Municipal futures rose nearly a point yesterday following Friday's sharp losses, while the cash market was idle ahead of today's Federal Open Market Committee meeting.
Fed policymakers are widely expected to hike short-term interest rates for the sixth time this year.
One trader described the cash market as "very, very quiet," with only a handful of bid wanteds. "We would have expected to see more selling, given the redemption schedule that we see from Data Services, he said." According to AMG president Robert Adler, $1.4 billion exited municipal bond funds during the week ended Nov. 9. Adler added that that figure understates the actual exodus because it assumes that all dividends are re-invested.
In debt futures, the December municipal contract was up 52/32 to 82 7/32. Yesterday's December MOB spread was negative 480, compared with negative 472 on Friday. In the government market, the 30-year bond was up 26/32 to yield 8.07%.
"The dollar's a little bit stronger but you're also getting some short-covering ahead of [today's] FOMC meeting," said Kathleen Camilli, chief economist at MFR Inc.
Camilli said the dollar gained ground against other currencies overnight after what appeared to be buying from some large funds. A municipal trader said that investors seem to be more comfortable with the dollar, following the strong Republican showing in last week's elections.
The trader also cited Thursday's report of a 0.5% decline in October wholesale prices, which some saw as skewed with regard to the way new passenger car prices were calculated.
"Say what you want about cars, the number was still down half a percent," the trader said.
Camilli said yesterday's short-covering stemmed from Thursday, when the drop in the producer price index helped push the government futures contract up to a high of 97 2/32 for the day.
"Then there was talk that the dealers didn't have any faith in the rally, and that they were setting these shorts at the high," Camilli said. The market subsequently traded off, and closed lower on the day, she said. Yesterday some of those Thursday shorts appeared to be getting covered, she said.
As for today's possible Fed action, Camilli is looking for half-point hikes in both the federal funds rate and the discount rate. If the Fed acts as she expects, Camilli doesn't envision much reaction on the short end.
"The front end is already priced to a 75-basis-point tightening," she said. How the long end reacts to a 50-basis-point move will depend largely on the accompanying language, Camilli said.
"Provided that they do 50 discount [and] 50 Fed funds and the language of the announcement leaves open the possibility of additional tightening in the days and weeks ahead, it could be constructive for the long end," Camilli said.
Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson, sees "a 90% chance of 50, about a 9.5% chance of 75, and about a 0.5% chance of 100."
A 50-basis-point move would likely mean a sell-off, he said.
"Right now they are behind the curve," Wesbury said, adding that a half-point rise will not allow the Fed to catch up. The market would just be left waiting for the next 50-basis-point move, he said.
"Seventy five basis points will get them close enough that the market can breathe a sigh of relief," Wesbury said, adding, however, that how the market reacts will-likely hinge on what the Fed says in conjunction with such a move. If the central bank indicates that 75 is the end of its tightening trend, a rally could be shortlived, he said.
Wesbury sees a 6% Fed funds rate as neutral, but said a 100-basis-point hike, which would boost the rate to 5.75%, could bring the market close enough to that level to be called neutral.
The Fed aside, Wesbury said the bond market is in an oversold position. The market already has priced in a 4% to 4.5% inflation rate, he said, adding that while those levels may eventually come to pass, current consumer price index and PPI figures do not support those levels yet.
"Even with 50 [basis points], while we may sell off, technically we could get a bounce," Wesbury said. "I wouldn't be surprised to see the market ahead of where it is right now in a week or so, regardless of what the Fed does."
In the new-issue market, a Bear, Steams & Co. group priced and repriced $192 million of Regional Transportation Authority general obligation bonds for Cook, DuPage, Kane, Lake, McHenry and Will counties in Illinois.
The FGIC-insured offering consisted of $62 million of Series 1994 C bonds and $129 million of Series 1994 D bonds. The series C bonds featured a top yield of 7.28% in 2025, while the Series D bonds featured a top yield of 7.27% in 2025.
The 30-day visible supply of municipal bonds yesterday totaled $5.38 billion, up $203.5 million from Friday. That comprises $2.126 billion of competitive bonds, up $52.1 million from Friday, and $3.257 billion of negotiated bonds, up $151.4 million from Friday.
Standard & Poor's Corp.'s Blue List of municipal bonds was up $18.6 million yesterday, to $1.88 billion.