Tuesday's rally came to an abrupt halt yesterday as the market gave back most of its ill-gotten gains.
The market opened with optimism after a big drop in producer prices Tuesday sparked a rally that brought relief to players after two weeks of straight, painful losses. Traders reported a firm tone early on with a good bid for some sizable blocks of bonds up or sale.
But optimists were immediately set back yesterday when the consumer price index posted a 0.4% gain in October, resulting from advances in all goods categories. Excluding food and energy prices, the core CPI increased 0.3%.
The CPI report came in as advertised, or slightly more aggressive than some expected. Bids for municipals immediately failed, traders said, and a stiffening optimism turned to mush as players realized Tuesday's rally was an aberration.
The market held on at mid-session, with prices quoted down only 1/8 to 1/4 point. Traders said they might have found a comfort level where they could avoid more of the painful losses suffered recently. But as the session progressed, the pain increased, thanks to climbing commodities prices, which began to force bonds lower. The Commodities Research Bureau index rose more than three points, presaged by reports late Tuesday. of sharply lower production estimates for corn and soybeans.
The market's inability to hold Tuesday's gains gave sellers more than enough impetus to become active and municipals began to lose more ground. By mid-afternoon, many traders said that credit market yields may be headed for a higher range.
"We need to give up the fantasy that we're moving back to 6% on the long bond," one trader said. "We're going to have to get used to hanging out in a range between 6.25% and 6.50%."
Traders did report some demand for product at the lower levels, reflected, in part, by a continuing drop in The Blue List of dealer inventory up for sale. The list fell $109.7 million yesterday, to $1.65 billion.
By session's end, prices were quoted mixed. High-grade bonds were mostly unchanged, thanks to favorably received competitive high-grade deals. But, traders said, secondary bond prices were down 1/8 to 1/2 point on average and by as much as one point, depending upon the name.
In secondary dollar bond trading, Chicago O'Hare MBIA 5s of 2018 were quoted at 5.62% bid, 5.59% offered; New York State Power Authority 5 1/4s of 2018 were quoted 96 1/2-97 to yield 5.5 1 %; and TBTA 5s of 2020 were 93 3/4-94 1/8 to yield 5.44%.
Also, Pittsburgh Water and Sewer FGIC 4 3/4s of 2016 were quoted at 5.41% bid, 5.39% offered; Florida Board of Education 5 1/8s of 2022 were at 94 3/8-7/8 to yield 5.51%; and Los Angeles DEWAP 5.40s of 2031 were 5.67% bid, 5.61% offered.
In the debt futures market, the December municipal contract settled just off the low of the day, down to 102.01. Several traders noted that the contract remains rich, indicating that municipals prices may indeed be headed even lower. They added that MOB buying yesterday also reflected a downward bias by some big firms on Wall Street. The MOB spread, meanwhile, was unchanged on the day at negative 459.
Competitive pricings dominated new issue action, led by a Merrill Lynch & Co. group that won $329 million Washington Suburban Sanitary District, Md., unlimited tax various purpose bonds with a true interest cost of 5.0808%.
New Deals
J.P. Morgan Securities Inc. had the next lowest TIC with a bid of 5.1092%.
An unsold balance was unavailable late in the day.
Serial bonds were reoffered to investors at yields ranging from 2.75% in 1994 to 4.55% in 2002, 4.85% in 2005, 4.55% in 2006, and 5.25% in both 2012 and 2013. Bonds in 2003, 2004; from 2007 through 2011; and from 2014 through 2018 were not formally reoffered to investors.
The issue is rated Aa1 by Moody's Investors Service and AA by Standard & Poor's Corp.
In other action, a Goldman, Sachs & Co. group won $310 million Los Angeles County Metropolitan Transportation Authority Proposition C sales tax revenue bonds, bidding a TIC of 5.4466%.
Lehman Brothers had the cover, bidding a TIC of 5.4665%.
Goldman reported an unsold balance of about $45 million late in the day.
Serial bonds were reoffered to investors at yields ranging from 4.05% in 1997 to 5.35% in 2013. A 2018 term, containing $73 million of the loan, was reoffered with a coupon of 4.75% for a return of 5.436%. A 2023 term, containing $96 million, was reoffered as 5 1/4s to yield 5.508%.
The offering, insured by AMBAC Indemnity Corp., is rated triple-A by Moody's and Standard & Poor's.
In light negotiated activity, Goldman priced and repriced $115 million Illinois Health Facilities Authority revenue bonds for the Rush-Presbyterian-St. Luke's Medical Center.
At the repricing, the yield on the. 2013 term bond was lowered by about two basis points.
The final offering included serial bonds priced to yield from 4.80% in 2001 to 5.30% in 2006. A 2013 term was priced as 51/4s to yield 5.66%; a 2020 term was priced as 51/4s to yield 5.73%; and a 2025 term was priced as 5 1/2s to yield 5.78%.
The deal is insured by the Municipal Bond Investors Assurance Corp. and rated triple-A by both Moody's and Standard & Poor's.
