Municipals shuddered yesterday as the 30-year Treasury bond surged above 7% and nearly $3 billion of offerings combined to flatten prices.
Tax-exempts opened the day naively higher. Many hoped the market would be able to renew the strength seen late last week in the face of Treasury losses.
But yesterday's price erosion added to Monday's losses as municipals were unable to regain their ability to decouple from the Treasury market's fall, which was sparked by last week's price reports.
The renewed price pressures worried traders who feared the Federal Reserve would tighten monetary policy.
The downward momentum increased as the 30-year bond tested the 7% level. Traders noted that, technically, the 7% level was not very daunting, but psychologically it proved to be a much bigger problem.
When the long bond moved through 7% and remained at 7.02% for the rest of the session, municipal prices quickly gapped lower and market psychology began to shift.
Combined with the pricings of a myriad of sizable deals, market players said there would be no price bounce as many had hoped, especially since the long bond broke through 7%.
"We're choking on supply and that's a short-term problem," said one trader. "But with governments above 7%, the whole market is in jeopardy,"
"Everybody who is waiting for a bounce is kidding themselves," said another trader. "We're too heavy. With 30-day visible and The Blue List where they are it's just not going to happen right now."
By session's end, prices were quoted down 1/2 to 3/4 point on average. But traders said more active names were down one point and more in spots.
In the debt futures market, the June municipal contract settled down 10/32 to 100.00.
The June MOB spread, meanwhile, narrowed to negative 309 from negative 320 as Treasury losses outpaced municipal drops.
Market conditions were poor enough for Donaldson, Lufkin & Jenrette Securities Corp. to withdraw $207 million Rhode Island Depositors Economic Protection Corp. special obligation refunding bonds from the primary.
The deal was originally priced Monday, but is now on a day-to-day basis, according to William J. Mulrow, senior vice president and manager of Donaldson's public finance department.
Looking ahead, supply will likely continue to be a problem for municipal prices. A quick glance at supply figures showed increases in both the primary and secondary sectors yesterday.
The Bond Buyer calculated 30-day visible supply at $9.48 billion, up from $9.38 billion Monday. The Blue List of dealer inventory jumped $199.1 million, to $1.66 billion.
Since Friday, The Blue List has risen $302 million, or 22%, to $1.66 billion from $1.36 billion. In the past week, it has jumped $380 million, or 30%, from last Tuesday's level of $1.28 billion.
Looking to near-term prices prospects, market players said continued weakness could spur broader selling that could further weaken the market's overall position.
"If we don't see some buying behind 7% on the long bond it's going to be hard to recover," a trader said. "That will frighten people a bit."
Continued weakness could also prompt widespread selling by the buy-side, traders added.
"Will we hear the L-word -- mutual fund liquidations?" one trader said. "The question is, is this a long-term drop or just a blip in an interest environment that is trending down?"
Issuers flooded the market yesterday, despite the price drops, indicating they may think the market has seen the lowest rates for the near-term.
Underwriters said that buyers were taking bonds in the 10-to- 15-year range, but were shy of the long end. Deals with specialty names featuring non-callable bonds with shorter maturities received a much better range of investors, they added.
Topping action, an 11-member syndicate led by Goldman, Sachs & Co. priced $797 million refunding revenue bonds for the Washington Public Power Supply System.
At the repricing, Project No. 1 serial bond yields were raised by five basis points, from 1999 through 2008. Term bond yields were also raised by five basis points.
Project No. 2 yields were raised by five basis points, from 1999 through 201 0. and in 2012. The final offering included $465 million Nuclear Project No. 1 bonds priced to yield from 2.90% in 1994 to 5.90% in 2008.
A 2012 term was priced as 6.05s to yield 6.072%; a 2013 term was priced as 5 3/4s to yield 6.07%; and a 2017 term, containing $176 million of the loan, was priced as 5.70s to yield 5.97%.
There also was $252 million Nuclear Project No. 2 bonds priced to yield from 2.90% in 1994 to 6.05% in 2010. A 2012 term, containing $43 million of the loan, was priced as 5 3/4s to yield 6.07%.
There also were $40 million Project No. 1 periodic auction reset securities and $40 million corresponding inverse floating rate securities.
Uninsured bonds are rated double-A by Moody's Investors Service, Standard & Poor's Corp., and Fitch Investors Service.
