The Treasury market rally that supported municipals on Wednesday failed to give market players enough confidence to take prices higher yesterday.
Over $5 billion of new bonds and notes were priced this week, and the tone turned heavy yesterday after investors gave a weaker than hoped for showing in the primary.
Traders reported a dearth of activity and an apprehensive tone even though the 30-year Treasury bond held its record low of 6.55%. posted during a strong rally after good inflation news on Wednesday.
By session's end, prices were unchanged overall, but some dollar bond prices were quoted 1/8 to 1/4 point lower.
In the debt futures market, the September municipal contract settled down 8/32 to 102.14. The MOB spread moved to a record low for the third straight session, widening to negative 424 from negative 417 Wednesday.
Market players noted that the market has survived the week mostly unchanged thanks only to strength in the Treasury market.
Bond funds have concentrated what money they have on the intermediate sections of deals, leaving longer bonds to an already bloated Street, while retail has balked at the high prices.
Some market players say tax-exempts are poised for a sharp move lower because buyers are largely absent at a time when supply and prices have been high.
"Some of the customer base has turned bearish and the dealers are apprehensive," said one trader. "We don't like the way munis have underperformed Treasuries and it feels like it's for sale. You just can't put your finger on it quite yet."
Looking to supply, the calendar is expected to drop off soon, but new issues continue to queue up for the primary. Secondary supply has also hovered at relatively high levels and continued that trend yesterday.
The Bond Buyer calculated 30-day visible supply at $5.49 billion. The Blue List rose $15.7 million, to $1.83 billion.
Fitch Rates New York City
Fitch Investors Service yesterday rated New York City's general obligation bonds A-minus.
The agency said in a statement: "This is the first time Fitch has rated the city's general obligation debt."
The rating was made in conjunction with a $650 million GO sale planned by the city later this month. The agency noted that the city's "credit trend is stable but recognizes the city's ongoing need to address projected out-year gaps."
Moody's Investors Service recently affirmed its rating on city GOs at Baal, and Standard Poor's Corp. held its rating at A-minus, with a negative outlook.
In relatively light new-issue action yesterday, Morgan Stanley & Co. tentatively priced $241 million of East Bay Municipal Utility District Water System subordinated revenue refunding bonds.
The offering included $167 million of current interest bonds priced to yield from 2.60% in 1994 to 5.15% in 2006. A 2010 term was not formally reoffered, while a 2013 term was priced as 5s to yield 5.45% and a 2021 term was priced as 5s to yield 5.50%.
There also was $75 million of yield curve notes and auction rate notes, which were not formally reoffered to investors.
The deal is insured by the Municipal Bond Investors Assurance Corp. and rated triple-A by Moody's Investors Service and Standard & Poor's Corp.
In other action, Merrill Lynch & Co. priced and repriced $180 million Hawaii refunding bonds and raised some yields.
At the repricing, yields were raised five basis points from 1994 through 1998 and by about four basis points in 2000, 2001, and 2002.
The final offering included $159 million of Series CF bonds priced to yield from 2.45% in 1994 to 4.69% in 2002. There also was $21 million of Series CG bonds priced to yield from 2.45% in 1994 to 5.20% in 2010.
The bonds are rated double-A by Moody's and Standard & Poor's.
Storage Tank Bonds Priced
In other action, PaineWebber Inc. priced $30 million of taxable revenue bonds yesterday for the Ohio Petroleum Underground Storage Tank Release Compensation Board.
The bonds were priced at an average interest rate of 6.64%. The deal contained $5.4 million of serial bonds priced to yield 4. 00% in 1994 to 5.375% 1998; and $24.5 million of term bonds that mature in 2008 and were priced to yield 6.86%.
The yield on the term bonds was about 90 basis points over comparable Treasury securities maturing in 15 years.
The issue, which was rated A-minus by Standard & Poor's, is the first storage tank deal to be backed solely by mandatory user fees.
The fees are paid annually by tank owners in the state. Because mostly private funds are being used to pay off the debt and because most of the bond proceeds will benefit private entities in the clean up of problems caused by leaking storage tanks, the issue had to be sold on a taxable basis.
Previous storage tank issues in Iowa and Maryland were backed by tax revenues and sold as tax-exempt securities.
Noreen White, a principal at Municipal Advisory Partners Inc., the board's financial adviser, said institutional investors, particularly insurance companies, were interested in the bonds.
"We were pleasantly surprised at the amount of interest in the transaction because it is sort of a new animal," she said. White added that the amount of the issue was raised to $30 million from $25 million because of favorable market conditions.
Activity was light again, traders said. Few bonds were said to change hands as the Street waits for the market to make a move.
"What this market needs is some confidence," said one observer. "Nobody is willing to get out there and make the first move." In secondary dollar bond trading,
prices were quoted unchanged to down 1/8 to 1/4 point in spots.
In late action, New York LGAC 5 1/2s of 2018 were quoted at 5.70% bid, 5.68% offered; Fulton-DeKalb MBIA 5 1/2s of 2020 were quoted at 5.68% bid, 5.67% offered; and SCPPA MBIA 5s of 2022 were quoted at 92 5/8-7/8 to yield 5.51%.
Pennsylvania COP AMBAC 5s of 2015 were quoted at 93-1/4 to yield 5.55%; Orange and Orlando FGIC 5 1/2s of 2018 were quoted at 99-1/2 to yield 5.57%; and Washington Public Power Supply System MBIA 5.70s of 2017 were quoted at 99 1/8-3/8 to yield 5.76%.
In short-term note trading, yields were unchanged to five basis points higher on the day, traders said.
In late action, Iowa notes were quoted at 2.93% bid, 2.90% offered and Wisconsin notes were quoted at 2.90% bid, 2.85% offered.
Puerto Rico Derivatives
Wednesday's $1.1 billion of Puerto Rico Highway and Transportation Authority issue featured a potpourri of derivative products, although some new ideas were left on the shelf.
Merrill Lynch. facing a market that has absorbed almost $2 billion of Puerto Rico paper in the past few months, turned to derivatives on the short end and in the intermediate sector to increase investor enthusiasm.
Approximately $100 million in the 1995 to 1999 maturities were sold as seven-day, putable floating-rate notes. The authority swapped its floating-rate exposure with Merrill. Union Bank of Switzerland provided a letter of credit backing the floaters.
The floating-rate structure saved the authority 37 basis points, according to Merrill officials.
In the intermediate sector, the 2003 to 2010 maturities, Merrill structured $250 million as FLOATS/RITES. The structure feature floating, auction-rate securities, and inverse floating-rate securities.
The deal also marked the debut of Merrill's version of Lehman Brother's "Strips and Pieces" product.
Dubbed Multiple Cusip Securities, or MCS, the derivatives allow an investor to separately buy or sell principal and interest payments on a single bond. The $25 million of MCS were sold in the noncallable 2009 maturity.
Some derivatives professionals expected to see more innovations on the authority's deal, but legal complications could not be resolved in time to include the new products.
Sources familiar with the deal said Merrill considered including an embedded swap product that was based on a constant maturity swap market rate as well as a bond offering investors a kicker based on the spread between short-term taxable and tax-exempt rates.
With institutional investors clamoring for more ways to play the spread between taxable and tax-exempt yields, derivatives professionals predicted that the unused structures will resurface in the next few weeks on new deals.