Prices ground higher yesterday, but trading was light and less than $300 million of new issues were priced.
Municipals opened mixed and traders said the market might back up after last week's big run-up. But by mid-morning the Treasury market had moved up 1/2 point with confidence as last week's bullishness carried over and players looked forward to a sign of neutral monetary policy.
The Federal Open Market Committee is set to meet today. Traders said they were confident the current low interest rates would allow the Fed to hold off on any moves to tighten monetary policy.
The 30-year long bond managed a record low of 6.29%, while municipal prices moved 1/8 to 1/4 point higher.
In the debt futures market, the September municipal contract settled up 4/32 to 103.22. The contract hit a low of 103.11 and a high of 103.24.
Cash trading was extremely light as the market seemed to be settling in for a week of summer doldrums, but traders did report a block of $31.5 million Intermountain Power Agency 5 1/2S of 2020 out for the bid. The bonds were said to trade right around 5.63% and were reoffered at 5.60%, market sources said.
The strength in the credit markets was strong enough that they were not phased by signs of economic growth.
U.S. industrial production gained 0.4% in July, resulting from a small increase in durable goods production and a large advance in utilities' output. Total industrial capacity utilization gained 0.2-points in July to 81.5%, resulting from a surge in utility usage.
Looking ahead, tax-exempt players said it would be difficult for the market to make any significant moves higher without the help of some new issues.
Supply has recently tapered off after record waves of bonds battered prices in July. In recent weeks, new deals have been snapped up at high prices by too many investors chasing too few bonds.
George D. Friedlander, managing director of Smith Barney Shearson's portfolio strategy group, noted in the firm's new newsletter that, "For the first time this year, lower borrowing costs did not prompt a flood of refundings.
"The decreased supply," he noted, "has forced investors to pay higher prices for available inventory, while the Street has been forced to consider the possibility that the record supply glut may be easing."
Looking to supply, The Bond Buyer calculated 30-day visible supply at $4.63 billion yesterday, down from $4.82 billion Friday.
Meanwhile, secondary supply levels remain low, reflected by The Blue List, which rose for the first time in a week yesterday, climbing $30 million, to $1.25 billion.
Topping the negotiated slate, Merrill Lynch & Co. as senior manager priced, repriced, and restructured $236 million capital construction and refunding bonds offered through the Los Angeles County Public Works Financing Authority for the L.A. County Flood Control District.
Despite the strength in the market, Merrill cheapened prices on the term bonds to raise yields by two basis points. The firm also eliminated the 2008 serial maturity.
The final scale included serial bonds priced to yield from 2.70% in 1994 to 5.20% in 2007. A 2011 term was priced as 5s to yield 5.424% and a 2017 term was priced as 5s to yield 5.50%.
The bonds are rated Aa1 by Moody's and AA-minus by Standard & Poor's and Fitch.
In other action, Merrill Lynch also tentatively priced $118 million lease revenue refunding bonds for the Sarasota County, Fla., School Board Financing Corp.
Serial bonds were priced to yield from 2.75% in 1994 to 5.60% in 2010.
The bonds are subject to the Florida intangible tax. The issue is insured by the Municipal Bond Investors Assurance Corp. and rated triple-A by Moody's and Standard & Poor's.
Secondary activity was limited with few bid-wanted lists or blocks of bonds changing hands, traders said.
In secondary dollar bond trading, prices were quoted narrowly mixed, traders said.
In late action, Charleston COP AMT AMBAC 5 1/4 of 2020 were quoted at 5.52% bid, 5.49% offered; New York State Dormitory Authority 5 1/4 of 2019 were quoted at 5.70% bid, 5.65% offered; and Philadelphia Water MBIA 5 1/4S of 2023 were quoted at 5.56% bid, 5.55% offered.
PICA MBIA 5.60s of 2015 were quoted at 99 1/2-100 to yield 5.63%, and Fulton-Dekalb Hospital MBIA 5 1/2s of 2020 were quoted at 98 5/8-99 to yield 5.59%.
In short-term note trading, yields were three to five basis points lower on the day.
In late action, California Rans were quoted at 2.91% bid, 2.8% offered and New York State notes were quoted at 2.60% bid, 2.55% offered.