Municipals finished yesterday's lightly traded session unchanged after an erosion in Treasury prices siphoned off slight morning gains.
Dollar bond prices had been up 1/8 point heading into noon yesterday, but ended unchanged to a touch higher. High-grades were unchanged. In the debt futures market, the September municipal contract was down 1/8 point at 90 25/32. Yesterday's September MOB spread was negative 390, compared with negative 392 on Friday. In the government market, the 30-year bond ended down more than 1/8 point to yield 7.49%. Yesterday's slightly lower levels came after big swings in the government's benchmark issue last week.
"Municipals don't handle this kind of illiquidity and volatility very well," one trader Said. At least in governments "you can actually trade on the way up and trade on the way down." In municipals, the volatility just results in wider bid and asked spreads, and little gets done, he said.
"I think everybody's focusing on the Denver Airport deal," the trader said.
Lehman Brothers is expected to bring $225 million Denver County and city airport system revenue bonds today. After the Denver deal is done, many believe that the market may as well close and reopen on Friday for the arrival of August employment figures, the next big event.
Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc., said that in addition to the problems caused by volatility, new issues, used as a benchmark for secondary market trades, are down dramatically. Lacking such a benchmark, "the market can get sloppy," he said.
"The calendar and today's visible supply are so low there's nothing to price off in the new4ssue market," Wesbury said. "This is one of the smallest calendars we've seen in a long time. Only holiday weeks are usually this slow."
While rising interest rates have thinned refunding candidates, it's harder to explain the lack of new project financing, the economist said.
'T m really at a loss to find why new [project financing] issues are so low right now," he said. The economist added, however, that with state revenues growing strongly, it's possible the demand for bond financing has fallen.
Turning to Friday's employment report, Wesbury sees a 285,000 rise in nonfarm jobs, somewhat higher than the 230,000 to 240,000 consensus forecast. He also sees the unemployment rate declining to 6% in August from 6.1% in July. Those projections "continue to suggest an economy growing in the 3.5% to 4% range" annually, Wesbury said.
The consensus scale for today's Denver airport issue calls for an 8.10% yield in 2019 and a 7.85% yield in 2024. The 2019 maturity has a three-year call provision, while the 2024 maturity has a 10-year call.
"I think that we are going to have good demand," a source close to the offering said.
Joe Deane, a managing director and portfolio manager of the Smith Barney Shearson Managed Municipals Fund, said he plans to take a look at the Denver Airport offering..
"It's a credit that we still are pretty comfortable with," Deane said. Smith Barney Shearson has about $90 million of Denver Airport paper spread among several fundS, Deane said, adding that such bonds account for about 3% to 3.5% of the fund group's assets.
Asked about confirmed reports that. a grand jury is investigating alleged wrongdoing' at the airport, Dearie replied:
"I think they could investigate any major building project in the U.S .... There's no way of knowing whether there's anything to the allegations,"
The key for Deane is still getting the baggage system working and the airport up and running, he said. With those issues resolved, the current worries will be "definitely moot six months after when the airport opens."
On Friday, the U.S. attorney for the District of Colorado, Henry L. Solano, issued the following release:
"Normally the Department of Justice and the individual United States attorney's offices do not confirm or deny. the existence of any ongoing grand jury investigation, The reason is to protect the rights of those persons or entities under investigation because many investigations are concluded with no charges being filed.
"However, based on prior substantial public news reports, I will confirm there is an ongoing investigation concerning Denver International Airport. Other than that, I cannot comment about the focus or progress of the investigation based on the secrecy requirements of grand jury and protection of the rights of witnesses and potential parties."
In other news yesterday, the 30-day visible supply of municipal bonds totaled $2.39 billion, up $106.7 million from Friday. That comprises $1.34 billion of competitive bonds, up $206.3 million from Friday, and $1.054 billion of negotiated bonds, down $99.5 million from Friday.
Standard & Poor's Blue List of municipal bonds rose $18.2 million yesterday to $1.80 billion.