Municipals returned to the upswing yesterday, but lagged the gains in the Treasury market, as tax-exempt buyers waited for $1.6 billion of new deals set for sale today.

The bond markets firmed Friday after the most recent Federal Open Market Committee minutes revealed that the Federal Reserve has adopted a neutral stance on monetary policy.

The markets got another boost from more signs of an anemic economy early yesterday. Treasury prices bolted higher right after the National Association of Realtors reported reported that existing home sales fell 1.3% in August to a seasonally adjusted annual rate of 3.81 million units.

Treasuries jumped nearly 1/2 point, just through the 6% yield level. Municipal futures were also about 1/2 point higher, but cash bonds were lethargic, rising only 1/8 to 1/4 point.

Traders reported lackluster dealings, adding they would wait for today's slate of new issues to set the tone for the rest of the week.

"There's a lot of table setting going on, but we haven't seen much trading," one player said.

Secondary trading has been choppy recently, after price losses last week put an end to the latest bull stampede.

"It's not as easy as it was," a trader said. "Before we were moving straight up, but now we've got some ebb and flow and it's harder to stay on top."

Buyers have been scarce, more than content to shun low yields, even though tax-exempts remain cheap to other securities. Instead, some players said late last week, they were biding their time as the forward calendar grows.

The Bond Buyer calculated 30-day visible supply at $6.3 billion yesterday, up $412 million from Friday. Secondary supply has been on the increase, thanks to the choppiness of the market and the paucity of buyers. Despite the market's improved tone, The Blue List of dealer inventory rose $16 million yesterday to $1.81 billion.

Tax-exempt prices did manage to add to their gains as the day wore on. The government 30-year bond rose more than one point by the end of New York trading. Tax-exempt traders marked bonds up 3/8 to 1/2 point on average by session's end, they said. High-grade prices were said to have risen by about 1/2 point on average.

In the debt futures market, the December municipal contract turned in a strong performance relative to cash. It settled up 21/32 to 104.24, just below the high of 104.25. Despite the gains, the MOB spread widened to negative 480 from negative 457 Friday as the government market outshot tax-exempts.

In follow-through business, Morgan Stanley & Co. freed $388 million New York State Dormitory Authority refunding bonds from syndicate restrictions, and the bonds made solid gains.

In late trading, the 5 1/2S of 2010 were quoted at 5.62% bid, 5.60% offered, compared the original 5.67% reoffering yield. The 5s of 2020 were quoted at 5.61% bid, 5.60% offered. Those bonds were originally priced to yield 5.70%.

In other secondary dollar bond trading, South PUB 5 1/8S of 2032 were quoted up 1/2 point to 5.46% bid, 5.45% offered, and South Carolina PSA FGIC 5s of 2025 were quoted up 5/8 at 5.30% bid, 5.29% offered.

New issuance was light yesterday, dominated by the negotiated sale of $218 million Metropolitan Transportation Authority transit facilities revenue bonds.

First Boston Corp., as senior manager, priced and repriced the issue.

At the repricing, zero coupon bond yields were lowered by five basis points.

The final offering included serial bonds priced to yield from 3% in 1994 to 5.15% in 2011. The non-callable zero coupon bonds were priced to yield 5.35% in 2012, 2013, and 2014.

The issue is rated Baa by Moody's and BBB-plus by Standard & Poor's, except for insured bonds. Maturities from 1996 through 2001 are insured by MBIA, while bonds from 2002 through 2011 and the zeros are insured by FGIC and rated triple A by Moody's and Standard & Poor's. The FGIC-insured bonds are rated triple-A by Fitch Investors Service

Competitive offerings will dominate new issue action today.

Toppings the list is $800 million California general obligation bonds.

Several traders said late yesterday bidding for the California bonds would probably be strong if the market remained frothy. The bulk of the loan is expected to come in shorter maturities. Depending upon the coupon structure, traders said it could fetch rates in the neighborhood of 2.50% to 2.60% for the 1994 maturity. Bonds on the long end could come at 5.30% or slightly lower, they added.

Kentucky Housing Upgraded

Moody's Investors Service late yesterday upgraded $783 million of outstanding Kentucky Housing Corp. housing revenue bonds to Aaa from Aa1.

KHC is the first state housing finance agency to receive an Aaa rating on an ongoing program that is not secured by third-party guarantees or support, Moody's said.

The action was taken in conjunction with the sale of $251 million housing revenue bonds, which are on parity with the agency's outstanding bonds, Moody's said.

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