Municipal bond prices dropped 1/2 point yesterday amid weakness in the government market and a barrage of bid lists totaling roughly $500 million.
"We had some good [economic] numbers this morning, but the market has got a mind of its own," a municipal trader said.
The Commerce Department yesterday reported that housing starts fell 5.2% in October to a seasonally adjusted annual rate of 1.419 million units, the lowest level in four months. Meanwhile, the Philadelphia Federal Reserve's business outlook index came in at 30.5 in November, down from to 33.2 in October.
The survey showed that while most indexes of current activity posted slight declines this month, levels remain higher than what was recorded for most of the year.
"The Philly Fed wasn't that favorable for the market," said Marilyn Schaja, a money-market economist at Donaldson, Lufkin & Jenrette Securities Corp. Schaja added, however, that the housing starts numbers were favorable because they indicate that higher interest rates are finally having some impact on the housing sector.
The favorable figures, however, were overshadowed by the overall negative sentiment of a market that sees an economy that still shows "a great deal of momentum" and high levels of resource utilization, Schaja said.
"The Fed hike just didn't help the mood," the economist said, referring to Tuesday's 75-basis-point tightening.
Mary Dennis, an economist at Merrill Lynch & Co., said she couldn't see much to blame the decline on other than "just the continued bear market trend.
There's "just no reason to buy in here," Dennis said.
In light secondary market activity, high-grade issues rose by three basis points overall, and by five basis points on the long end. Dollar bonds lost 1/2 point overall, and more in spots.
In debt futures, the December municipal contract closed down 13/32 to 81 22/32. Yesterday's December MOB spread was negative 481, compared with negative 480 on Wednesday. On the government side, the 30-year bond was down 10/32 to yield 8.12%.
As for new issues, a municipal trader said that with some exceptions, this week's crop appeared to be doing well.
"Most of them on the long end are doing exceptionally well, but the serials are lagging, which is putting more inventory in dealers' hands," the trader said.
He cited a lack of serial buyers, but said arbitrage buying was lending support to the long end.
"Most of the long buyers are arbitrage, straight arbitrage," he said.
The trader said the volume of bid lists was "substantial" yesterday, with most of it coming from mutual funds. He added that while lists totaled $500 million to $600 million yesterday, they don't provide a total picture of what is for sale.
"A lot of them are working situations," he said. "While they don't have a list out, they'll be giving dealers a tremendous amount of situations to work on, saying 'Here's $30 million,' I have to sell. Here's $40 million ... go find a buyer.'"
In addition to seeing redemptions, the funds are also selling to make way for new bonds they bought this week at cheaper levels, the trader said.
Meanwhile, in competitive action yesterday, a CS First Boston group won $218 million of Virginia general obligation bonds with a true interest cost of 6.440%, nosing out J.P. Morgan Securities Inc.'s cover bid of 6.447%. The deal was reoffered to investors at a top yield of 6.80% in 2021.
In negotiated deals, Artemis Capital Group Inc. priced $136 million of California State Public Works Board lease revenue bonds with a top yield of 7.43% in 2019.
Also yesterday, Bear, Steams & Co. said it put $222 million of Michigan State Hospital financing authority revenue bonds on a day-to-day basis. The bonds were expected to be priced yesterday.
Topping this week's new deal list is California's $407 million of competitive general obligation offering, scheduled for Tuesday.
Looking ahead to next year, Mark Tenenhaus, a first vice president at Dean Witter Reynolds Inc., sees even fewer new issues than in 1994. Through yesterday, 1994 Bond Buyer statistics show new issues totaling $146.1 billion, off 43.8% from the same period in 1993, when volume was $259.9 billion.
"What has been a lack of supply this year will only get worse," he said.
"There's obviously less refundings to be done, and, legitimately, you can count on your finger tips the amount of major capital intensive revenue bond programs being done in this country," Tenenhaus said. "What you are seeing is a return to a traditional market, dominated by local bond issues for very specific purposes such as education."
A review of ballot initiatives that passed on Election Day reveals that education issues passed dramatically "because people perceived a local benefit," he said. Initiatives that had "more of a general public good" did not fare as well.
"Statewide issues did not do as well," Tenenhaus said, adding, "Statewide issues are where the big bonds come from."
He sees a "trend toward a bit of a traditional bond market before the debt explosion of the mid 1980s."
"And keep in mind," Tenenhaus said, "that the volume levels we are doing fight now are still relatively high compared to historic standards."
The 30-day visible supply of municipal bonds yesterday totaled $3.945 billion, down $669.7 million from Wednesday. That comprises $1.44 billion of competitive bonds, down $463.7 million from Wednesday, and $2.505 billion of negotiated bonds, down $205.9 million from Wednesday.
Standard & Poor's Corp.'s Blue List of municipal bonds was up $83.1 million yesterday to $1.938 billion.