Project No. 1 and No. 2 bonds in 1999 are insured by Financial Security Assurance, while bonds in 2003 and 2017 are insured by the Municipal Bond Investors Assurance Corp. Those bonds are rated triple-A by all three ratings agencies.
The derivative portion of the loan was also insured by FSA and rated triple-A.
Merrill Lynch & Co. as senior manager priced, repriced, and restructured $579 million Texas Municipal Power Agency refunding revenue bonds.
At the repricing, the amount was boosted from $576 million. Also, 2009 and 201 0 serial maturities were added, while serial bond yields were lowered by 20 basis points in 1993 and by five basis points in maturities from 2006 through 2008. Capital appreciation bond yields were lowered by five basis points.
The final scale included serial bonds priced to yield from 2.30% in 1993 to 5.70% in 201 0. A 2012 term, containing $67 million of the loan, was priced as 5 1/4s to yield 5.80%. There also were non-callable capital appreciation bonds priced to yield from 6. 1 0% in 2013 to 6.15% in 2017.
The issue is insured by MBIA and rated triple-A by Moody's and Standard & Poor's.
New York City Issue
New York City weighed into yesterday's choppy market with a variety of bonds totaling over $900 million and designed to appeal to many investors, including buyers in Japan.
A 29-member syndicate led by Bear, Stearns & Co. as senior manager priced and repriced $496 million general obligation fixed rate current interest bonds for the city. This leg of the deal included a $15.4 million of tax-exempt refunding bonds.
At the repricing, yields were raised by five to 10 basis points throughout the loan, except in 2005, where the yield was lowered by five basis points, while Series F yields in 1996 through 1998 were lowered by 10 basis points.
A Bear Stearns underwriter roughly estimated street float at about $100 million.
The final offering included $481 million Series E bonds priced to yield from 3.80% in 1995 to 6.25% in 2021. There was $16 million Series F bonds priced to yield from 3.20% in 1994 to 6.25% in 2023.
Series E bonds in 1996 and 1997, totaling $51 million, were priced as variable rate securities and were not formally reoffered to investors. The bonds are rated Baal by Moody's and A-minus by Standard & Poor's.
In a separate offering, New York City joined a handful of municipal bond issuers that have tapped the Japanese market, with its sale of $200 million of taxable Yen denominated bonds, including some taxable refunding bonds.
The so-called Samurai bonds saved the city $3.8 million compared to comparable domestic securities, city officials said. The bonds, which totaled 22.5 billion yen, were sold through a syndicate led by Nikko Securities Co. International.
City officials said underwriters placed the bonds with a mix of Japanese institutional investors, including life insurance companies and regional banks, and that the bonds sold well in the Japanese market.
Under the terms of the deal, the city will sell to a special purpose corporation general obligation bonds with yields that float between 108 to 115 basis points above the 6-month London Interbank Offering Rate. The deal was priced at rate of 3.375% and will be reset every six months.
The newly created corporation will then sell the bonds to Nikko. State law does not permit a direct sale by the city to an underwriter.
The city also sold $68 million of fixed-rate tax-exempt capital appreciation bonds, including $10.7 million of fixed rate tax-exempt convertible CABS. Prudential Securities served as senior manager for NYC bonds, which were priced with yields ranging from 5% in 1998 to 6.4% 2019.
There were also $12 million fixed-rate taxable CABs, including about $6 million of taxable refunding bonds. This portion of the deal was also senior managed by Prudential. Yields on these securities ranged from 6.66% in 1998 to 8.44% in 2012.
And $130 million taxable floating rate bonds are expected to be priced by Kidder, Peabody & Co. just before the city closes on the entire offering. The bonds will have a liquidity facility by Financial Guaranty Insurance Co.
A William R. Hough group won $18.2 million Brevard County, Fla., solid-waste management system revenue bonds with a true interest cost of 5.5619%.
Serial bonds were reoffered to investors at yields ranging from 3.10% in 1994 to 5.80% in 2010. The bonds are rated A by Moody's and Standard & Poor's.
Officials in Brevard County, Fla., said they were pleased with the results of the auction.
In what was apparently a first for a Florida issuer, the county had allowed underwriters to submit their bids by fascimile transmission.
"We were very happy with how well the fax bid system worked," said Thomas Holley, the county's financial adviser.
"But it was the one hand-delivered bid that won," he added. Holley said the winning bid, from St. Petersburg, Fla.-based William R. Hough & Co., beat out five other entries, each of which was faxed in.