The market may have been screaming "Just Do It" louder than a Nike ad yesterday, but the Federal Reserve remained firmly on the couch.

Municipals sank 5/8 point overall as the central bank turned a deaf ear to market demands for a fourth Fed tightening of monetary policy.

"The comment on the Street is that no one's going to buy a bond until the Fed makes its move," Larry Wachtel, a market analyst wit Prudential Securities, said.

Had the dollar not been stable yesterday, Wachtel thinks the Fed would have acted.

Yields on high-grade issues rose five basis points overall, and more on the long end, a municipal analyst said. Dollar bonds lost 1/2 point to 5/8 point overall, and more than a point in spots, he said. Activity was light to moderate.

In late secondary activity, San Joaquin 6 3/4s of 2032 were quoted at 7.30% bid, 7.20% offered, while Tribe 5s of 2024 were 6.53% bid, 6.48% offered.

The government market's 30-year bond closed down more than 3/4 of a point to yield 7.62% -- the highest yield since Oct. 11, 1992.

Yesterday's June MOB spread was negative 414, down from negative 418 on Friday. In debt futures, the June municipal contract closed down 3/4 points to yield 88 21/32.

In the primary market, yesterday's volatility resulted in the rescheduling of at least one issue, according to a syndicate member.

The Georgia Municipal Electric Authority's two-part deal totaling $369 million has been placed on a day-to-day basis.

Returning to the overall market, Wachtel said the Fed should "clear the air" by acting aggressively before the Treasury's quarterly refunding that begins today.

The Treasury Department is slated to sell $17 billion of three-year notes today and $11 billion of 10-year notes tomorrow.

The Fed could raise the discount rate by 50 basis points sometime between yesterday's close and today's opening, he said.

The central bank must also raise the fed funds rate by 50 basis points to show the market it means business in the fight against inflation, he added. The discount rate is now 3%; the fed funds rate is at 3.75%.

It the Fed does not act now, it will probably wait until next Tuesday's Federal Open Market Committee meeting, which is a long time in "bond land," Wachtel said.

"I think that's absolutely right," James Kochan, head of fixed income asset management at Robert W. Baird & Co., said of Wachtel's comment that the market will not buy bonds until the Fed acts. The Fed's inactivity has sidelined investors who are loath to act until the see how the markets react to a Fed move.

"I wish they'd just get it over with," Kochan said.

The longer the Fed adheres to its policy of gradually raising rates, "the more likely it is that interest rates are going to end up much higher," he said. "I think it's dispiriting to the bond markets," he said.

The Fed needs to act more aggressively than the three 25-basis-point fed funds rate hikes that it began on Feb. 4. Those moves have failed to slow the economy and help the market, Kochan said. He is looking for a 50-basis-point increase in the both the discount and fed funds rate.

"I think that would probably do it," he said, "It needs to be a more aggressive, more substantial move than just [25 basis points] on the fed funds."

Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson, said Friday's larger-than-expected increase in non-farm payrolls should have provided enough reason for the Federal Reserve to act.

Wesbury noted signs that inflation is building including higher gold prices and a rising Commodities Research Bureau Index.

"If they didn't do it Friday, why would they do it today," Wesbury said, "I think that any credibility they gained with the first three moves, they've now lost."

Like the others, Wesbury says a 50-basis-point increase is needed for both fed funds and the discount rate.

"I'd say 50-50 is what they need to do at least to catch up with the market," Wesbury said.

In other news yesterday, Standard & Poor's Corp's The Blue List rose $75 million, to $1.75 billion from $1.67 billion on Friday.

Today's 30-day visible supply totals $5,748.9 million, up $392.7 million from yesterday. That compromises $2,340.2 million of competitive issues, up $25.3 million from yesterday, and $3,408.7 million of negotiateds, up $367.4 million.

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.