Municipal bond prices dipped 1/8 to 1/4 point yesterday in a session marked by few bid lists and increased caution ahead of the release Friday of employment data for October.
"I think this is going to be a week where people wait for more information," a municipal trader said. "People are just focused on the number on Friday, [and] until then, I think they're going to be afraid to take big positions."
In light secondary activity, yields on highgrade issues rose two basis points overall, while dollar bonds lost 1/8 point, one municipal analyst said.
In debt futures, the December municipal contract was down 1/8 point to 85 10/32s. Yesterday's December MOB spread was negative 417, compared with negative 413 on Friday.
Bid-list activity was described by one trader as "very minor" compared with what the market has seen in recent sessions. He said the amount of selling is likely to diminish now that an Oct. 31 deadline for mutual funds has passed.
Yesterday's deadline relates to a federal law contained in the Internal Revenue Service code that deals with distribution of capital gains by mutual funds, said Ken Hubenak, an IRS spokesman. When it comes to making distributions to shareholders, mutual fund companies must distribute 98% of the capital gains they show for the one-year period ended Oct. 31, or incur an excise tax, Hubenak said.
"So if you have losses that are taken into account today, you'll have less capital gains as far as your required distribution," he said.
With the deadline behind it, the market "may settle down," a trader said.
"I think you'll see a lot less jockeying for position, a lot less movement of bonds around, and a lot less selling," the trader added.
In the government market, the 30-year bond ended down 7/32 to yield 7.96%.
Yesterday's economic data included the Purchasing Management Association of Chicago's business barometer, which increased to 64.3% in October on a seasonably adjusted basis from 63.3% in September. A reading below 50% signals a slowing economy, while a level about 50% suggests expansion.
"The big worry for the credit markets would have to be the robustness of its price component," said John Lonski, senior economist at Moody's Investors Service.
Lonski noted that the prices paid index went to 72.5% in October from an "already very high" 72.1% in September. The index's employment index increased to 56.0% in October from 54.5% the previous month.
He also noted that the speed of deliveries portion of the report was at 63.8% in October, up from 62.9% in September, which "tells us that the speed of deliveries is beginning to slow down because of the buildup of unfulfilled orders," Lonski said.
The economist said yesterday's purchasing managers report "mimics the robust findings" of the Philadelphia Federal Reserve's latest survey of regional manufacturing activity.
Yesterday's Detroit Purchasing Managers' Index, meanwhile, showed both an overall decline, as well as a drop in its price component. But Lonski said the readings still remained at "lofty levels."
"The recent glimpses at regional manufacturing activity suggest that factories hummed even louder during October," he said.
The economist thinks today's National Association of Purchasing Managements' report will continue the same theme.
"I think you'll see the overall index perhaps post another significant gain," Lonski said, adding that he sees it rising to 59% in October from 58.2% September.
"That's actually a pretty big increase," he said, adding that a reading of 59% would be the highest since 1988.
The price index may decline a bit from the September's 77.1% reading, but not by much, he said.
"It might give a little bit from that, but it still leaves it above 70% for a sixth consecutive month in October," he said. "This string of steep readings by the NAPM price index will only reinforce inflation worries."
Lonski also cited another aspect of the report as warranting a close watch.
"I would also keep my eye on what happens to the export orders index. It broke above 60% for the first time in some while the previous month," he said. The economist said last month's reading was the first time the index had hit the 60% mark since 1989.
"I would be looking for export strength in 1995 as a possible source of unexpected support for the U.S. economy," he added.
As for Friday's employment figure, Lonski looks for a 290,000 increase in nonfarm payrolls.
"The sense is that, increasingly, companies have no choice but to increase staff if they're to meet increased orders," he said. The consensus forecast calls for roughly a 230,000 increase in nonfarm payrolls, Lonski said.