Prices dropped yesterday amid uncertainty and quarter-end selling pressure with bonds from Tuesday's California deal leading the way.
Prices opened down 1/8 to 1/4 point as faint demand, along with quarter-end selling and mixed economic data, continued to take their toll on market psychology.
Mixed economic data were released throughout the morning.
Traders got two shots of bad economic news before 10 a.m., eastern time. Initial state unemployment insurance claims fell 11,000, while the Purchasing Management Association of Chicago's index of area business activity increased to 54.5% in September on a seasonally adjusted basis from 50.2% in August.
New single-family home sales tumbled 3.1% in August, but that sign of economic weakness did little to bolster the market.
The futures contract gyrated as the reports were released, but cash bonds slowly eroded, quoted down 1/8 to as much as 3/8 point by the middle of the trading session. The true bid for bonds was even weaker, traders said, down 1/2 point on average on the day. Secondary blocks of bonds were said to be numerous, but buyers were scarce.
"The customer base wants to shake it out and sit back to wait and see what happens," said one trader. "We've also got a lot of quarter-end selling that's putting on pressure in general."
Selling pressure increased as bonds from competitive deals began to hit the Street at significantly lower prices.
Traders cited bonds from Tuesday's $800 million California general obligation bond deal. They said a significant portion of the loan was held by dealers. They said the bonds traded in the secondary market at yields of 10 to as much as 20 basis points higher than the original reoffering levels. For example, bonds in 2001 reportedly traded in size right around 4.40% net, where they were originally reoffered at 4.20%.
Several market sources said a rumor that California plans to sell $250 million more refunding bonds around Oct. 14 added to selling pressure. In addition, there has been more California issuance recently, which also made for cheaper secondary bidding.
A source close to the deal acknowledged the bonds were bought at the top of the market Tuesday and news of the new refunding deal was an unpleasant surprise. But, the source added, bonds were finding interest at the adjusted levels.
Secondary supply increased, thanks to the lack of investors, reflected by a jump in The Blue List of dealer inventory. The list rose $481 million yesterday, to $2.2 billion, a 28% jump from $1.72 billion Wednesday. The Blue List is at its highest level since Oct. 28, 1991, when it totaled $2.26 billion.
By session's end, dollar bonds were quoted down anywhere from 1/8 to 3/4 point, but traders put the market down 1/2 on average.
In the debt futures market, the December municipal contract settled down 8/32 to 103.31, off a low of 103.23. The MOB, spread, however, made progress. It narrowed to negative 466 from negative 475 Wednesday as the municipal contract outpaced government futures.
New issue activity was scarce, dominated by Lehman Brothers.
The firm priced and repriced $213 million lease revenue refunding bonds through the California State Public Works Board for the Department of Corrections.
At the repricing, the bonds were made non-callable and yields were raised by five basis points from 1994 through 2003. Yields in 2009 were lowered by three basis points.
The final scale included serial bonds priced to yield from 2.90% in 1994 to 5.274% in 2009.
The bonds are rated Al by Moody's Investors Service, A by Standard & Poor's Corp., and A-plus by Fitch Investors Service.
Secondary Markets
Trades reported light trading, but added that there were a plethora of bonds up for sale.
"The Street volume has been thin," a trader said. "We're seeing a lot of bonds, but few are turning over to permanent buyers. The bid-offered sides are spread wide and liquidity seems to be drying up."
In late secondary dollar bond trading, New York State Dormitory Authority City University 5 1/2S of 2012 were quoted at 5.67% bid, 5.64% offered; South PUB 5 1/8S of 2032 were at 5.53% bid, 5.49% offered; and Washington Public Power Supply System 5 3/8S of 2015 were 5.61% bid, 5.58% offered.
New York State Power Authority 5 1/4S of 2018 were quoted at 99 1/2 to yield 5.32%, and Florida State Board of Education 5 1/4S of 2023 were at 98-98 7/8 to yield 5.38%.
In the short-term note market, yields were unchanged to five basis points higher.
In late trading, California Rans were quoted at 2.75% bid; New York State Trans were quoted at 2.68% bid, 2.60% offered; and Texas notes were 2.74% bid, 2.72% offered.
