Municipals posted modest gains yesterday in sympathy with the Treasury market's testing of the record highs won in September.
The credit markets opened in positive territory, riding a bullish tone fueled by expectations for positive inflation news at the end of the week. Soon after the opening, the Treasury 30-year bond was quoted up 8/32 to yield 5.90% while the December municipal contract was 10/32 higher.
Municipal traders reported moderate secondary activity, dominated by bid-wanted lists, one of them totaling about $35 million. Traders said discount bonds for sale were numerous and some sizable secondary block trading was reported. Among those, they said, were $16 million Lucas County, Oh., MBIA 5 3/8S of 2017 and $10 million Delaware State Health Facility MBIA 5 1/4S of 2018.
The markets continued to move cautiously higher. The long bond was quoted up 18/32 to 5.87% by mid-morning, while the December municipal contract made gains of 14/32. Tax-exempt dollar bonds posted 1/8 to 1/4 point gains and held steady. Then, just before noon, eastern time, the 30-year bond made a run at the all-time price high. On Sept. 8 the long bond managed to hit 5.83%, before settling at 5.86% its lowest closing yield ever.
Yesterday, government players ran the long bond to 5.85%. But sellers took profits, and the rally stalled and then faltered. Governments quickly gave up nearly all of their gains as commodities prices rose and buying dried up. When the dust settled, the long bond was quoted up jsst 2/32 to yield 5.91% where it stayed for the remainder of New York trading.
By session's end, tax-exempts retained gains of 1/8 to 1/4 point of average.
In secondary dollar bond trading, prices were quoted unchanged to 1/2 point higher, depending on the name. In late trading, New York City Group C 5 3/8S of 2022 turned in a strong performance, up 1/2 at 5.75% bid, 5.70% offered, while Florida State Board of Education 5 1/4S of 2023 were quoted up 1/4 99 5/8-100 to yield 5.27%.
Top high-grade bond prices were said to have risen about two basis points on average, while lesser highgrades managed 3/8 point gains through the intermediate range.
The daily Municipal Bond Index rose 1/4 yesterday, to a record high of 105.28, from 105.20 on Monday. That lowered the average yield to maturity of the 40 bonds used in the index to a record low of 5.39%.
In the futures market, the December municipal contract settled up only 1/32 to 105.07. The contract closed just off the session low of 105.07, after achieving a high of 105.22. The MOB spread narrowed to negative 491 from negative 494.
Traders generally were optimistic about the show of strength in municipals, especially in the face of falling Treasury prices. But the bulk of the week's new deals will slam into the primary sector today and will test buyer sentiment.
"A lot of performance accounts took the opportunity to sell ahead of the week's new deals," a trader said late yesterday. "You've got to watch the new issues market here now. That's the key."
Up until now, buyers have been able to disregard the attractiveness of municipals as building supply weighed on the market. Thanks to Friday's employment report rally and ensuing bullishness, however, investors have been forced back into the some degree, players say.
Municipals have typically lagged Treasury gains recently, making them particularly attractive in comparison.
The current ratio shows The Bond Buyer's 20-Bond Index is 89% of governments, while the Revenue Bond Index is 93% of Treasuries. The Revenue Bond Index is at its most attractive level in relation to the government market since November 1989. But underwriters said demand has increased only slightly as traders slowed the rally ahead of the inflation reports, leaving new issue prospects up in the air.
New issue results were mixed overall yesterday for a moderate number of pricings.
Topping competitive action, a Prudential Securities Inc. group won $125 million Los Angeles Department of Water and Power, Calif., electric plant revenue bonds, bidding a true interest cost of 5.2103%.
Donaldson, Lufkin & Jenrette Securities Corp. has the cover with a bid of 5.2298%.
Prudential reported an unsold balance of about $17 million late in the day.
Serial bonds were reoffered to investors at yields ranging from 4.20% in 1999 to 5.20% in 2015. A 2020 term, containing $21 million, was reoffered with a coupon of 4.75% to yield 5.18%; a 2024 term, containing $17 million, was reoffered as 5 1/8s to yield 5.26%; and a 2033 term, containing $38 million, was reoffered as 5s to return 5.28%.
The bonds are rated double-A by Moody's Investors Service and Standard & Poor's Corp.
Bear, Stearns & Co. dominated the negotiated sector. The firm priced, repriced, and restructured $739 million Salt River Project Agricultural Improvement and Power District, Ariz., refunding revenue bonds.
