go straight down."
While municipals have posted gains, the gains have been on relatively few trades.
"We're definitely up; the question is, is it going to last, and are people believers," the trader said. Municipals owe much of their recent gains to crossover and arbitrage buyers, he added.
Municipals had gotten cheap relative to Treasuries in recent weeks, he said, which prompted crossover buyers to start buying longer revenue bonds once they started to yield 90% to 92% of Treasuries.
The arbs starting buying cash after the municipal contract became rich, following last week's Treasury market rally, the trader said.
"It created this whole group of buyers that didn't exist a couple of weeks ago," he said. Prior to that, "we had mutual fund selling and nobody buying," he said, adding that the funds remain quiet.
The funds are still doing some tax swapping and "some jockeying around," he said. But while the funds are not selling as heavily as they had been, "they're certainly not scarring up bonds," the trader said.
Helping to push Treasuries lower yesterday was a rise in existing home sales in October, according to Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc.
"This was a very important number. So we knew going in that a small change one way or another was going to make a big difference," Wesbury said.
The National Association of Realtors yesterday reported that existing home sales grew by 0.5% in October to a seasonally adjusted annual rate of 3.91 million. The October increase followed a revised 1% drop in September. The September figure originally was reported as a 1% gain.
Wesbury noted that yesterday's numbers represent a change of course from new housing data reported earlier this month, showing October housing starts off 5.2%, and building permits off 1.7%.
While yesterday's figures for October and September are down from levels earlier this year, they remain high, Wesbury said, adding that in 1992 only 3.4 million existing homes changed hands.
"Sitting at 3.9 million, even though we are down from the 4.3 [million] to 4.4 [million] sales rate of late last year or early this year, it's still significantly higher than it was in 1992 or 1991, which suggests that new home sales could probably stay strong as well, and that housing starts are most likely to make a rebound once inventories get worked off," the economist said.
Also pressuring the bond market yesterday were reports of strong Christmas buying over Thanksgiving Day weekend, a rise in stock prices, and fears of this week's economic statistics, Wesbury said.
Bonds had gotten a lift after the Dow Jones Industrial Average dropped sharply last week, as investors bought bonds in a "flight to quality." The industrial average plunged 91.52 points last Tuesday.
Yesterday, the stock market was up and the dollar was firm as it appeared that an agreement regarding the General Agreement on Tariffs and Trade looks more plausible.
Looking ahead, this week's economic statistics contain several "slippery spots" that could prove hazardous for bonds, Wesbury said. In addition to Friday' s November employment figures, the Conference Board will release its survey of consumer confidence today, and the Chicago Purchasing Managers Index will be issued tomorrow.
The National Association of Purchasing Management report arrives on Thursday.
Wesbury expects Friday's report to show non-farm payroll growth of 275,000 in November, higher than the 225,000 consensus estimate.
"All in all, the consensus does expect a report that's bigger than October's numbers, which would once again throw some caution into the bond market," he said.
Yesterday's homes sales figures, coupled with strong retail sales reports from the Thanksgiving Day weekend, "all suggest that the Fed will need to tighten monetary policy again," Wesbury said.
The economist sees a 20% chance that the Fed will move in December, adding that November' s producer price and consumer price indexes are "likely to show the Fed inflationary signs." By the Jan. 31 Federal Open Market Committee meeting, that chance grows to 80%, he said.
In negotiated action yesterday, a Smith Barney Inc. group tentatively priced $124 million Of Pennsylvania Intergovernmental Cooperation Authority special tax revenue bonds. The FGIC-insured offering consisted of serial bonds priced to yield from 4.25% in 1995 to 6.90% in 2009. A 2014 term, containing $20.4 million, was priced to yield 7.10%. A 2024 term, containing $70.5 million, was priced to yield 7.20%. The bonds are callable beginning June 15, 1995, at par.
Later, the deal was said to have been restuctured and repriced to offer a top yield of 7.13% in 2021.
The 30-day visible supply of municipai bonds yesterday totaled $3.60 billion, up $459 million from Friday. That comprises $1.589 billion of competitive bonds, up $93.9 million from Friday, and $2.016 billion of negotiated bonds, up $365 million from Friday.
Standard & Poor's Corp.'s Blue List of municipal bonds was down $17.7 million yesterday, to $1.586 billion. The Blue List was $1.603 billion on Friday.