A two-day municipal rally stalled Friday when bonds lost gains in sympathy with the Treasury market.
Municipals were poised to steam full speed ahead this week, after navigating the stormy presidential election, oversupply, and Friday's employment report.
But Treasury prices declined significantly Friday, even though released employment data matched the market's expectation, as traders began to sell ahead of this week's auctions.
Municipal traders reported a firm bid early on when tax-exempts seemed to move away from the Treasury market.
But as the afternoon wore on, tax-exempts succumbed as sellers emerged and the market gave back some of its gains. By session's end, prices were quoted mixed.
In the debt futures market, the December municipal contract settled down 9/32 to 94.25.
But the MOB spread widened as government losses outpaced those in the tax-exempt arena. The spread was calculated at negative 214, down a hefty 95 basis points from negative 309 the previous Friday.
Friday's losses in the municipal market dampened hopes for a major rally this week, although market players noted investor demand has increased and supply has thinned.
"Technically, municipals are in great shape, but you can only fight the government market for so long," a trader said. "It looks like we're going to have to show some respect for the long bond, which pushed to 7.75% late in the day ahead of the auctions."
Tax-exempts had made gains for nearly three sessions in a row as prices moved more than one point higher on the week.
The market had suffered heavy losses up until the presidential election, but a broad range of investors, fearing higher taxes, suddenly returned after Clinton was elected.
Demand was strong enough that the deluge of bonds, which humbled the Street just weeks ago, began to dissipate.
As bonds grew scarce, demand increased even more, traders said, and prices were lifted.
On Friday, traders were still counting on the improved technicals and the ever weak economy to give the market resiliency against a failing government sector.
"The market seems like it's in good shape as supply decreases," a trader at a large Wall Street-based firm said. "There are good trading situations out there and we're seeing good demand."
Dealers around the country also reported a similar outlook.
"We're seeing a lot of healthy interest out there," said a trader at a small Chicago-based firm. "We're dealing with a scarcity of bonds that are getting scarcer everyday."
Looking to supply, The Bond Buyer calculated 30-day visible supply at $7.1 billion. Approximately $5.9 billion of bonds and notes are expected to be priced this week, but market players said the market's improved technical position will boost demand.
Reflecting lighter supply in the Street, The Blue List of dealer inventory fell $172.4 million, to $1.14 billion Friday.
The negotiated sector this week features $407 million of California State Public Works Board lease revenue bonds, to be priced by Bank of America; $290 million of Indianapolis Local Public Improvement Bond Bank revenue bonds, to be priced by Lazard Freres & Co.; and $250 million of Texas Public Finance Authority general obligation refunding bonds, to be priced by Smith Barney, Harris Upham & Co.
The competitive calendar offers few sizable deals, the largest being $163 million of Alameda County, Calif., Transportation Authority revenue bonds.
On the economic front, meanwhile while, the Labor Department is scheduled to report the October producer price index tomorrow, followed by the consumer price index on Friday. October retail sales will also be reported on Friday.
Traders reported moderate bid-wanted activity late in the session, dominated by several bid-wanted lists, one totaling nearly $40 million.
In secondary dollar bond trading, prices were mixed, with some bonds retaining 1/4 point gains, while others lost as much as 1/2 point, traders said.
In late action, California GO 6 1/4S of 2019 were quoted at 6.54% bid, 6.50% offered; New York City Water and Sewer 63/8s of 2022 were quoted at 96 1/8-3/8 to yield 6.676%; and Puerto Rico GO 6s of 2014 were quoted at 93 1/2-94 1/4 to yield 6.566%.
Denver Airport AMT 6 3/4S of 2022 were quoted at 93 3/4-94 1/4 to yield 7.26% and Florida Board of Education 6s of 2025 were quoted at 93 1/2-94 to yield 6.48 1 %.
In the short-term note market, yields were two to three basis points higher on average, traders said.
In late action, Los Angeles tax and revenue anticipation notes were quoted at 2.85% bid, 2.83% offered; New Jersey Trans were quoted at 2.85% bid, 2.82% offered; and Pennsylvania tax anticipation notes were quoted at 2.88% bid, 2.83% offered.