Prices edge lower ignoring the gains in Treasury market; O'Hare gets 5.39%.

Municipals foundered in the wash of supply yesterday, unable to make headway in sympathy with the Treasury market.

Market players generally still call for lower interest rates over the long term, but tax-exempts are suffering from a nagging inability to digest supply, which is clouding short-term prospects.

Yesterday, roughly $2 billion of offerings were priced, including $643 million Chicago, Ill., general airport second lien revenue refunding bonds for the Chicago-O-hare International Airport. The Chicago deal netted a maximum yield of 5.39%, which was better than what city officials had anticipated.

Technical hang-ups have prevented municipals from keeping up with Treasuries, which have continued to benefit from the effects of a sour economy. This pattern held fast yesterday as new deals received a tepid review from buyers and secondary prices were unable to make gains with a Treasury market that was strong enough to overcome initial losses.

Treasuries headed lower at the opening when it was reported that U.S. housing starts gained 2.8% in September to a seasonally adjusted annual rate of 1.35 million units. The gain put housing starts at their highest level since February 1990.

Government traders were able to overcome the initial losses when buyers showed interest at the lower price levels. The 30-year bond was quoted up 4/32 to 5.83% near the close of New York trading. Municipals, however, suffered initial losses of 1/8 to 1/4 point and never really recovered. Traders said bonds were unchanged to 1/4 lower on the day and reported selling throughout the session.

"The buying audience is sitting back in their seats and waiting to see what happens," one trader said. "I don't think they're going to be buying a lot of thing right here."

Players reported some sizable secondary block trading, including $21 million South PUB 51/8S of 2032, which were said to have traded right around 5.40%, possibly through that level to a 5.38%, while $14 million Salt River 5s of 2030 were said to have traded at 5.32% earlier in the session.

In secondary dollar bond trading, Ohio Building 43/4S of 2014 were quoted at 5.15% bid, 5.14% offered, New York City Group C 53/8S of 2022 were at 5.66% bid, 5.62% offered; and Salt 43/4S of 2017 were 5.16% bid, 5.15% offered.

In the debt futures market, prices were also weaker. The December municipal contract settled down 4/32 to 105.27, after hitting a low of 1201.05. The MOB spread widened to negative 487 from negative 478 Monday. The ever widening MOB spread prompted some traders yesterday to note the disparity between government and municipal supply and its effect on MOB trades.

"With so much muni supply against very light Treasury supply, the MOB spread could written significantly," one trader said.

The disparity in performance between the two markets has left municipals comparatively attractive in price, and crossover buyers have been prevalent in the primary, players say. But traditional investors have shunned new offerings, content to let growing supply force dealers to lower prices even more. The downward pressure has been exacerbated as dealer holdings increase at the same time issuers bear down on the primary, eager to reap the benefits of historically low yields.

Dealers have been able to make a dent in their inventories after She rallies late last week. The Blue List of dealer inventory fell $101 million yesterday, to $1.42 billion. Relief from oversupply was not in the near future as The Bond Buyer calculated 30-day visible supply at $7.66 billion, up from $5.16 billion Monday.

Negotiated Deals

A 21-member syndicate led by Goldman, Sachs & Co. as senior manager priced and then restructured the $643 million Chicago, Ill., general airport second lien revenue refunding bonds for the Chicago-O'hare International Airport, with a maximum yield of 5.39%.

Late in the day, Goldman Sachs said it received the verbal award at the original price levels. The firm did add a non-callable 2012 maturity to the Series A portion of the scale.

One underwriter said there was a little less priority business on the insured portion, forcing some Street float in 2010, 2011, and 2018. The firm reported a present value savings of $190 million from yesterday's sale.

John Holden, a spokesman for Chicago Comptroller Walter Knorr, said the final numbers for the deal "worked more in our favor than we expected at the outset." On Friday, Knorr said he expected a pricing with a top yield in the area of 5.50%.

Holden added they opted to scuttle a plan to use derivatives in the deal. Holden said the use of PARS and INFLOS was dropped "when the market moved more in our favor." Knorr had set a threshold savings of 10 basis points in order to keep the derivatives in the deal. If the derivatives had stayed in the deal, it would have marked their first use ever in a Chicago bond issue.

The final offering included $323 million Series A revenue refunding bonds, priced to yield from 4.80% in 2004, 4.90% in 2005, and 5% in 2006. A 2012 term, containing $46 million, was priced with a coupon of 5% for a return of 5.27%; a 2013 term, containing $94 million of the loan, was priced as 5s to yield 5.34%, and $160 million term bonds due 2016 were priced as 5s to yield 5.39%.

