The municipal market continued to amble through new supply and prices were hovering near the top of the range yesterday, but significant economic news is needed to break out of the summer doldrums.
Initial state unemployment insurance claims increased 30,000 to a seasonally adjusted 425,000 -- slightly more than expected -- in the week ended July 13.
Some market observers called the move "purely technical," but the data was a bullish surprise for bonds and traders reported a firm tone with prices up 1/8 point in spots in late trading.
But secondary trading continued as the summer doldrums and negotiated new issues combine to stagnate activity, traders said.
New issuance ebbed yesterday, but in follow-through business, Lehman Brothers, senior manager for $250 million Puerto Rico Electric Port Authority, power revenue bonds, freed the issue from syndicate restrictions. Traders said the 7s of 2021 were quoted up 1/2 to 5/8 from the original net at 98-98 1/8 to yield 7.15.
Merrill Lynch & Co., senior manager for $200 million Florida Board of Education public education capital outlay bonds, reported the unsold balance down to $8 million from $23 million late Tuesday.
BT Securities, senior manager for Tuesday's $195 million Minnesota general obligation state various purpose bonds, reported the remaining $3 million bonds sold and the account closed.
First Boston Corp., senior manager for $186 million University of California, revenue bonds, reported the unsold balance down to $7 million. First Boston was also senior manager for $174 million Phoenix, Ariz., unlimited tax various purpose GO bonds, and reported this balance at $18 million.
In secondary dollar bond trading, New Jersey Turnpike Authority 7.20s, due 2018, were quoted unchanged late in the session at 103-103 1/4 to yield 6.64% to the 1999 par call and 6.80% to the premium call in 1993. New York LGAC 7 1/4s of 2023 closed up 1/4 to 97-5/8 to yield 7.22%. And Metropolitan Seattle 6 7/8s of 2031 were at 97-97 1/8, where they returned 7.09%.
Short-term note yields were unchanged on the day in light secondary trading. March New York State tax and revenue anticipation notes were quoted at 5.50% bid, 5.48% offered near the end of cash. Los Angeles and New Jersey notes were being quoted at 5.05% bid, 5% offered late in the session.
Prerefunded bond yields were also unchanged on the day. Issues with national names and prerefunded into 1995 were quoted at 5.82% bid, 5.80% offered, while bonds callable in 1996 were quoted at 5.88% bid, 5.85% offered.
The market has taken on significant supply over the last few weeks -- swallowing $3.2 billion in the week ended July 19 alone -- and traders noted that the onslaught of bonds has helped to cap prices.
"It takes a lot to get this market going right now," one New York trader said. "We've had decent supply in the primary and people have been able to buy bonds there, so the secondary looks high. If you're short the MOB you're looking smart and that has been a good trade the last couple of days."
In the debt futures market, the September municipal contract settled up 2/32 to 92.06 with the September MOB spread moving to negative 74 from negative 65 on Wednesday and negative 49 on Tuesday.
Traders noted that new-issue supply will continue to test the market and that the Treasury refunding in August looms on the horizon.
But the 30-day visible supply is currently at $1.8 billion, down about $400 million from Wednesday, while the Blue List of municipal bonds is down $72 million from Wednesday to $1.2 billion.
Market participants pointed out that demand is still strong as intermediate and long-term municipal bonds remain attractive compared to short-term yields on short-term taxable or tax-exempt paper. In addition, coupon payment's peaked on July 1 and investors have had cash to invest.
George D. Friedlander, managing director in portfolio strategy at Smith Barney, Harris & Co., noted in the firm's latest market letter that demand has been pent up and is likely to remain strong.
"Clearly, many individual investors have resisted putting money to work in the long-term market over the past year, because long-term rates seemed to be too low," he wrote. "Equally important, many of the investors facing heavy bond calls have resisted swapping out of high-coupon paper, even as the average maturity on their portfolio measured to the first optional call date collapsed."
He also noted that there is more cash for reinvestment coming from maturing short, fixed-rate instruments, including CDs and Treasury bills.
The market has been suprised recently by some weak economic news, including a drop in durable good orders for June. That has prompted some players to resurrect arguments for a double-dip recession, and prices have moved cautiously higher.
But most market observers still describe an economy on the slow track to recovery.
"The durable goods orders report was a concern, but you must always resist the temptation to interpret too much on one report because it is so volatile," said Lawrence Krohn, senior economist at Lehman Brothers. "If we have reports like that a couple of months in a row then we have to worry about the recovery."
"The number of negative indicators still is behind the number of positive numbers and today's increase in claims was purely technical," he said. "You have to play the odds, but most indicators are suggesting that the economy will recover, albeit weakly."
Today, preliminary second-quarter gross national product data will show a 1.1% increase, according to 18 economists surveyed by The Bond Buyer. But participants will be looking to next week's July employment data for a more revealing look at economic strength.
Mr. Krohn said that preliminary estimates for nonfarm payrolls are for an increase of 95,000, while weakly hours will also rise.
"As long as hours keep rising, the outlook is for an improving economy," he added. "If that doesn't happen, then that's an important signal."
