The bulls renewed their charge Friday after Thursday's sudden sell-off, but they face more inflation news and $5.6 billion of new deals this week.
A drop in producer prices sent bond prices higher Friday, erasing most of the sharp losses suffered Thursday. The producer price report caught players in short positions, where they had sought safety from the sell-off.
PPI in August plunged a stunning 0.6%. the biggest monthly decrease in two and a half years, the Labor Department said. The core rate, excluding food and energy prices, fell 1.0%, a record drop.
Analysts were expecting a small rise in the August PPI, somewhere in the vicinity of 0.2%.
By mid-morning Friday, the 30-year Treasury bond had rallied nearly 1 1/4 points, as investors moved back out along the yield curve. Municipal bonds were 1/4 to 1/2 point higher. Prices held steady throughout the session and were quoted 1/4 to 3/8 point higher on average, and up 1/2 point in spots, by session's end.
In the debt futures market. the December municipal contract rose 105.08. The MOB spread widened to negative 477 from negative 461.
Looking ahead, traders said prices would likely remain in a range, waiting for the next market-moving news.
The markets will get another look at inflation this week from the consumer price report, due out tomorrow. Once CPI out, supply and demand factors are likely to take over. Market players Friday were generally positive about the market's ability to digest new deals.
"It's probably a sideways trade right here," a trader said. "We'll take a look at some economic reports and the new deals, which we expect to go well. We're getting good customer inquiry and there seems to be cash flows out there to buy bonds."
The supply calendars have been light during August and going into September. So far, this month, the trend continues. Traders say, however, that record low interest rates are bound to attract issuers, even though many of them have already enjoyed refinancings at low rates in recent months.
The Bond Buyer Friday calculated 30-day visible supply at $5.17 billion, up. from $3.27 billion Thursday. Visible supply is its highest level since Aug. 24, when it was $6.01 billion. Secondary supply remained light, although The Blue List of dealer inventory jumped $200.3 million during Thursday's sell-off to $1.07 billion.
This week's negotiated calendar includes some sizable offerings, dominated by $380 million Nebraska Public Power District refunding revenue bonds, to be priced by First Boston Corp.; $363 million Kentucky State Property and Buildings Commission revenue and revenue refunding bonds, to be priced by Merrill Lynch & Co.; and $340 million Illinois, ~Build Illinois' sales tax revenue bonds, which will be priced by Lehman Brothers. The competitive sector is sparse on big deals. The largest is $107 million New Jersey Health Care Facilities Financing Authority revenue bonds, to be bid for Wednesday.
The short-term new issue calendar includes $700 million Puerto Rico tax and revenue anticipation notes, to be priced by Donaldson, Lufkin & Jenrette Securities Corp.
Friday's Secondary Markets
Traders reported moderate activity as bonds regained the losses suffered Thursday.
In follow-through business, Merrill Lynch & Co. freed $183 million Florida Municipal Power Agency refunding revenue bonds from syndicate restrictions. In late action, the AMBAC 4 1/2s of 2027 were quoted at 89-1/8 to yield 5.19%. The bonds were originally priced to yield 5.22%.
In other dollar bond trading, prices were quoted up to as much as 1/2 point, traders said.
Late in the session, Jacksonville Electric 51/4s of 2021 were quoted at 5.33% bid, 5.31 % offered; New York State Power Authority 5 1/4s of 2018 were quoted at 1/4 to yield 5.23%; and Florida Board of Education 51/4s of 2023 were quoted at 99 1/8-1/2 to yield 5.30%.
In the short-term note market, yields were 10 basis points higher on average, traders said.
In late action, California Rans were quoted at 2.73% bid, 2.70% offered, and New York State notes were quoted at 2.44% bid, 2.40%