The municipal market eked out gains yesterday on lingering enthusiasm over prospects for another easing of monetary policy by the Federal Reserve, while new-issue activity was dominated by two large "college-saver" issues totaling $225 million.
Tax-exempts imitated early increases in the Treasury market, albeit on a smaller scale, then stalled as participants waited for some direction. Gains for the day were 1/8 point to 1/4 point in spots, according to traders.
"The market is confident that rates are coming lower," said the head of a New York trading desk. "Although we have a significant calendar, there seems to be enough confidence that the [inflation] numbers this week are not going to be enough to drive prices either way, especially to the downside."
The two deals to wathc out for this week ar the $449 million New York Local Government Assistance Corp. revenue bonds and the $240 million Triborough Bridge and Tunnel Authority's special obligation refunding sale.
Two college-saver issues -- zero-coupon bonds packaged as savings vehicles for retail investors -- both received strong interest yesterday, the first day of lengthy order periods, according to senior underwriters. Illinois sold a $150 million general obligation issue and the New Jersey Building Authority sold $75 million of zeroes.
The general market barely notices such issues because they are shuttled directly to retail buyers. "You hardly even see it," said one Wall Street municipal executive. "It's almost as if it's not there."
A group led by First Chicago Capital Markets Inc. priced the Illinois issue with yields ranging from 4.9% in 1993 to 6.65% in 2012. The zeroes are all noncallable and will mature evenly, with each of the 20 maturities eventually reaching $14.12 million.
Mark Gallagher, vice president at First Chicago Capital Markets, said the sale was going well due to several considerations, including a dearth of in-state Illinois tax-exempt paper. The long end of the deal, as expected, was witnessing the greatest volume of business.
The 18-year bond, known as the "new-born" maturity because it coincides with when new parents expect their children to be entering college, the 20-year, and the 21-year maturities were going the fast, Mr. Gallagher said.
Last week, Moody's Investors Service dropped the Illinois GO rating to Aal from Aaa, but market participants said the move had no impact whatsoever on either the state's outstanding bonds or today's zero-coupon sale.
"It had no effect at all" on the college savers, said a syndicate official. "The downgrade was already built into the rates the state was getting."
Wall Street traders looked upon the Illinois pricing as "very aggressive," but said the selling syndicate was accurately playing on the instate exemption, the relative scarcity of zeroes, and the eye-popping takedown at the long end of the deal. The takedown was $7.50 for every $1,000 maturity value, according to underwriters.
Mr. Gallagher called the takedown "fair," given the enormous processing costs involved with large sales broken into $1,000 maturities. "The takedown has been negotiated on the basis of the work involved," he said. "It's not a matter of motivating salespeople; you have to set up a system to handle the enormous volume of calls.
"This is not a normal bond issue," Mr. Gallagher added. "The back office work is tenfold what you normally have."
The New Jersey college deal is expressly for retail investors at the request of the building authority. Yields ranged from 5.9% in 1999 to 6.65% in 2011.
The order period for these bonds does not close until Friday, but an underwriting official at the firm said buying demand was exhibited "top to bottom" for the deal. "It was a little slow because a lot of people were out for the Jewish holdiay," he said, "but we expect it to pick up tomorrow."
The deal is expected to be rated Aa by Moody's and is under review by Standard & Poor's. The order period stretches through Friday, so the final pricing will not be set until next Monday.
Secondary Market
In the secondary market, activity was not heavy, but interest was strong for most transactions, with "a couple of guys on each quote," one trader noted.
In dollar bond trading, prices inched up about 1/8 point on the day, with some morning advances given up due to sheer disinterest in the afternoon. "Nobody came back from lunch," one trader said.
New Jersey Turnpike Authority 6.90s of 2014 were quoted 1/8 higher on the bid side, at 99 3/8-1/2 to yield 6.95%. Florida State Board of Education 7 1/4s of 2023 were 1/4-poing lower, locked at 103 3/8 to yield 6.85% to the 2004 par call.
The New York Local Government Assistance Corp.'s 7s of 2016, meanwhile, firmed almost 1/2 point on the bid side to 98 1/8-98 1/4, for a 7.15% yield. And the Puerto Rico Electric Power Authority 7s of 2021 were quoted 3/8-point higher at 99 3/8-5/8, for a yield of 7.03%.
In the note sector, yields increased as retail-oriented accounts continued to rid themselves of short-term paper, and institutional traders looked warily at the upcoming calendar, market participants said. Prices floated down this morning in spotty trading and held those levels through the afternoon.
"When some of the notes backed up, there was going away business in between trades," said one New York note trader, referring to notes purchased by accounts that will hold the securities until maturity.
Later this week, Pennsylvania is scheduled to sell $1.45 billion of tax anticipation notes, flooding the market with nine-month paper, and next week a Texas 11-month sale of tax and revenue anticipation notes is penciled in at $800 million.
This afternoon, both Los Angeles Transportation Authority notes and New Jersey Trans were quoted at 4.79% bit and about 4.70% offered, three to seven basis points higher in yield.
March New York State Trans were quoted two to three basis points higher at 5.27% bid, 5.23% offered.
