Municipal bond prices fell with Treasuries yesterday following stronger-than-expected growth in June durable goods orders, while brisk demand greeted California's $3 billion of short-term notes.
Walter Beveridge, portfolio manager of the $1.24 billion Schwab California Tax-Exempt Money Fund and the $2.9 billion Schwab Tax-Free Money Market Fund, was among the buyers of the California revenue anticipation notes.
"The yield to maturity, I think, was decent," Beveridge said."It's a liquid name, everybody knows it, [and] the ratings were in place --decent ones."
Beveridge noted that at the repricing, the yield on the 5% fixed-rate notes was lowered to 4.10% from 4.20%. Roughly $700 million of the offering was done as floating-rate securities, leaving $2.3 billion to satisfy an estimated $4 billion of orders for fixed-rate bonds.
State officials said the $700 million of floating-rate notes were sold in a competitive bidding process. Merrill Lynch won $200 million of the notes structured to pay 72% of the one-month London Interbank Offered Rate. BT Securities won $100 million of similar notes.
The remainder of the notes will pay the PSA's municipal swap index plus 10 basis points. CS First Boston won $200 million of the PSA notes, J.P. Morgan Securities won $100 million, Dillon Read & Co. won $50 million, and Bank Of America won $50 million.
John Guarascio, an associate municipal portfolio manager at the Benham Group, said Benham purchased the notes. Benham is buying for two California money market funds and a national money market fund that total $700 million in assets, Guarascio said.
"There was good demand all the way around between retail and institutional buyers," he said.
Guarascio said that yesterday's deal might have gotten a boost from a potential tax problem brought to light by last week's California revenue anticipation warrants deal, he said.
Under recent tax regulations, bonds that do not pay interest in the first year are considered original issue discount bonds, which could more easily create market discount subject to taxation. While the California state controller's office rectified the problem by adding an additional coupon payment on the RAWs, the event raised questions concerning what would happen to like issues that don't pay a coupon within one year.
While yesterday's California note deal nearly encountered similar difficulty, the U.S. Treasury lifted a regulation indefinitely pending further study. The Internal Revenue Service regulation, which took effect in April, stated that any interest on a security maturing in less than one year would be added to the principal, which in effect would make them zero coupon bonds. They then would have been subject to the market discount role, increasing the possibilty of taxable market discount income.
However, because the IRS issued an opinion that original issue discount rules will not apply to tax-exempt notes with maturities of a year or less, the RANs deal, with its MIG-1 and SP1-plus ratings, looks attractive relative to other choices buyers might have, Guarascio said.
In a press release, California State Treasurer Kathleen Brown obtained what she called "extremely favorable rates through some hard bargaining" on the $3 billion of notes, which completes the second and final leg of California's $7 billion cash borrowing.
"After yet another state budget impasse and unnecessary costs associated with it, this finally represents some good news for taxpayers," Brown said, "Aggressive marketing, the use of innovative market tools, and tough fiscal management enabled us to drive the cost down, saving tax payers more than $2 million."
According to the release, the RANs were part of a cash management plan designed by the Treasurer and the controller, and agreed to by the Governor that will afford the state money "to meet normal cash obligations during months when revenues are low." They will also allow the state to pay $1.2 billion in short-term warrants that mature on Dec. 21, 1994, the release says.
Turning to the yesterday's secondary activity, municipals fell with Treasuries following the durable goods report.
"It's off pretty good," a municipal trader said. The trader also pointed to 15 bid lists totaling roughly $200 million. One list, from a fund, totaled $40 million by itself, the trader said.
"It' s pretty well spread out -- insurance companies, the funds," the trader said.
Dollar bond prices fell 1/4 to 3/8s overall, while yields on high-grade issues rose by about three basis points. Activity was light. The 30-year Treasury bond closed down. more than 5/8s to yield 7.60%.
New orders for durable goods grew 1.3% in June. That growth was helped by a large gain in autos, the Commerce Department reported. June's gain marked the fourth in a row, and the 10th in the last 11 months.
In the new issue market, a Merrill Lynch & Co. group priced and repriced $105 million New York State Medical Care Facilities Finance Agency FHAinsured mortgage project revenue bonds for the Hospital for Special Surgery.
The offering consisted of 2004, 2014, 2024 and 2034 maturities, with the 2034 maturity priced to yield 6.467%. At the repricing, the yield on the 2004 maturity was lowered by 10 basis points, while the yield on the 2024 maturity was raised by two basis points, and the yield on the 2034 maturity was lifted by four basis points.