Municipal bond prices rose and then faded with Treasuries yesterday, as early gains evaporated in the face of what is expected to be strong economic reports next week.

Tax-exempts were up as much as [incomplete text in original publication] point in the morning, but finished yesterday's quiet session unchanged to slightly weaker overall.

"We're going down in sympathy, but there's still a pretty

good tone in our market," one municipal trader said. "Cash is beginning to come into our market, and it's going to have to be spent."

While some of the money is speculative kind attempting to buy long municipals at an attractive percentage of Treasuries, the trader described most of the real

investor money coming into the market as "defensive, trying to be short [and] looking for quality."

The trader said that while the market saw bid lists again yesterday, it appeared to be absorbing them fairly well. Traders estimated yesterday's lists at roughly $400 million, though at least one trader said there seemed to be less.

Most lists appeared to come from mutual funds, though some property and casualty company selling was noted as well. One trader said some selling was identified as being done against new issues.

Dollar bonds ended unchanged to down 1/4 point in spots, while high-grades ended unchanged. In debt futures, the December municipal contract was down 1/2 point to 82 10/32. Yesterday's December MOB spread was negative 457, compared with negative 460 on Wednesday.

The 30-year Treasury bond, which was up as much as 1/4 point early yesterday, ended down 12/32 to yield 8.14%.

Kevin Flanagan, a vice president and financial economist at Dean Witter Reynolds Inc., said the bond market started to rise yesterday on news of a decline in the October producer price index, and also drew strength from a stronger dollar.

"It was also a technical rally," Flanagan said. "The market still is oversold to some degree, and that was enough to bring in some people off the sidelines for the time being, but obviously, considering what looms ahead, not nearly enough to sustain any price increases."

Flanagan cited next week's data on retail sales, industrial production, capacity utilization, and consumer prices. Also of concern is Tuesday's Federal Open Market Committee meeting, during which the Federal Reserve is expected to tighten monetary policy. Players also appeared to be treading warily ahead of the Veterans Day weekend, he said.

"Moving into a three-day weekend, no one wants to be caught holding a long position of any significance, so what you have is a paring back of positions," Flanagan said.

"Fixed-income investors are just not comfortable moving bonds down to the 8% level or getting close to that 8% level," given the possible challenges ahead, Flanagan said.

The economist added, however, that while yesterday's PPI report was somewhat skewed because of the way auto prices were figured, it still suggests that inflation is under control.

The Labor Department yesterday reported that producer prices dropped 0.5% overall in October. The index's core rate, which excludes food and energy prices, was also down 0.5%.

Flanagan said that the report is questionable as it relates to a 2.6% decline in auto prices. He said that since October marks the start of the new model year, the Bureau of Labor Statistics has to seasonally adjust for the price increases that are usually implemented.

"Although in reality new vehicles did increase in price, it wasn't to the degree that the BLS was looking for, so that resulted in a decline," Flanagan said. Still, the BLS yesterday noted that even without the big decline in autos, PPI overall still would have been down by 0.1% in October, he said.

Turning to the primary market, next week is shaping up as a busy one. The negotiated calendar includes $300 million of New York State Environmental Facilities Corp. bonds, $222 million of Michigan State Hospital Financing Authority bonds, and $192 million of Illinois Regional Transportation Authority bonds. Bear, Steams & Co. will serve as lead manager on all three deals.

Also ahead are $200 million of Santa Clara County, Calif., lease revenue bonds through Morgan, Stanley & Co.; $141.6 million of California State Public Works Board bonds through Artemis Capital Group; and $122 million of Pennsylvania Intergovernmental Cooperative Authority bonds through Smith Barney Inc.

The competitive slate includes $226.5 million of Virginia general obligation bonds on Thursday. Wednesday is scheduled to include $200 million of Massachusetts general obligation bonds, two series of New York State Mortgage Agency revenue bonds totaling $102 million, and $100 million of Missouri Housing Development Commission revenue bonds.

The 30-day visible supply of municipal bonds yesterday totaled $4.67 billion, down $287.9 million from Wednesday. That comprises $2.059 billion of competitive bonds, down $57.6 million from Wednesday, and $2.612 billion of negotiated bonds, down $230 million from Wednesday.

Standard & Poor's Corp.'s Blue List of municipal bonds was down $59.3 million yesterday, to $1.996 billion.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.