A six-day orderly retreat turned into a rout yesterday as stronger than expected economic reports scattered prices.
Meanwhile, a $627 million Los Angeles Department of Water and Power deal dominated new issue action. A top rate of 5.58% for bonds due in 2031 was set in competitive bidding.
The credit markets opened lower in New York as the bearish trend that began last week continued to prevail. Economic indicators have shown strength recently, forcing the credit markets to give up ground every day. Tax-exempts have suffered from additional supply problems as buyers bow out of the game, waiting for prices to cheapen further. Municipal traders said yesterday that retail investors greeted them right out of the gate with two blocks of bonds for sale totaling $28 million. Soon afterward, the markets took a look at the index of leading economic indicators. It came in as expected, and action was dull, traders said. The index gained 0.5% in September, the third increase in four months, the Commerce Department reported.
But what was a gradual price erosion suddenly built into an avalanche with prices falling freely by mid-morning. The drop was prompted by a home sales report which showed a marked increase in September. New single-family home sales surged 20.8% in September to a seasonally adjusted annual rate of 762,000 units. The mark was the highest since December 1986 when sales hit a 784,000 rate. The highest forecast had been for 6.8% increase.
Municipal bonds were almost immediately quoted down 1/8 to 1 point, and more in spots, after the home sales figures were released.
"After a six-day orderly retreat they finally gave up and ran," a trader said. "The bid just disappeared in many cases."
Treasuries recovered some ground on short-covering late in the afternoon, but tax-exempts were unable to recoup much ground.
"We never had a chance," another trader said. "The firmness we're seeing in the economy the fundamental ball game seems to be changing. It's difficult to function and the losses are significant."
Reflecting the heavy tone, The Blue List of dealer inventory rose $62 million yesterday, to $2.06 billion. The Blue List has been at least $2 billion five of the past six days and has been under $1.5 billion only once since Sept. 21.
By session's end, prices were quoted down 3/4 to one point on average.
Reflecting the six rounds of losses, bonds traded significantly lower on the $169 million Triborough Bridge and Tunnel Authority general purpose revenue bond deal soon after being freed to trade by CS First Boston.
In late action, the 5s of 2020 were quoted at 93 7/8-94 1/4 to yield 5.43% on the bid-side compared to the original 5.29% reoffering level.
In other secondary dollar bond trading, Pittsburgh Water and Sewer FGIC 4 3/4s of 2016 were quoted at 5.46% bid, 5.43% offered; Florida Board of Education 5 1/8s of 2022 were quoted 95 1/4-3/4 to yield 5.45%; and Los Angeles DEWAP 5s of 2033 were 5.55% bid, 5.53% offered.
Also, Valdez, Alaska 5 1/2s of 2028 were quoted at 97 1/4-1/2 to yield 5.68%; New York City 5 1/2s of 2017 were quoted 5.92% bid, 5.88% offered; and Salt River 43/4s of 2017 were 5.37% bid, 5.35% offered.
In the debt futures market, the December municipal contract settled down 22/32 to 102.17. The MOB spread narrowed to negative 452 from negative 460 on Monday.
New issuance was light yesterday, and dominated by competitive sales. In October, the competitive component of the 30-day visible supply was 50% of the average total forward supply. On Monday, the $3.4 billion of competitive sales were 62% of the $5.51 billion. And yesterday's $2.8 billion of competitive sales made up about 60% of the $4.63 billion expected to be priced this week.
Grabbing center stage, a Goldman, Sachs & Co. group won the $627 million Los Angeles DEWAPs, bidding a true interest cost of 5.423%.
A Merrill Lynch & Co. group had the next lowest bid, with a TIC of 5.4526%.
Goldman reported an unsold balance late in the afternoon of $24 million. The firm also freed the term maturities to trade, and players said some bonds were trading down 1/2 to 1/8 point from the original reoffering levels.
A Goldman underwriter said the loan saw demand mostly from traditional buyers, not crossover players.
Market players said that a deal of such magnitude would better have been priced by negotiation. They argued that a negotiated pricing would have allowed underwriters the flexibility to adjust to a harrowing market and would also have provided a shield from the increased risks of competitive bidding.
"Let's face it, long bonds have been tough to sell," a player said. "It's frustrating because you'll get good demand on so much of the loan, but you're stuck in certain places and you can't adjust the price."
The DEWAP serial bonds were reoffered to investors at yields ranging from 3.45% in 1995 to 5.40% in 2014. A 2019 term, containing $104 million of the loan, was reoffered with a coupon of 4.75% to yield 5.447%; a 2026 term, containing $121 million, was reoffered as 5 1/4s to yield 5.55%; and a 2031 term, containing $76 million, was reoffered as 5.40s to yield 5.58%.
The issue is rated double-A by both Moody's Investors Service and Standard & Poor's Corp.
