Municipal participants breathed a collective sigh of relief at the end of trading yesterday as the bulk of this week's new issues were absorbed into the market with positive results.
Even with yesterday's hectic pace of new deals, when more more than $2 billion in new issues flooded the Street, prices continued to defy the odds and move higher.
On average, traders said municipal prices were 3/8 to 5/8 point higher on the day.
Among the new issues were $1.3 billion of North Carolina Municipal Power Agency number 1 Catawba Electric revenue refunding bonds and $400 million of California state various purpose general obligation bonds. Both deals were well received.
Investors have been presented with over $4 billion in new municipal debt this week, and their interest is expected to remain strong into the end of the week, market participants said.
"There have been a lot of people with cash who have been on the sidelines since the rush of new paper in mid-October," said Susan Peabody, senior vice president at Alliance Capital Management Corp. "Now that the fears of the election have somewhat subsided, people are getting back in the game.
"The reality of the new administration has hit both retail investors and those on the street," she said. "There is little Clinton can do to immediately boost the economy and his probable tax boost to the rich increases interest in tax-exempt bonds."
Peabody also said with so much money coming due on Jan. 1 combined with the usual lull in issuance in January, investors are making sure they are fully invested by the start of the year. More than $9 billion in municipal bonds may be redeemed or called away from investors on Jan. 1.
Action in the secondary market has been muted all week, traders said. The success of new deals did much to bolster prices a point or more in some spots this week, they noted.
Although market participants were focused on the performance of the new deals, a batch of economic indicators gave the municipal market an early lift.
The Commerce Department reported that the September trade deficit fell 7.1% from August, to $8.3 billion. The figure was helped by record-highs in both imports and exports.
Virginia Reflects Tone
Even though many investors were watching the performance of the two largest issuers yesterday, North Carolina and California, one of the medium-range deals gave the market a better understanding of the strong investor demand for bonds.
In the competitive sector, an issue of $24.4 million Virginia general obligation bonds was won by Wheat, First Securities with a true interest cost of 5.7075%.
The offering, which was AAA-rated by all three major ratings agencies, was structured to include serial bonds priced to yield from 3.25% in 1994 to 6.00% in 2013.
According to a representative of Wheat, First, the account was closed by the end of the day.
"The deal performed as a AAA-rated, state GO offering should," said an underwriter from the firm. "We knew we were coming at aggressive levels, but the demand for bonds is definitely there."
"I'm really not surprised the deal was successful," Peabody said. "There is enough cash out there, and enough regional investors to support a deal at this price."
Keyed by this week's heavy dose of issues, forward supply for the next 30 days, as measured by The Bond Buyer, was reported down $1.2 billion, to $6.83 billion. Dealer inventory, according to the Blue List, was up $124 million, to $1.1 billion.
Goldman Sachs' Big Deals
In the largest issue of the week, and the third largest of 1992, Goldman Sachs & Co. priced and repriced $1.3 billion North Carolina Municipal Power Agency Number 1 Catawba Electric revenue refunding bonds.
The loan was split into three sections.
The first consisted of $ 1.1 billion fixed rate bonds with serials priced to yield from 3.55% in 1994 to 6.20% in 2011.
At repricing, yields on the serial bonds were dropped from five to 10 basis points.
This portion of the loan also contained four term bonds priced with an original issue discount.
The first term matures in 2015 and was priced as 5 3/4s to yield 6.43%. The second term matures in 2017 and was priced as 6 1/4s to yield 6.48%. The third term matures in 2018 and was priced as 6.20s to yield 6.375%. The third term matures in 2020 and was priced as 5 3/4s to yield 6.31%.
At the repricing, yields were lowered three or four basis points on the term bonds.
The deal was rated A by Moody's Investor's Service, Standard & Poor's Corp., and Fitch Investors Service.
But a large portion of the total loan - $522 million - received some form of insurance, bolstering it to triple-A.
In this portion, FGIC insured the 1997, 1999, and 2000 maturities, totaling $59 million of the loan; FSA insured the 2001 serial and the 2018 term bond, totaling $122 million of the loan; AMBAC insured the 2006, 2008, and 2009 serial bonds, totaling $77 million; and MBIA insured the 2010 and 2011 serial bonds and the 2020 term bond, totaling $239 million.
The second section of the loan consisted of $100 million zero coupon bonds. This portion contained serial bonds priced to yield from 6.65% in 2008 to 6.55% in 2012.
MBIA provided insurance on the 2011 and 2012 maturities.
The third portion of the loan was comprised of $61 million uninsured indexed cap bonds, maturing in 2012. These bonds were not formally reoffered to investors.
According to a senior banker at Goldman Sachs, the indexed cap bonds are a variable-rate security with a yield based on an index agreed to by both the issuer and the banker. The bonds can yield no higher than a predetermined level. The banker declined to name the index.
The terms of this part of the issue were not released, the banker said. Generally such bonds are purchased by institutional investors to add stability to an otherwise risky portfolio
One hour after pricing the deal, a representative of Goldman Sachs closed the order period on the fixed-rate bonds due in 1994 through 1996, 2000, 2003 through 2005, and 2008 through 2011.
"We definitely were interested in involving a lot of different investors into this deal," said a member of the underwriting team. "We came up with this deal to involve casualty companies, bond funds, and other institutional investors."
"There was certainly broad-based support," said Richard Kohlman, manager of Goldman Sachs' underwriting desk. "Last week, all the talk on the deal had us coming at a 6.65% to a 6.70%."
Kohlman said the use of the index caps was important to diversify the pool of interested investors, but "was not the be-all and end-all of the deal."
"We're extremely pleased with the way the deal was marketed and priced," said Al Conyers, treasurer of the power agency. "Initially, the deal appeared to have saved us about $50 million, but although we're still looking over the numbers, it looks like we came out $85 million ahead on the deal."
Jerry Jacobs, senior municipal portfolio manager at the Vanguard Funds, said that his fund bought the Catawba bonds in "substantial amounts and across the the maturity spectrum."
"We expected the deal to be oversubscribed and it was," he said. "It was attractively priced and it had benefit of a lot of cash coming into the market."
Robert C. Newman, manager of municipal trading at J. Lee Peeler & Co. in Durham, N.C., called the deal an "exceptional success among" North Carolina buyers. "We saw a lot of interest from trust bank departments, with particularly strong demand for the serials of intermediate maturity."
Also in yesterday's market, a group led by Goldman Sachs won an issue of $400 million California state various purpose general obligation bonds with a true interest cost of 5.91%.
Bank of America was the only other bidder, with a TIC of 5.93%.
Goldman Sachs' TIC represented the lowest for a California GO issue since 1979, according to the state treasurer's office.
The loan was structured to include serial bonds priced to yield from 2.90% in 1993 to 6.20% in 2012.
There were also two term bonds included in the deal. The first term matures in 2017 and was priced as 53/4s to yield 6.15% and the second term matures in 2022 as 5s to yield 6.25%.
The bonds were rated Aa by Moody's and AA by Standard & Poor's.
California last sold a GO through competitive sale on Oct. 15. The $1.3 billion offering was won with a TIC of 5.9917% by Merril Lynch & Co. The maximurriyield on the deal was 6.30%.
According to officials from Merrill Lynch at the time of the deal, the issue was burdened by less-then-favorable market conditions and lingering investor concerns about the state budget.
Market participants said yesterday's California deal was helped by the nationwide demand for new paper and interest from some of the state's bond funds.
Late yesterday, Goldman Sachs reported an unsold balance of $59 million.
The sale marked the state's final scheduled GO sale in calendar 1992, and brought the state's total GO issuance in 1992 to $3.1 billion, compared to a record of $4.01 billion in 1991.
"In a year which saw the worst budget and cash crisis in the state's history, as well as a deepening of California's economic recession, bond sales have been one of the state's most effective job-producing tools," Kathleen Brown, the state treasurer, said in a news release.
The December municipal bond futures contract settled Up 21/32, to 96.30 and the MOB spread was measured at negative-229 from yesterday's total of negative-236.
Traders said that dollar bond prices were anywhere from 1/4 to 3/4 point higher on the day in moderate trading.
In late action, Piedmont Municipal Power Agency MBIA 6.30s of 2022 were quoted at 99-1/2 to yield 6.37%; California Public Works AMBAC 6.40s of 2016 were quoted at 1003/8-3/4 to yield 6.36%; and California GO 61/4s of 2019 were quoted at 6.33% bid, 6.30% offered.
New York City Water and Sewer 63/8s of 2022 were quoted at 98 3/8-7/8 to yield 6.49%; Puerto Rico GO 6s of 2014 were quoted at 95 3/4-6 to yield 6.36%; and Florida Board of Education 6s of 2025 were quoted at 96 1/2-3/4 to yield 6.25%.
In the short-term note trading, yields were three to five basis points lower in quiet trading.
In late trading, notes of Los Angeles and Pennsylvania were quoted at 2.80% bid, 2.78% offered; Texas Trans were quoted at 2.75% bid, 2.72% offered; and Wisconsin notes were quoted at 2.78% bid, 2.76% offered.
Dennis Walters and Donald Yacoe contributed to this column.