The rich pricing of recent new issues indicates that municipal underwriters either believe tomorrow's employment news will help bonds or that any downturn it triggers will fade fast, one analyst said.
New deals have been coming "a trifle rich" in recent days, making it appear that underwriters aren't afraid of having leftover inventory going into the August jobs report, said Robert W. Chamberlin, senior vice president and supervisory municipal analyst at Dean Witter Reynolds Inc.
Even if the nonfarm jobs number isn't good for bonds, the trend of late has been for the market to shake off bad news in about 48 hours, Chamberlin said.
Recent economic news supports the idea that the economy is "toning down" and inflation is under control, Chamberlin said. He noted that yesterday's July index of leading economic indicators came in unchanged and that July factory orders were down. The analyst added, however, that none of the economic news coming out is "all plus or minus."
He noted that the market found troubling an increase in the Chicago Purchasing Managers' prices-paid index for August.
"It's Philly Fed all over again," Chamberlin said, alluding to the Philadelphia Federal Reserve's economic survey for August, which two weeks ago showed big gains in its prices-paid and prices-received indexes and largely "unglued" the gains that followed the Fed's Aug. 16 tightening.
While yesterday's prices-paid index gave the market pause, it didn't do the damage the Philly Fed report did, he said.
The overall Chicago Purchasing Managers' index dropped to 61.6% in August on a seasonally adjusted basis. That compares to a 63% reading in July.
All in all, however, "It would appear that we are constructive about Friday," Chamberlin said. "I think that probably the best indication is the willingness that underwriters have got to put big prices on new deals."
"I think there's richness across the screen," Chamberlin said.
But in the current environment of sparse dealer inventories and thin new supply, underwriters appear to be betting that investors eventually will be wig to pay the extra five to 10 basis points, Chamberlin said.
"It's all a study in investor psychology," he said.
Chamberlin doesn't envision a flood of deals in September.
"I could be dead wrong, but I don't think anybody's afraid of the calendar right now," he said. In addition, the funds appear to be seeing some cash coming back in, Chamberlin said.
"That is not to say that the funds are in rollicking good shape," he said.
One notable exception to deals that came rich this week was Denver Airport's $257 million offering. Chamberlin said the top yield of 7.80% in 2023 "sounds quite attractive." Yesterday, those same bonds tightened by 10 basis points to 7.70%, traders said.
In secondary activity yesterday, the market was up 3/8 point overall, with light morning action turning more lively in the late afternoon. High-grade issues improved by three basis points overall, while dollar bond prices moved up 1/4 to 3/8 point. The market was helped by "strong pricing on new issues," a municipal analyst said.
"The primary market is stronger than the secondary market," he said.
In debt futures, the December municipal bond contract settled up 11/32 to 90 15/32. Yesterday's December MOB spread was negative 399, compared to negative 402 on Tuesday.
In competitive action yesterday, a PaineWebber Inc. group won $75 million of Maryland Department of Transportation consolidated transportation revenue bonds with a true interest cost of 5.471%. A balance of $22.895 million was left near day's end.
The offering consisted of serial bonds, reoffered to investors at yields ranging from 4.55% in 1998 to 5.70% in 2008. Bonds in 1995 to 1997 and in 2009 were not reoffered. The bonds are rated double-A by Moody's Investors Service, Standard & Poor's Corp., and Fitch Investors Service.
J.P. Morgan Securities Inc. had the cover bid with a 5.498% TIC, followed by Merrill Lynch & Co. with 5.499%; Lehman Brothers 5.509%; and Bear, Stearns & Co. with 5.545%., according to Beverley Swaim-Staley, director of finance for the Maryland Department of Transportation. Proceeds will be used for highway projects. Swaim-Staley said she was pleased with the bids received, which came largely in line with her expectations.
Also yesterday, Morgan Stanley & Co. won $70 million of Boston AMBAC-insured general obligation bonds, bidding a 5.6651% TIC. The bonds were reoffered to investors at a top yield of 6.05% in 2014. The underwriter reported a late-day balance of $34.640 million.
In other news yesterday, the 30-day visible supply of municipal bonds totaled $2.50 billion, up $76.4 million from Tuesday.
The total comprised $1.32 billion of competitive bonds, down $34 million from Tuesday, and $1.177 billion of negotiated bonds, up $110.4 million.
Standard & Poor's Blue List of municipal bonds declined $50.5 million yesterday, to $1.75 billion.