A municipal rally failed soon after it began yesterday, but prices eked out small gains amid a sizable number of new issues.
The credit markets opened with a sigh of relief after the consumer price report reaffirmed a signal from Friday's producer price report that inflation was no threat to bonds.
The CPI inched up 0.1% and the core index, excluding food and energy, gained a paltry 0.2% in May.
Government prices moved as much as 1/2 point higher to yield 6.77% right after the data were released. But then traders took profits, knocking the market off its highs. By the end of the day, the long bond was unchanged, while notes posted 3/4 point gains.
Many market players had hoped a favorable CPI report would prompt a rally. But several traders said yesterday they were unwilling to buy long bonds aggressively at the market's highs when it appears the Federal Reserve will not ease monetary policy.
In the tax-exempt arena, municipal traders reported some trading on the long end and prices rose 1/4 to 3/8 before losing 1/8 point when the Treasury market faded.
Traders reported moderate broker bid-wanted flow in the secondary. They said the Street put bonds up for sale that have limited upside potential to make room for new issues, which have a greater propensity for price appreciation.
But activity was minimal and died down typically by late afternoon to mark another dog day in the tax-exempt arena.
By session's end, prices hung onto 1/8 to 1/4 point gains, thanks mostly to illiquidity, traders said.
High-grade bond yields were said to fall about two basis points on average.
In the debt futures market, the September municipal contract settled unchanged on the day at 100.22.
The September MOB spread narrowed to negative 352 from negative 357 Monday.
Most of yesterday's action centered around new deals, dominated by competitive offerings.
Market observers said the issues sold well at yields two to three basis points lower than Monday's scales. But, underwriters met resistance from buyers when they tried to push yields down by five basis points or more.
In competitive action, $232 million of District of Columbia general obligation bonds were won by a Lehman Brothers group with a true interest cost of 5.86795%.
The firm reported an unsold balance of $22.5 million by session's end.
Serial bonds were reoffered to investors at yields ranging from 3.25% in 1994 to 6.10% in 2013.
Maturities from 1996 through 2004 were insured by the Financial Guaranty Insurance Corp. and rated triple-A by Moody's investors Service, Standard & Poor's Corp., and Fitch Investors Service. The remaining bonds were rated A-minus by Fitch.
In other action, a Merrill Lynch & Co. group won $228 million of Los Angeles Wastewater System revenue bonds with a TIC of 5.7823%.
Merrill reported an unsold balance of $26 million.
Serial bonds were reoffered to investors at yields ranging from 2.75% in 1994 to 5.70% in 2015. A 2020 term, containing $53 million of the loan, was not formally reoffered to investors. A 2023 term, containing $110 million of the loan, was priced as 5.70s to yield 5.74%.
The bonds are insured by MBIA and rated triple-A by Moody's and Standard & Poor's. Fitch rated the issue A-plus.
An issue of $206 million of Ohio general obligation bonds was also won by a Merrill Lynch group, with a true interest cost of 4.8666%.
Merrill reported an unsold balance of $68 million.
The loan included serial bonds maturing from 1994 through 2008. But most of the bonds were not formally reoffered to investors.
The loan was insured by AMBAC indemnity Corp. and triple-A rated.
An issue of $510 million of Massachusetts Bay Transportation Authority general transportation system refunding bonds topped the negotiated slate.
The offering was priced, repriced, and restructured by a syndicate led by Goldman, Sachs & Co. as senior manager.
At the repricing, the size of the loan was raised from $434 million and most serial bond yields were lowered by five to 10 basis points. A 2012 term replaced a 2011 maturity.
The final reoffering included serial bonds priced to yield from 3.60% in 1995 to 5.60% in 2009. A 2012 term was priced as 51/2s to yield 5.68% and a 2022 term, containing $91 million of the loan, was priced as 51/2s to wield 5.75%.
The 2003 and 2006 serial maturities and the 2022 term are insured by the Municipal Bond Investors Assurance Corp. and are rated triple-A by Moody's Investors Service, Standard & Poor's Corp., and Fitch Investors Service.
The remainder of the loan was rated single-A by all three ratings agencies.
In short-term new issue action, $268 million of California Statewide Communities Development Authority 1993, Series A pool notes were tentatively priced by a group led by Sutro & Co.
The bonds all mature in 1994 and were priced as 3 1/4s to yield 2.80%.
The loan was rated SP-1 plus by Standard & Poor's.
Traders reported moderate broker bid-wanted flow and there was some long bond trading, but few sizable blocks of bonds were said to have changed hands. Some market players reported brisk going-away business, including $63 million of Massachusetts GOs from 2008 through 2011.
Supply in the secondary increased yesterday, reflected by The Blue List of dealer inventory, which rose $46.2 million to $1.89 billion.
In secondary dollar bond trading, prices were quoted up 1/8 to 1/4 point.
In late action, Orange and Orlando FGIC 5 1/2s of 2018 were quoted at 5.69% bid, 5.67% offered; Dade County, Fla., School MBIA 5 1/4s of 2023 were quoted at 5.75% bid, 5.72% offered; and Boston 5 3/4 of 2023 were quoted at 97 1/4-1/2 to yield 5.94%.
Washington Public Power Supply System MBIA 5.70S of 2017 were quoted at 97 3/8-1/2s to yield 5.90%; California Water 51/2s of 2023 were quoted at 5.76% bid, 5.75% offered; and Chicago GO FGIC 55/8s of 2023 were quoted at 96 3/8-5/8 to field 5.88%.
In short-term note trading. yields were mixed on the day, traders said.
In late action, New York State Trans were quoted at 2.20% bid, 2.15% offered, and Texas Trans were quoted at 2.12% bid. 2.08% offered.