Municipal bond prices climbed 1/4 to 1/2 point Friday, as the market crawled out from the initial fallout surrounding the Orange County, Calif., debacle.

"It's kind of gotten back to a little bit of normal stability, that's all," a municipal trader said Friday. "It's up almost 1/2 point and there's some business going on - people are just being careful of what they buy."

He cited "a couple" of bid lists out Friday morning, which appeared to do well.

"There was one out of Kemper, $1.00 million, and I'm hearing there's some good interest in some of the stuff," the trader said.

Friday's light to moderately active session saw dollar bond prices finish up 3/8 point to 1/2 point, while high-grade issues improved by three basis points.

In debt futures, the March municipal contract was up 1/2 point to 84 1/32. Friday's March MOB spread was negative 496, compared to negative 498 on Thursday. In the government market, the 30-year bond closed up more than 1/8 point to yield 7.85%.

Orange County issues aside, the tracer said for the most part California paper was doing a bit better.

"I don't see any bids and offers in Orange County uninsured paper, but Cal in general is just trading along with the rest of the muni market" the trader said.

A trader in Los Angeles reported that, Orange County issues aside, the overall California market was "trading fine." While volume was "very limited," the market was exhibiting a better tone, he said.

"It's probably up five basis points today," the trader said Friday. "It got sneaky better [Thursday] night, and then a little bit of follow-through [Friday]."

The trader said that the California market was starting to recover the retail demand that preceded the Orange County fiasco,

Some of that money is starting to come back into the market," he said. "Obviously the paralysis on Wednesday and part of [Thursday] was such that it was very difficult for people to focus o anything other than Orange County, an now that's starting to play out a little bit and people are getting back to business"

Robert W. Chamberlin, a senior vice president and supervisory municipal analyst at Dean Witter Reynolds Inc., said he sees some interesting twists in how the Orange County situation has played out for the municipal market.

"When a major AA-1-rated county files Chapter 9, that means the municipal market supposed to go down the tubes, right?" "But instead, Chamberlin said, what has happened is that the bankruptcy caused a,"temporary blip" in a pattern of mainly higher prices for about two weeks. Retail, which usually buys at this time of the year, has provided good support for the market and has helped to push the Standard & Poor's Corp. Blue List down, Chamberlin added.

"They know that the end of December is coming when you have no new volume and they are buying bonds," he said.

In addition, with the stock market getting beaten up lately because of Orange County's woes, municipals seem to be sharing with Treasuries the benefit of being seen as "sort of a haven of safety."

"This the ultimate irony for me," Chamberlin said. "We've come around all the way and we are the beneficiaries of a series of events that started with a default of a municipal credit."

While Treasuries have outperformed municipals, municipals have not fallen as far behind as would be expected, he said.

Kevin Flanagan, a vice president and financial economist at Dean Witter Reynolds, said part of the reason why long end of the bond market has improved is linked to equity market declines

"The continued declines in stock values around the globe, I think, continues to support long-dated maturities" Flanagan said. "I think there's a growing feeling among bond investors that perhaps this could be a signal of a pending slowdown in growth."

The economist said that picture is different from one painted earlier last week by Federal Reserve chairman Alan Greenspan, "at least for the period ahead where he suggested that growth remains on the robust side, and that inflationary pressures could finally begin to emerge here."

"I think that has helped put some money into the back end because you are not seeing, it at all on the front end," Flanagan said.

As for this week, tile market will have a variety of economic reports to chew on following, the "relative data vacuum" of last week, he said.

"We really didn't have many of the fundamental reports to contend with, so the focus was on things such as Orange County and what's going on in the stock market," Flanagan said.

Some of this week's numbers could prove troublesome for the bond market the economist warned.

"I think some of the numbers that are due out [this] week, especially on the inflation front, may not be as friendly as has been the case in the last month or two."

Tomorrow, the producer price index and retail sales figures are due out. The consumer price index comes out Wednesday.

"As far as Fed watchers go, of course [industrial] production and capacity [utilization] are important," Flanagan said.

While the importance of PPI and CPI cannot be dismissed, the Fed has "repeatedly shown this year that it is not focused on those government stats."

Meanwhile Munifacts reported Friday that some firms are working with issuers on a technique referred to as "reverse refundings." It calls for issuers to tender certain outstanding discount bonds and replace them with par bonds to reduce the impact of tax consequences on market discounts and at the same time increase the value of the call for the issuer.

Sources familiar with the situation said the technique would be tried in some cases by institutions trying, to get out of inverse floaters, but that the flattening of the yield curve and the availability the right bonds would be significant hurdles to success. Players also noted finding investors able to take losses might be difficult and that issuers face obstacles in their efforts to re-issue new bonds.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.