Municipals suffered the most severe price correction in several months yesterday, gouging bullish market players, as prices sank as much as I point amid heavy selling.

"We've been waiting for a correction and we were whacked all day," a trader said. "It's eerie."

Tax-free bond prices had enjoyed a long run-up with practically no major price correction for nearly two months.

The rally had been fueled mainly by investors laden with cash from recent massive bond redemptions who were eager to buy a dwindling amount of bonds. Market players had been so bullish that underwriters had boosted prices of new deals, pushing yields on longer bonds below 6% this week.

But bond prices wavered Wednesday as the Treasury market suddenly retreated after the auction of $10.5 billion of five-year notes.

Early yesterday Treasury prices dipped again when initial state unemployment insurance claims fell 21,000, to a seasonally adjusted 400,000 in the week ended July 18, while sales of new single-family homes jumped 7.9% in June, to a seasonally adjusted annual rate of 572,000.

The drop in government prices sent a shiver through the municipal market and, as the day wore on, profit takers flooded the secondary with as much as $400 million in bids wanted, traders said.

Darkening the picture, the market absorbed about $2 billion of new issues at the height of the market Tuesday. Meanwhile, several issuers, including New York City, announced large refunding issues yesterday, boosting the upcoming negotiated calendar.

"The calendar jumped so buyers know they can get what they need in the future, so they took profits," a trader said. "We've got bonds on our hands from Tuesday and more on the way."

Treasury prices eventually retraced most of their losses but, by session's end, tax-free bond prices were still quoted down anywhere from 1/2 to 1 point. High-grade yields were quoted up about five basis points late in the session, while discount bonds were quoted down 5/8 to one point.

For example, Los Angeles Department of Water and Power 6s of 2032 were quoted late yesterday at 99 1/4-1/2 to yield 6.05%, compared to 99 3/4-7/8 to yield 6.01% late Wednesday.

But other bond prices suffered more severe losses. Jacksonville Electric Authority 5 1/2s of 2014 were quoted at 94 3/4-95 1/8 to yield approximately 5.93% on the bid-side late yesterday. But Wednesday, the same bond was quoted trading at 95 5/8-3/4 to yield 5.85% late in the session. The bond was originally priced in the primary market Tuesday, when the market was hovering at its recent highs, to yield 5.982%.

In the debt futures market, the September municipal contract settled down 22/32 to 99.15, while the MOB spread widened to negative 173 from negative 160 Wednesday.

Looking ahead, market players today face the release of the Chicago purchasing managers report, which recently has held surprises that moved the market.

New Issues

New-issue activity was light yesterday, but Merrill Lynch & Co. won $40 million of Warren Township, Ind., School Building Corp. first mortgage revenue bonds.

Serials were reoffered to investors at yields ranging from 5.55% in 2004 to 6% in 2010 and 6.10% in 2012.

The issue is rated conditional-A by Moody's Investors Service.

In follow-through business, Smith Barney, Harris Upham & Co., senior manager for $124 million Rhode Island and Providence Plantations general obligation bonds, reported an unsold balance of approximately $42 million.

Meanwhile, in the short-term note sector, yields were mixed, traders said.

In late action, Iowa Trans were quoted at 3% bid, 2.95% offered, Los Angeles Trans were quoted at 2.80% bid, 2.75% offered and Wisconsin notes were quoted at 2.86% bid, 2.75% offered. New York City Tans were quoted at 2.78% bid, 2.75% offered and New York State Trans were quoted at 2.84% bid, 2.82% offered.

Cargill Tender Results

Cargill Financial Services Corp. announced yesterday they have set a maximum price of $114.25 per $100 face value of $450 million Government Development Bank of Puerto Rico bonds issued in 1983.

Cargill, the world's largest privately held company, invited bond-holders to sell the bonds at a minimum price of $114.25 through a modified "dutch auction".

On Wednesday, the original deadline for bondholders, Cargill announced they were extending the offer for one week to allow more bondholders to submit a bid.

Then yesterday, officials of Merrill Lynch & Co., bookrunner for the tender offering, announced that the price has been set at the minimum. According to officials at Merrill, only $88 million of the bonds were submitted -- far below expectations.

According to the offer to bond-holders, Cargill stated if they did not receive a "substantial amount of the bonds, they would be in a position to call the bonds" at their first call date in 1994.

The bonds were sold in 1983. All the bonds are scheduled to mature in 2013 and were priced to yield 10%

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.