The remaining $320 million Series C-1 and C-2 second lien revenue refunding bonds were priced to yield from 5% in 2007 to 5.12% in 2011. A 2018 term, containing $121 million, was priced as 5s to yield 5.29%. Maturities from 2008 through 2011 are non-callable.

The Series A bonds are rated A1 by Moody's Investors Service and A-plus by Standard & Poor's Corp. The Series C-1 and C-2 bonds are insured by the Municipal Bond Investors Assurance Corp. and rated triple-A by Moody's and Standard & Poor's.

Mayor Richard Daley of Chicago has set a goal of 25% minority-owned firm and 5% woman-owned firm participation in city bond contracts. An attempt to require the 25%-5% minority and woman-owned firm participation in all professional services, including municipal bond work, failed to pass the City Council in 1990.

On yesterday's deal, a minimum of 22% of each designated trade was required to be allotted to minority firms, which included: Apex Securities, Inc.; M.R. Beal & Co.; Carmona, Motley & Co.; Gaean Capital Inc.; Pryor, McClendon, Counts & Co.; and Reinoso & Co. Also, a minimum of 3% of each designated trade must go to woman-owned firms, which included Artemis Capital Group Inc.; Llama Co.; Muriel Siebert & Co.; and Smith Mitchell Investment Group Inc.

Elsewhere, Rauscher Pierce Refsnes, Inc. priced and repriced $234 million Phoenix Civic Improvement Corp. wastewater system lease revenue refunding bonds.

At the repricing, serial bond yields were raised by five basis points from 2006 through 2009; by three basis point in 2011; by two basis points in 2011; and by one basis point in 2012 and 2013.

The final scale included serial bonds priced to yield from 4.10% in 1999 to 5.235% in 2013. A 2018 term, containing $66 million, was priced as 5s to yield 5.273% and a 2023 term, containing $84 million, was priced as 4 3/4S to yield 5.251%.

The bonds are rated A1 by Moody's and A by Standard & Poor's.

Bear, Stearns & Co. priced and repriced $109 million certificates of participation for the San Joaquin County Public Facilities Financing Corp.

At the repricing, serial bond yields were raised by 10 basis points in 1994 and in 1998. Yields were raised by five basis points from 1995 to 2003 and by three basis points in 2004 and 2005. Yields were lowered by about one basis point for term bonds due in 2013.

The final scale included serial bonds priced to yield from 2.60% in 1994 to 5.05% in 2010. A 2012 term was priced as 51/2S to yield 5.115% and a 2019 term, containing $18 million, was priced as 43/4S to yield 5.209%.

The bonds are non-callable, except for the 2019 maturity. The issue is MBIA-insured and rated triple-A by Moody's and Standard & Poor's.

Competitive Deals

Topping a busy competitive sector, Massachusetts awarded $200 million general obligation bonds to a Goldman Sachs group with a true interest cost of 4.8593%.

The firm reported an unsold balance of about $103 million late in the day. Smith Barney Shearson had the cover, with a bid of a 4.864% TIC.

Serial bonds were reoffered to investors at yields ranging from 3.65% in 1997 to 5.10% in 2011. A 2013 term, containing $30 million, was reoffered as 47/8S to yield 5.14%.

The bonds are rated A by Moody's and A-plus by Standard & Poor's and Fitch Investors Service.

An issue of $84 million Vermont general obligation bonds was won by a Kidder, Peabody & Co. group with a TIC of 4.5507%.

Kidder reported an unsold balance of about $31 million late in the day. First Boston had the cover with a TIC of 4.55648%.

Serial bonds were reoffered to investors at yields ranging from 2.50% in 1994 to 4.95% in 2013.

The issue is rated double-A by Moody's and Fitch and AA-minus by Standard & Poor's. Capital Guaranty said it qualified the Vermont bonds under the optional bidding program.

A group including Morgan Stanley & Co., J.P. Morgan Securities Inc., and Donaldson, Lufkin & Jenrette Securities Corp. won $91 million Nassau County, N.Y., federally taxable unlimited tax retirement system bonds with a net interest cost of 5.60%.

The bonds are non-callable.

Morgan reported all bonds sold and the account closed by mid-afternoon.

Serial bonds were reoffered to investors at yields ranging from 3.53% in 1994 to 5.85% in 2005.

The deal is insured by the AMBAC Indemnity Corp. and rated triple-A by Moody's and Standard & Poor's.

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