Municipal prices climbed 1/2 point overall yesterday, while in competitive action a clerical error cost a CS First Boston group the winning bid on a $120 million Maryland deal.
"Once First Boston was rejected, Goldman Sachs was the low bid," Doug Harris, special assistant to the Maryland State Treasurer, said.
The mix-up occurred after First Boston telephoned its bid for the general obligation bonds to a representative of the firm in Maryland, said an underwriting source.
In transferring his notes to the official bid form, the representative apparently wrote 4.00% instead of 4.80% for the 2000 maturity as First Boston had intended, according to the source.
When the bid was opened, the maturity containing the error violated an ascendancy clause in bidding conditions, which stipulates that no coupon can be lower than the coupon on an earlier maturity, Harris and and others said.
First Boston's bid had a true interest cost of 5.3378%, compared to Goldman's TIC of 5.3591%.
Even though accepting Goldman's bid cost Maryland slightly more in interest costs, the state could not allow First Boston to correct the mistake after the opening because of possible legal challenges from Goldman Sachs and the other bidders, Harris said.
Goldman Sachs's scale contained serial bonds priced to yield from 4.35% in 1997 to 5.65% in 2009. First Boston's scale was similar, though it offered investors five more basis points of yield in the 1997, 2000 and 2001 maturities.
Commenting on the mistake, an underwriter at one firm said the reliance of the municipal bond industry on the telephone to relay competitive bids is a continuing problem.
A second underwriting source said that while yesterday's mishap was "unfortunate," he saw no problem with the current system. About 99% of the time things go smoothly, he said.
While that may be true, one municipal source said he remembered another time in Maryland bond history when a winner was not a winner.
According to the source, a snow storm was blanketing the area more than 20 years ago as word spread through the market that a Harris Trust group had the winning bid on a Maryland general obligation bond deal.
Because of the snow, however, the Harris bid was not delivered to state officials on time. So the issue was awarded to the second lowest bidder. The second bidder, however, still assumed that Harris had won the deal.
Meanwhile the market headed south, "and the second bidder got murdered," the source said.
A J.P. Morgan Securities Inc. syndicate won $110 million Wisconsin general obligation bonds with a true interest cost of 5.5688%.
CS First Boston had the cover bid at 5.583%.
The other bidders in order of finish were Dillon, Read & Co., Chemical Securities; Goldman Sachs; Merrill Lynch & Co.; and Smith Barney Shearson.
The offering consisted of serial bonds priced to yield from 3.50% in 1995 to 5.95% in 2014. Moody's and Standard & Poor's rate the offering double-A.
"It sure looks great compared to where the market's been the last two or three weeks," said Frank R. Hoadley, capital finance director of the Wisconsin Department of Administration. The market has been in positive territory since Tuesday when the Federal Reserve raised both the federal funds and discount rates by 50 basis points.
"I'm feeling awfully good about our luck," Hoadley said. As late as Monday night, Wisconsin had been expecting a top yield of 6.15% on the 2014 portion. "We broke through 6%, so that's really good," he said.
A municipal analyst said that when it came to high-grade issues yesterday, the secondary market lagged the primary market. Had the Maryland and Wisconsin issues been priced in the afternoon, he said. it's unlikely that they would have done as well.
Late in the day, roughly $11 million of the Maryland deal remained, while the balance on the Wisconsin issue was $3.6 million. Overall yesterday, yields on high-grade issues dropped by seven basis points, and more in the intermediate range. Yields on new issues were lower by 10 to 15 basis points. Dollar bond prices rose 3/8 point.
Activity was moderate to brisk in the morning, and light to moderate in the afternoon.
In debt futures, the June municipal contract closed up 1 1/32s to 92 7/32. Yesterday's June MOB spread was negative 419, down from negative 424 Tuesday.