Municipal bond prices finished unchanged to slightly lower yesterday despite favorable inflation news that followed Tuesday's dramatic tightening by the Federal Reserve. New issues, however, saw good demand.
"CPI was a good number this moming," one municipal trader said yesterday, referring to October's consumer price index report. "I guess it's gotten to the point fight now where sentiment is so negative that it's going to take more than just a few days and a few statistics to turn things around."
The Fed's 75basis-point-hike in the fed funds ratt should have pleased the market, but resulted in only "a 14 second rally" on Tuesday, the trader said.
In the government market yesterday, 30-year bond yields dipped barely below 8% shortly after word came that the consumer price index rose 0.1% overall in October, and that the core rate, which excludes food and energy prices, rose 0.2%. The report was more favorable than analysts expected.
The market's improvement was shorthved, however, and the long bond ended the day down 21/32 to yield 8.09%.
Kevin Flanagan, a vice president and financial economist at Dean Witter Reynolds, said he couldn't say for certain what stemmed the rally, but theorized that it could be investors' fear of venturing below the 8% yield mark on the long bond.
"There's absolutely no sponsorship for 30-year securities when you get down to 8% or try to go through the 8% level," Flanagan said. "And I think once you got to that point and investors and dealers started selling, you started to get a snowball effect."
In the tax-exempt secondary market, yields on high-grade issues were higher by three basis points, while dollar bond prices fell 1/4 point. Activity was light. In debt futures, the December municipal contract closed down 1/23 to 82 3/32. Yesterday's December MOB was negative 480, compared to negative 482 on Tuesday,
"There's no dollar bond quotes; there's no two-sided markets, [and] the de minimis [role: continues to be a big problem," one trader said. He was referring to a 1993 tax law that changes the way profits are taxed on municipal bonds bought in the secondary market at a discount from face value. Because of the new law, some or all of the profits on the bonds may be taxed as Ordinary income, and not just capital gains.
"There's demand out there, I guess, but it's for the right merchandise," the trader said, adding that investors want full coupon or premium bonds. He pointed to the $192 million of Illinois Regional Transportation Authority offering priced earlier in the week, which offered a good chunk of noncallable bonds as well as premium bonds.
"That looked like it went very well," the trader said, adding that yesterday's offerings appeared to fare well also.
"I heard there's some pretty good interest if you look at some of the deals:' he said, and put Massachusetts' $200 million competitive deal in that camp. The trader noted that some portions of yesterday's new deals were not formally reoffered to investors.
"It seems to me like there's a fair amount of NRO business going on if you look at some of the scales, and that's probably a combination of the arbs or the crossover buyers, and a few of the casualty companies that still have some cash," he said. For the most part, mutual funds still seem to be sellers, the trader said.
A municipal analyst yesterday emphasized that yesterday's session was a "perfect example of a two-tiered rocket," with new issues faring better than those in the secondary. In the primary market, highgrade issues ended unchanged to slightly stronger in the long end, he said. The analyst said the "ton of new issues" that arrived yesterday should benefit the market.
"They are establishing a base, which has been lacking for the past several weeks," he said.
In negotiated action, Bear, Steams & Co. priced and repriced $262 million of New York State Environmental Facilities Corp. water pollution control revolving fund revenue bonds. A source familiar with the deal said the term bond yield was dropped five basis points and some serials were also lowered by five basis points.
Also in negotiateds, a Morgan Stanley & Co. group tentatively priced $205 million of Santa Clam County, Calif., Financing Authority lease revenue bonds.
The AMBAC-insured offering contained serial bonds priced to yield from 5.70% in 1999 to 6.90% in 2011. A 2014 term, containing $27 million, was priced to yield 7.05%. A 2020 term, containing $74 million, was priced to yield 7.13%. A 2022 term, containing $31 million, was priced to yield 7.10%.
On the competitive side, a Merrill Lynch & Co. group won $200 million of Massachusetts general obligation bonds with a true interest cost of 6.7381%. Serial bonds were reoffered to investors at yields ranging from 5% in 1996 to 6.90% in 2011. Bonds from 2012 to 2014 were not formally reoffered. The offering is FGIC-insured.
"I'm very pleased with the way the deal went," said Kenneth Olshansky, deputy treasurer for Massachusetts. Olshansky said he beheves rates are headed higher and his strategy was to wait for the Fed to move and take advantage of the "stable window immediately after they came out with their decision."
"And so far it looks good," he said, adding that Massachusetts got the deal to market early.
"I think we hit a reasonable sweet spot," Olshansky said.
An A.G. Edwards & Sons Inc. group won $100 million of Missouri Housing Development Commission single-family mortgage revenue bonds with a true interest cost of 7.1899%. The bonds are subject to the alternative minimum tax.
Serial bonds were reoffered to investon at yields ranging from 5% in 1996 to 6.70% in 2007. The loan also contained term bonds in 2010, 2014, 2017, 2020, and 2025. The 2025 maturity was reoffered at a 7.30% yield. The 2017 maturity was not formally reoffered.
