Municipals ended unchanged to slightly better Friday going into the July 4 holiday, but one analyst sees the potential for fireworks of a different sort ahead.
"It's kind of a witch's brew here of events that could create a great deal of market volatility," James Kochan, head of fixed income asset management at Robert W. Baird & Co., said. Kochan cited the Federal Open Market Committee meeting taking place today and tomorrow, out of which he sees a 60% likelihood for some form of monetary policy tightening.
Also, the market receives June employment on Friday, Kochan said. Economists are looking for non-farm payrolls to increase by roughly 263,000.
In addition, foreign exchange traders will be closely watching this weekend's Group of Seven economic summit in Naples, Italy, he said. Political comments emanating from that meeting have the potential to cause currency market volatility, which would affect the bond markets as well, Kochan said.
Participants generally like to have inventory on hand going into the big coupon re-investment months of January and July, Kochan said, adding that those months generally also see a drop off in new issue volume.
In this instance, however, the positive effects of the re-investment could be offset by the external events of the coming days, Kochan said.
As for secondary market activity Friday, "It's kind of quiet," one trader said, "I think bonds are up about 1/8 to 1/4 of a point, but you can count the trades on your fingers and there's not a lot going on."
A municipal analyst, however, called Friday's market unchanged to slightly better.
"We're not going anywhere," he said.
"It's extremely quiet," a second trader said, "There were a couple of bid lists with really nothing on them."
The trader, however, sounded a pessimistic note.
"It feels heavy again, even though nothing's going on," he said.
In the government market Friday, the 30-year Treasury bond ended marginally higher to yield 7.60%. In debt futures, the September municipal contract settled up nearly 3/8 point Friday to 89 1/8. Friday's September MOB spread was negative 391 compared to negative 398 on Thursday.
In other news, the 30-day visible supply of municipal bonds for today totals $2.30 billion, up $129.8 million from Friday. That comprises $1.31 billion of competitive bonds, up $209.7 million from Friday, and $989.4 million of negotiated bonds, down $97.9 million from Friday.
The measure of future supply has now been under $4 billion for 12 straight business days.
Overall, the 30-day visible supply has now been under $5 billion for 36 straight days and for 74 days so far this year. In all of 1994, it was under $5 billion 78 times.
Dealer inventories continued to decline. Standard & Poor's Blue List declined $110 million on Friday to $2.02 billion from $2.13 billion. Although the Blue List has fallen $230 million in the past three days, it has still been above the $2 billion mark for 10 straight days.
Preliminary long-term sales for the week ended July 1 fell to $1.82 billion from $3.47 billion a week earlier.
Note sales jumped to $2.12 billion last week from $1.57 billion in the previous week. Weekly note sales have exceeded $2 billion in three of the past four weeks.
Anticipated bond sales for this four-day week are $918 million.