Prices plodded slightly higher in methodical trading yesterday, while nearly $2 billion of new deals hit the primary market with good results.
After posting confident gains Tuesday, the market jerked and jolted to modest gains yesterday, traders said.
Municipals are benefitting from the effects of increased demand from cash heavy bond funds and the prospect of diminished supply.
Buyers were eager to snap up new issues Tuesday, but issuance was light yesterday, leaving secondary market players to hash it out.
"It got going in spurts, but there wasn't follow-through to take it straight up," a trader said. "We traded a lot of bonds today, but with only slight gains. You have to be patient, it's almost painful how long you have to wait for your bonds to trade sometimes."
Traders reported increased activity in the secondary. Some sizable blocks of popular names changed hands at prices 1/8 to 1/4 point higher as dealers turned over their inventory, they said.
"There's a real good tone to the market and we seem to be ahead of Treasuries right now," said one trader.
Tax-exempts made 1/4 to 3/8 point gains in some spots yesterday, but traders quoted the market up 1/8 point overall by session's end.
In the debt futures market, the September municipal contract settled up 5/32 to 101.21. The September MOB narrowed slightly to negative 350 from negative 351 Tuesday.
Bucking the upward trend, California bonds were said to suffer after a dealer reportedly put $60 million California bonds out for the bid. One trader said he traded a California name at 5.72% in the morning and the bonds were quoted at 5.75% net near session's end.
But tax-exempt demand was sufficient enough for the market to dodge the pull of lower government prices.
Treasury prices were hurt at the opening by a story in The New York Times that suggested the Federal Reserve will raise short-term interest rates by the end of the summer. But the market came off its lows when economic indicators reflected more weakness than expected.
The Commerce Department said the nation's gross domestic product grew only 0.7% during the first quarter, originally reported as a 0.9% increase. New orders for durable goods tumbled 1.6% in May to $128.3 billion.
The government market faces significant supply this week, and prices were generally lower after the Treasury set a 5.125% coupon on $11 billion five-year notes it auctioned at a 5.23% yield at mid-afternoon.
But the long bond was firm near the close. Traders said action was tame.
A group led by Lehman Brothers as senior manager priced and restructured $961 million public improvement refunding bonds for the Commonwealth of Puerto Rico.
At the restructuring, the amount was boosted from $949 million.
A Lehman officer said the issue was oversubscribed top to bottom with especially good business on the longer non-callable serial bonds, in the five-year range.
The offering included serial bonds priced to yield from 3.50% in 1995 to 5.55% in 2007. A 2013 term, containing $101 million of the loan, was priced with a coupon of 5.50% to yield 5.72%; a 2018 term, containing $160 million, was priced as 5 1/4s to yield 5.75%, and a 2021 term, containing $88 million of the loan, was price&as 5s to yield 5.72%.
The deal included Lehman's "Strips and Pieces" derivative in the 2008, 2009 and 2010 maturities. The securities had a face value of $126 million, but were sold at a premium and raised $160 million for the issuer.
A Lehman official said the derivatives saved the issuer 10 basis points in yield compared to the rate that would have been paid on ordinary, fixed-rate bonds.
The deal is "by far the largest use of strips and pieces," noted Gary Gray, a senior vice president at Lehman and one of the architects of the product.
The derivatives were non-callable, simplifying the product from earlier uses. In the past, the securities were based on callable bonds and had to be assigned amortized values to properly compensate investors holding interest-only pieces in case of a call.
The offering is rated Baal by Moody's Investors Service and A by Standard & Poor's Corp.
In other action, PaineWebber Inc. priced and repriced $323 million Maine Municipal Bond Bank refunding bonds.
At the repricing, yields in 1994 were raised by 10 basis points, while yields in 1995 and 2020 were raised by five basis points. A 2009 term, containing $18 million, was added but not formally reoffered.
The final scale included serials priced to yield from 2.50% in 1993 to 5.55% in 2008. A 2013 term, containing $20 million, was priced at par to yield 5.70%. A 2020 term was priced as 5 3/4s to yield 5.80%.
The bonds are rated Aa by Moody's and A-plus by Standard & Poor's.
Traders reported more customer bid-wanted lists circulating and some sizable blocks of bonds were said to change hands.
In follow-through business, Port Authority of New and New Jersey bonds from Tuesday's $150 million deal were said to trade in the secondary at the original prices levels, less 1/8.
In secondary dollar bond trading prices were unchanged to up 1/4 to 3/8 point, traders said.
In late action Seattle Met Muni 5 5/8s of 2012 were quoted at 99 1/8-3/8 to yield 5.70%; Philadelphia Municipal Authority FGIC 5 5/8s of 2014 were quoted at 5.72% bid, 5.69% offered; and Orange and Orlando FGIC 5 1/2s of 2018 were quoted at 5.64% bid, 5.63%s offered.
Boston 5 3/4s of 2023 were quoted at 98 3/8-5/8 to yield 5.86%; Washington Public Power Supply System MBIA 5.70s of 2017 were quoted at 98 1/4-1/2 to yield 5.83%; and Chicago GO FGIC 5 5/8s of 2023 were quoted at 97 3/8-5/8 to yield 5.81%.
In short-term note trading, yields were mixed on the day.