Prices for most municipal issues ended flat yesterday but with a better tone, as a Lehman Brothers group captured the $125 million San Francisco Airports Commission's competitive deal.
"We caught a bid this morning, and we were firmer," said Stephen Malfitano, managing director and head of municipal trading at Cowen & Co. Prices paid yesterday for some select original-issue discount bonds were well out in front of what you might normally think the bonds would be worth," he added. "I just think that for the right bond, for the right block of bonds with the right story to it, people are willing to pay a price," Malfitano said.
A municipal analyst said that both dollar bonds and yields on high-grade issues ended unchanged in light to moderate trading. He estimated that bid lists totaled between $200 million and $300 million.
In the Treasury market, the 30-year bond closed down nearly 1/2 point to yield 7.86%. In debt futures, the December municipal contract closed down more than 1/4 point to 87 1/32. Yesterday's December MOB spread was negative 375, compared to negative 384 on Monday.
Christopher Rupkey, financial economist at Mitsubishi Bank, said a false minor that Fed governor Alan Blinder was telling the Japanese the Fed was on the sidelines for the rest of 1994 sparked a rally that was then followed by selling. The market also fell on comments by Fed governor Susan Phillips about the strength of the economy, and the results of the latest Johnson Redbook report on retail sales.
"I don't think Johnson Redbook would have had the impact if it hadn't been for Fed governor Phillips speaking at around 10:25," Rupkey said. "She says that the economy is showing surprising strength, and her comments are very important because she's kind of a centrist, not dovish, but certainly a more liberal member of the Federal Reserve Board, and she's been waiting to see what the effect of the interest rate hikes this year were going to be."
The Redbook report, which covers the first two weeks of October, showed that retail sales were continuing at a fairy moderate pace.
Despite yesterday's firmer municipal market tone, Malfitano doesn't think a bottom has been reached yet. He said the Treasury's long bond could get to 8% or even 8 1/4% in early 1995.
"You've got to look at the cycle," Malfitano said."We are in the first third of a bear market for argument' s sake. There's more to go, and we haven't in my judgement seen the peak in long-term rates nor short-term rates for that matter."
While municipals have largely outperformed Treasuries; "it hasn't been anything earthshattering," Malfitano said. Higher tax rates, fewer new issues and bond calls and redemptions have made municipals slightly more expensive now than they have been on a historical basis, he said.
Given the higher tax rates and reduced supply, Malfitano said he would have expected a better performance from municipals.
"However, if you were to look at this in a static environment, all things being equal, you would conclude that there would have been much more of an outperformance of municipal bonds than what we' ve experienced, and all that tells me is that while there's been a decline of supply of 45%, there's been a decline in demand of 42%," he said.
At some point, that will change, Malfitano said, adding that it could be as early as the first quarter of 1995.
"One of the things that will make it change is when you reach a point where rates of return become attractive enough that suddenly the demand side of the equation becomes more normalized, and when that happens you will see municipal bond prices outperform Treasury bond prices by wider margins," he said.
In competitive action yesterday, a Lehman Brothers group won $125 million San Francisco International Airports Commission, Calif., bonds with a hue interest cost of 6.58981%. Goldman, Sachs & Co. had the cover bid with a 6.592261% TIC. Smith Barney Inc. came next with 6.6024%, followed by Bear, Steams & Co. with 6.6138%, and Dillon Read & Co. with 6.636678%.
John Martin, deputy director of Airports, business and finance, said the commission was "very pleased" with yesterday's bids; considering the market. The commission had assumed a TIC of 7.25%, he said. "So we are doing better than our projections," he added.
Proceeds from yesterday's offering will go toward various master plan projects at the airport, he said, adding that the deal is the second leg of a $2.4 billion financing that could involve as many as 15 separate new offerings.
The Ambac-insured offering, which is subject to the alternative minimum tax, consisted of serial bonds reoffered to yield from 4.60% in 1996 to 6.45% in 2012. A 2014 term, containing $8.7 million, was priced to yield 6.50%. A 2018 term, containing $24 million, was priced to return 6.60%. A $14.5 million 2020 term was priced at 6.625%, and a 2024 term, containing $38 million, was priced to yield 6.65%.
Christian Smith, who runs two California funds for Prudential totaling $390 million, said he passed on the offering.
"It just wasn't a structure I cared about," Smith said, adding that he didn't have much use for current coupon bonds. "Typically I coupon barbell my portfolio by buying either discount or premium bonds to give my funds better convexity characteristics."
Smith said Prudential manages its funds on more of a total return basis rather than in terms of absolute yield.
"You have some funds that don't care about convexity and don't pay up for it," he said. "If one bond is yielding five basis points more than another, they're always going to buy the bond yielding more, (but) I won't necessarily do that," Smith said, adding that if he thinks another bond has a better structure, he'll buy that.
Smith also thought the AMT spread was too tight relative to other insured paper which is not subject to the alternative minimum tax.
'The spread. I would say right now [for California paper] is 10 to 12 basis points, and I think it has widened out in the national market closer to 15 basis points," he said.
David MacEwen, senior municipal portfolio manager at the Benham Group, which has several California bond funds totaling roughly $1.3 billion, also passed on the offering.
"We didn't [participate] because we can't use AMT except in our high-yield fund, and the high-yield fund of course is looking for highyield securities, note insured," MacEwen said.
"Even if you could use AMT, you're certainly not getting paid much for the spread," he said, adding, "it looks like maybe 10 to 12 basis points maybe for the AMT, and that's about as tight as we've seen it recently."
Prudential's Smith added that he would have preferred to see the offering, which had an underlying ratings of A1 from Moody's Investors Service and A-plus from Standard & Poor's, come uninsured. However, the insurance was so cheap, "something like $5 and change" per bond. Uninsured, the bonds would have likely yielded just four or five basis points more, he said.
'"That's just way too tight," Smith said. "The insurance companies are bidding more aggressively this year to keep their level of business up, so I would have wanted to have been compensated more than five basis points for taking it uninsured," he said.
The 30-day visible supply of municipal bonds yesterday totaled $3.471 billion, up $215 million from Monday. That comprises $1.638 billion of competitive bonds, down $56.8 million from Monday, and $1.833 billion of negotiated bonds, up $272 million.
Standard & Poor's Corp.'s Blue List of municipal bonds was down $73.4 million yesterday to $1.872 billion.