Municipal bonds ended a quiet session yesterday with a lower bias.
"Not much is happening," said one trader, adding that municipals moved 1/8 point in either direction depending on the name, He cited "a couple of small bid lists."
Dollar bond prices ended 1/8 point lower overall, while high-grade issues were marginally weaker. Activity was light.
In debt futures, the September municipal contract settled down 1/8 point at 90 1/2. Yesterday's September MOB spread was negative 391, compared to negative 384 on Wednesday.
"We're just following the Treasury market," a municipal analyst said.
Municipals are likely to closely follow governments until at least Monday, when Georgia's $272 million competitive offering could provide a benchmark, the analyst said.
A second trader said the market remained on hold yesterday following the downturn in Treasuries on Federal Reserve Chairman Alan Greenspan's Humphrey-Hawkins testimony on Wednesday.
Greenspan addresses a House Banking subcommittee today, and participants are unlikely to commit themselves prior to his comments, the trader said.
Since Monday's are typically slow, next Tuesday is likely to be the next day for actual business, he said.
"Everything was going relatively smoothly until Alan [Greenspan] started talking," the trader said. He added, however, that some may have used the Fed chairman's remarks as an excuse to take the market lower following a good run-up.
The government's 30-year bond has improved by nearly 20 basis points in the past week and a half. The long bond went from a closing yield of 7.73% on July 11, to a close of 7.54% yesterday. It closed at 7.46% on July 19.
Bonds got off to a good run early Wednesday when the June housing starts number came in bad for the economy and good for bonds, the trader said.
While Greenspan's comments were relatively "elusive," the trader said, the bond market interpreted them as increasing the probability of another Fed tightening of credit.
The market "turned on a dime," he said.
The trader added that while some institutions are still experiencing "sticker shock" when they see how municipal yields stack up percentage-wise to Treasuries, institutions have cash on hand.
He also observed that institutions are loath to sell anything unless they can get something to take its place. State specific funds are particularly reluctant to sell without replacement bonds.
Christopher M. Dillon, a vice president at J.P. Morgan Securities, said that while cash flows into municipal bond funds have been "fairly poor" for the past couple of weeks, he's seeing some improvement now.
Going forward, Dillon believes municipals should outperform Treasuries slightly because of the supply coming into the government market.
Now that Wednesday's $791 million New York City general obligation bonds and California's $4 billion revenue anticipation warrants are out of the way, the calendar is relatively light.
Dillon added that Wednesday's New York City deal was priced fairly attractively, "so that went pretty well."
The California Raws deal also fared well, considering its large size. A good deal of it went away, and some other interested institutions may have held back, waiting for the street's portion to cheapen up, Dillon said.
Returning to Greenspan's comments, John Lonski, senior economist at Moody's Investors Service, observed: "I think what Alan Greenspan wanted to indicate was that investors and anybody engaged in financial planning ought to be prepared for another rate hike."
Lonski said, however, that the Federal Reserve is caught in a vise of rising inflationary pressures and slower economic growth.
"The faster rise of prices amidst slower growth revives memories of the stagflation from the Carter years," the economist said.
On the inflationary side, industrial materials prices have risen at a "breakneck" pace, and now are about 15% higher than a year ago, he said. Pointing to slow growth, however, were initial claims for state unemployment benefits released yesterday for the week ended July 16. Claims rose 27,000 to a total of 392,000. If claims are any indication, growth in nonfarm employment in July should be well below the 379,000 jobs reported for June.
The economist said the strong July employment could trigger a Fed tightening of credit.
"If you do get a strong reading on July employment despite what has been reported on first time jobless claims, the Fed could respond immediately," Lonski said.
Nonfarm payrolls growth of at least 300,000 coupled with a longer work week and an increase in hourly earnings would likely prompt an immediate Fed tightening, he said.
Lonski said, however, that the July figure is more likely to be in line with the first-quarter's average monthly increase of 239,000 in nonfarm jobs, rather than the 345,000 average monthly increase for the second quarter.
Elsewhere, Standard & Poor's the Blue List of municipal bonds was up $106.2 million yesterday, to $1.59 billion.
The 30-day visible supply of municipal bonds for today totals $3.84 billion, down $334 million from yesterday. That comprises $1.86 billion of competitive bonds, up $113.7 million from yesterday, and $1.98 billion of negotiated bonds, down $447.5 million from yesterday.
Next week's negotiated calendar includes $250 million Portland Ore. sewer system revenue bonds through Smith Barney Inc.
Monday's competitive slate includes $272 million Georgia bonds and $139 million Dade Co. Fla. (MBIA) revenue bonds. On Tuesday, Nassau County, N.Y., will sell $136 million bonds.
Also, a $250 million Florida State Board of Education deal could be priced with 24-hours notice.