At the repricing, the amount was boosted from $653 million. Serial bond yields were lowered by six basis points in 2009 and 2010; by five basis points in 1997 through 2000 and in 2005; and by two basis points in 2006 and 2007. Yields in 2016 were raised by about one basis point. Finally, 1995 and 2012 maturities were added to the serial portion of the loan.
Bonds in 2011 and 2012, totaling about $73 million, were not formally reoffered to investors. The bonds were priced as derivatives called STARS and STRIPES, or short-term auction reset securities and short-term inverse payment exempt securities.
A Bear Stearns official said the loan was oversubscribed top to bottom, but, after repricing, bonds will be available in 2013 and 2016.
"We had a lot of bonds in the serial range and we went non-callable and saw good interest there," the official said. "We had to move some coupons around, but term bonds in 2017 are all done, the 2016s are half-sold, and the 13s we were surprised by because we thought they were attractive. We have some more to go there, but the account is willing to position them."
The final scale included serial bonds priced to yield from 3% in 1995 to 5.04% in 2010. A 2013 term, containing $86 million, was priced as 5s to yield 5.239%; a 2016 term, containing $150 million, was priced as 5s to yield 5.289%; and a 2017 term, containing $47 million, was priced as 4 3/4s to yield 5.237%.
Serial bonds from 1996 through 2007; 2009 and 2010 are non-callable.
The bonds are rated double-A by Moody's, Standard & Poor's, and Fitch Investors Service.
Elsewhere, Smith Barney Shearson priced and repriced $138 million Louisiana Public Facilities Authority special insurance assessment revenue bonds.
At the repricing, yields were raised by five basis points from 1995 through 1998. The firm said they received the verbal award, and the deal was underwritten and the account closed.
The final scale included serial bonds only, priced to yield from 3.45% in 1995 to 4.70% in 2002.
The bonds are non-callable.
The Louisiana PFA issue is insured by Financial Security Assurance Inc. and rated triple-A by Moody's and Standard & Poor's.
Merrill Lynch & Co. tentatively priced $121 million Fairfax County, Va., Industrial Development Authority hospital revenue refunding bonds for the Inova Health System Hospitals project.
The offering is non-callable. Serial bonds were priced to yield from 2.75% in 1994 to 5.30% in 2013. A 2023 term, containing $69 million of the loan, was priced as 5s to yield 5.35%.
The bonds are rated Aa by Moody's and AA-minus by Standard & Poor's.
Morgan Stanley & Co. priced and repriced $100 million revenue bonds for the Guam Power Authority.
At the repricing, serial bond yields were cut by five basis points, while the 2013 term yield was lowered by three basis points and the 2023 term was lowered by about one basis point.
The final scale included serial bonds priced to yield from 3.95% in 1996 to 5.35% in 2005. A 2013 term was priced as 5 1/4s to yield 5.499% and a 2023 term, containing $52 million, was priced as 5 1/4s to yield 5.551%.
The bonds are not rated by Moody's, but Standard & Poor's rates them BBB.
South Africa Barrier Nixed
For the first time since 1991, three investment banking firms with South Africa business connections yesterday were allowed to join a syndicate bidding for Los Angeles Department of Water and Power bonds.
On Oct. 5, the department lifted its two-year-old prohibition against doing business with firms with ties to South Africa.
The three firms -- Lehman Brothers, CS First Boston, and Kidder, Peabody & Co. -- were among 32 members of an account senior managed by Prudential Securities Inc. The syndicate yesterday won $125 million in electric plant revenue bonds with a true interest cost of 5.2103%
The move followed a Los Angeles City Council decision to work with firms which have ties to South Africa in recognition of the country's efforts to dismantle apartheid.
A DEWAPS official said four bids were submitted. The Prudential group provided the public utility its lowest interest rate on electric plant revenue bonds since 1973.
Robert Boytano, a first vice president in the municipal underwriting department at Prudential Securities, said "the addition of those firms definitely did strengthen our account." But Boytano added that an "equal force" was the strong market.
William G. Williams, assistant chief financial officer for DEWAPS, said the bid submitted by the Prudential group was "a pretty good bid."
Williams added that the lifting of the ban is helpful to DEWAPS. "The more competitive bids you have, the theory is that sharpens the competition. So it is a win-win."
The cover bid was entered by a group headed by Donaldson, Lufkin & Jenrette Securities Corp. Also submitting a bid was a group headed by Morgan Stanley & Co. A fourth bid was received from Chemical Securities Inc., which bid alone.