Tax-exempts got a reprieve yesterday after prices were condemned to 1/2-point losses soon after the opening, following precipitous price drops Tuesday.

Underwriters reported positive results from the sale of new issues, but market players and said buyers continued to retreat amid heavy issuance, stranding the Street with supply.

The Treasury market began to decline last Thursday after price reports showed signs of greater inflation. Tax-exempts initially showed some resistance to the downward pressure, but gave up the struggle Monday.

Matters quickly worsened Tuesday. Tax-exempts fell freely when the Treasury long bond moved through 7%, a key psychological level. At the same time, $3 billion of municipal new issues were priced, giving the market a severe case of indigestion as buyers retreated.

Municipal players were further discouraged early yesterday when the government market failed to even try to move back below 7%. Tax-exempts dropped 3/8 to 1/2 point by midsession.

But Treasuries finally found some support just behind the 7% level by mid-afternoon and municipals recovered about 1/4 point.

But, near the end of futures trading, government prices suddenly made a dash higher.

Market sources said that when gold came off its highs late in the morning government traders who feared a Fed tightening were reassured. Hedge funds were then said to have sold gold and bought Treasuries.

When Treasuries showed signs of improvement other retail investors joined in, pushing the market even higher. Finally, the late price increases were attributed to related short-covering.

Players breathed a sigh of relief in the tax-exempt arena, and by session's end, prices recovered their losses to close unchanged on the day in light trading.

But the tone was still cautious, traders said, after a week marred by volatility and supply problems.

In the debt futures market, the June municipal contract settled up 5/32 to 100.05, after hitting a low of 99.19. The June MOB spread widened to negative 324 from negative 309 Tuesday.

The support in Treasuries eased some fears that the market would continue its free-fall, but supply in the municipal arena remained threatening.

Underwriters struggled throughout the day, market players said, to cheapen the new deals enough to attract some buyers.

"People are falling over each other trying to cheapen up the deals and get rid of all these bonds left over from Tuesday's pricings," said one trader early in the day. "We're seeing panic for the first time since last Spring."

Market conditions were bad enough that the North Carolina Medical Care Commission withdrew its $183 million hospital revenue refunding bonds for the Presbyterian Health Services Corp. project. The bonds were tentatively priced at mid-morning by Merrill Lynch & Co.

Market conditions were also cited by J.C. Bradford & Co. for its postponement of the sale of $358 million Metropolitan Government of Nashville and Davidson County, Tenn., GOs.

The firm said the deal was on a day-to-day basis and that "all retail orders submitted to date will be held for the time being."

Dealers away from the main syndicates, meanwhile, feared heavier-than-expected allotments, mainly from Tuesday's New York City offering, exacerbating supply pressure.

City allotments were made, traders said, and the Street was said to have gotten more bonds than it expected.

Reflecting new issue weakness, in the secondary market yesterday, New York City bonds were said to be trading dealer to dealer less 5/8 point early in the afternoon and less 1/2 point after the Treasury market spiked higher.

From last Thursday to Tuesday's close, triple-A municipal yields have risen 10 to 15 basis points through three years and by 10 basis points from 2013 to 2033. Yields rose only about five basis points in the mid-range, where buyers have been most willing to buy bonds.

Negotiated Deals

Topping action in the negotiated sector, Bear, Stearns & Co. priced and then restructured $234 million New York State Housing Finance Agency service contract obligation revenue bonds.

At the restructuring, a 2008 serial maturity was eliminated and a 2020 term was added, which contained $129 million of the loan, most of which was originally due in 2021.

The final offering included serials priced to yield from 4.20% in 1996 to 5.95% in 2007. A 2011 term, containing $8 million of the loan, was not formally reoffered; a 2014 term was priced as 5 7/8s to yield 6.1068%; a 2020 term, containing $129 million, was priced as 6 1/8s to yield 6.182%; and 2021 term, containing $23 million, was priced as 6s to yield 6.182%. The bonds are rated Baa 1 by Moody's and BBB by Standard & Poor's.

In other action, issuers continued to rush refunding deals to market, eager to catch rates before they rise further.

Bear Stearns also priced and repriced $227 million Cleveland waterworks improvement first mortgage revenue refunding bonds.

At the repricing, yields were lowered from two to five basis points from 2003 through 2021.

The final offering included serials priced to yield from 3.50% in 1995 to 5.63% in 2009. A 2013 term was priced as 5 1/2s to yield 5.70% and a 2021 term was priced as 5 1/2s to yield 5.78%. The bonds are insured by the Municipal Bond Investors Assurance Corp. and related triple-A by Moody's and Standard & Poor's.

A syndicate led by Lehman Brothers priced $150 million Kansas Department of Transportation highway revenue refunding bonds.

Lehman said it received the verbal award at the original price levels.

The offering included serials priced to yield from 2.65% in 1994 to 5.75% in 2010. A 2012 term, containing $46 million of the loan, was priced as 5 3/8 as to yield 5.80%.

The managers said they expected the issue to be rated double-A by Moody's, Standard & Poor's, and Fitch.

Competitive Deals

A Morgan Stanley & Co. group won $535 million California Department of Water Resources Central Valley project water system revenue bond with a true interest cost of 5.7653%.

An unsold balance was unavailable by session's end.

Serial bonds were reoffered to investors at yields ranging from 2.70% in 1994 to 5.80% in 2014. A 2016 term was priced as 5 3/4s to yield 5.85%; a 2019 term was priced as 5 3/4s to yield 5.87%; a 2023 term was priced as 5 1/2s to yield 5.87%; and 2025 term was priced at par to yield 5.875%. The bonds are rated double-A by Moody's and Standard & Poor's.

Goldman, Sachs & Co. group won $278 million Maryland full faith and credit general obligation bonds with a TIC of 5.1009%.

The firm reported all bonds sold. The bonds were offered to investors at yields ranging from 2.80% in 1994 to 5.20% in 2005. Bonds from 2006 through 2008 were not formally reoffered to investors. The bonds are rated triple-A by Moody's, Standard & Poor's, and Fitch.

Secondary Markets

Traders reported very little secondary action as most participants waited out price volatility.

In secondary dollar bond trading, prices were quoted mixed on the day.

In late trading, Los Angeles Department of Water and Power 5 7/8s of 2030 were quoted at 99 5/8-7/8 to yield 5.90%; Chicago GO FGIC 5 5/8s of 2023 were quoted at 95-1/4 to yield 5.98%; Florida DOT FGIC 5s of 2019 were quoted at 5.71% bid, 5.70% offered.

In short-term note trading, yields closed unchanged to slightly lower on the day.

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