Muni market gets on the ball, stirred by romp in Treasuries.

A Treasury buying spree spurred already giddy municipal players to trade bonds even higher, although haltingly.

The municipal market has dragged its feet this week in the face of continued Treasury price gains and record low long bond yields.

But government traders gave another bullish whoop yesterday arid traded the 30-year bond up almost one point to yield 6.09%, an all-time low.

Municipal dealers were forced to play into the strength as were buyers with cash to invest, traders said. "The buyers are starting to realize this market can go higher and will go higher," said one player. "Those people who were sure the market was going to go lower are now being convinced otherwise."

As a result, the Municipal Bond Index reached a record high of 104.02 yesterday, resulting in a record low average yield to maturity of 5.61 %.

Some underwriters said this week that buyers are suffering from sticker shock, while dealers are also reluctant to make any significant moves at such high price levels.

But, true to many economists' predictions, bullishness is apparently warranted, thanks to a weak economy, prospects for low inflation, and some strong technical factors, including municipal defeasance-related buying.

The latest data confirming this were initial state unemployment insurance claims, which increased 8,000 to a seasonally adjusted 332,000 in the week ending Aug. 2 1, another sign of a weak jobs sector. Gold prices, meanwhile, declined, confirming the market's belief that inflation is in check.

Municipal traders reported brisk action once the government market took off, with some sizable blocks of bonds changing hands.

By session's end, prices were quoted 3/8 to 1/2 point higher on average, but other bonds gained as much as one point, traders said.

For example, bonds were freed to trade from $1.3 billion New York State Power Authority deal priced Wednesday, and prices broke up 1/2 point and traded even higher by session's end.

In late secondary trading, the 5s of 2014 were quoted at 963/4-7/8 to yield 5.25%, where they were originally offered to investors at 5.32%. The 51/4s of 2018 were quoted at 983/4-lock to yield 5.34%. Those bonds were originally priced to yield 5.25%.

Massachusetts general obligation bonds were said to out-perform other names. Traders said a $10 million block of bonds due in 2003 and $10 million due in 2004 traded up approximately 1/2 point on the day.

In the debt futures market, the September municipal contract settled at the high mark of the day, up 23/32 to 104.18, up from a low of 103.24.

The MOB spread hit a record low, widening to negative 484 from negative 463 as Treasuries continued to move higher than tax-exempts.

Underscoring the notion that yields will continue to move lower, underwriters have been able to price many deals aggressively and still raise prices, thanks to buyer demand.

The buyers have been selective, however, keeping their powder dry in anticipation of certain deals, mainly higher-rated names.

Secondary supply has increased as a result of buyers' selectivity, and also from a lack of action during the two quietest weeks of the year.

The Blue List edged higher to $1.795 billion from $1.79 billion Wednesday. The measure of dealer inventory has now risen eight of the past nine business days and is at its highest level since Aug. 5, when it was $1.86 billion.

The Blue List has averaged $1.62 billion this month versus $ 1.53 billion during the previous seven months.

But forward supply has declined significantly, suggesting demand for bonds should increase even more. The Bond Buyer yesterday calculated 30-day visible supply at $3.56 billion, the lowest total tabulated since Feb. 10, when it was $3.28 billion.

The 30-day figure has declined $616 million from $4.179 billion Wednesday and $2.48 billion from last Friday's $6.05 billion. In August, the 30-day visible supply averaged $5.39 billion compared with an average for the year of $6.35 billion.

Elsewhere, long-term new issuance was light yesterday, but in the short-term new-issue market, A.G. Edwards & Sons Inc. priced and repriced $170 million non-callable Maine GO tax anticipation notes.

At the repricing, the reoffering yield was lowered by five basis points. The notes were priced with a coupon of 3.50% to yield 2.80%, due June 30, 1994.

The issue is rated MIG1 by Moody's Investors Service and SP1-plus by Standard & Poor's Corp.

Secondary Markets

Traders reported dull action until the Treasury market took off. The market got a wake-up call when the long bond continued to penetrate record high prices.

In secondary dollar bond trading, prices were quoted anywhere from unchanged to 1/2 point higher, traders said.

In late action, Los Angeles Convention Center MBIA 51/8s of 2021 were quoted at 5.43% bid, 5.42% offered; Philadelphia Water Cap. Guar. 51/2s of 2014 were quoted at 987/8-991/8 to yield 5.59%; and Rhode Island MBIA 5s of 2020 were quoted at 5.53% bid, 5.50% offered.

In the short-term note sector, yields were mixed on the day, traders said.

In late action, California Rans were quoted at 2.79% bid, 2.75% offered and New York State notes were quoted at 2.50% bid, 2.43% offered.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER