Municipals ended unchanged yesterday ahead of this morning's report on the August producer price index as customer lists and antacids continued to make the rounds.
"I'm really nervous about tomorrow's number," said Frank Lucibella, who manages the $500 million John Hancock Tax Exempt Income Fund and the $250 million John Hancock Managed Tax Exempt Fund. With the Labor Department's figures due out at 8:3 O a.m., Lucibella said he'll be experiencing "a Maalox moment at 8:25 a.m."
"I think if we get a number that shows strong inflation in here, we could have a rocky time for a bit," Lucibella said.
Lucibella noted that the economic consensus calls a 0.4% increase in the overall rate. While the market could probably withstand a 0.5% increase, much more than that could spell trouble, he said.
A municipal analyst yesterday said both high-grades and dollar bonds ended unchanged in a lightly traded session that saw "a plethora of lists." The lists started to come in "right off the bat" and totaled roughly $300 million, he said.
In debt futures, the December municipal contract settled up 2/32 at 89 1/2. Yesterday's December MOB spread was negative 382, compared to negative 383 on Wednesday. The 30-year Treasury bond closed unchanged to yield 7.56%.
Christopher M. Dillon, a vice president and municipal market strategist at J.P. Morgan Securities Inc., observed little activity yesterday, aside from some investors swapping into new deals.
"I think that people are just waiting on the inflation number, to be perfectly honest."
The previous two days also saw little business getting done, he said.
"It's amazing there was so little that went on on Tuesday," Dillon said. However, he added, "things picked up a little bit" on Wednesday.
Today's inflation number is especially important to the municipal market because it could make a difference in how retail investors, upon whom the market has become increasing dependent, invest their money.
"At the moment, the [municipal bond mutual] funds don't seem to have a whole lot of interest either way," Dillon said.
In addition, municipals are now trading at levels that are rich relative to Treasuries, which means tax-exempts can't rely on interest from crossover buyers such as insurance companies. That leaves retail, which Dillon said given the strengthening economy may be leaving the fixed income market for the equities.
Municipals' saving grace, however, has been the lack of new supply, Dillon said.
Marilyn Schaja, a money market economist at Donaldson, Lufkin & Jenrette Securities Corp., expects a 0.4% rise in the overall PPI rate, and a 0.2% rise in the core. Most other economists are expecting a 0.3% in the core rate, she said.
"I think if the bond market gets a 0.2% rise [in the core rate], I think the market would like that kind of a number."
Brian J. Fabbri, chief economist for North America at Paribas Capital Markets, New York, expects a 0.4% to 0.5% rise in the overall rate, and a 0.2% to 0.3% rise in the core rate.
Contributing to the rise in the overall PPI are higher energy prices stemming from the higher crude oil prices seen earlier this year. Fabbri cited the lag that occurs between the time crude oil prices rise and the time that the increase makes its way through the production process. The effects of higher crude prices were also felt in the July PPI report, he said.
In new issue activity yesterday, a Merrill Lynch & Co. group priced and repriced $102 million Ohio Air Quality Development Authority revenue refunding bonds to yield 6.493% in 2029. Half the bonds, mature on Jan. 1, 2029, while the other half mature on April 1, 2029. At the repricing, yields on both maturities, which are AMBAC-insured and subject to the alternative minimum tax, were lowered by about three basis points.
A source familiar with the offering said the account was closed and that most of the interest came from Ohio bond funds, as well as from some national high-yield funds. The deal also saw "a decent amount" of in-state retail-retail interest owing to a lack of Ohio paper, he said.
Turning to next week's competitive deals, the Alaska Housing Finance Corp. is expected to sell a $130 million offering on Tuesday, while the State of Washington plans to sell $350. 6 million bonds on Wednesday.
Next week's negotiated calendar, includes two issues from the New York State Medical Care Facilities Finance Agency. The agency is expected to sell $173 million of bonds through Bear Stearns & Co. and $139 million of bonds through J.P. Morgan. Also next week, the Tempe Union High School District, Ariz., is expected to sell $102 million of bonds through Peacock, Hislop, Staley & Given Inc.
In other news yesterday, the 30-day visible supply of municipal bonds totaled $1.88 billion, up $18.1 million from Wednesday. That comprised $1.248 billion of competitive bonds, is down $22.6 million from Wednesday, and $635 million of negotiated bonds, up $40.7 from Wednesday.
Standard & Poor's Blue List of municipal bonds was up $6.3 million yesterday to $1.719 billion
Standard & Poor's Corp. officials yesterday confirmed that Vickie Tillman, who has headed the public finance department since 1989, has been promoted to executive managing director of structured finance. Tillman's is one of three senior level promotions, the rating agency is expected to announce today.
"Structured finance is an increasingly important part of the financial marketplace and it's also an increasingly important part of S&P's franchise," said Glenn Goldber, a Standard & Poor's managing director. He said Tillman's experience will be "a plus for Standard & Poor's and for the financial community." Tillman joined the agency in 1977.
Vladimir Stadnyk, managing director for new products and business development, will fill Tillman's shoes as executive managing director of public finance. Stadnyk has been with Standard & Poor's since 1979, according to Michael Dorfsman, director of communications at the agency.
Tillman replaces former managing director of structured finance Frank S. Rizzo, who has been promoted to executive managing director of the Ratings Policy board. Rizzo joined Standard & Poor's in 1974, Dorfsman said.