The biggest jump on the producer price index in nearly four years clobbered the credit markets Friday, knocking municipals down a point, and more in spots.

"There's very little liquidity right now in the municipal market," one trader said. "People are worded about mom and pop going home and reading the paper."

The trader also cited "a lot of 'what its' out there that are keeping people on the sidelines." They include the possibility of arbitrage selling at the third quarter's end, diminished interest from crossover buyers from the taxable ranks, and redemptions at long-term open end funds, the trader said.

Customer lists were fewer than in preceding days, with selling limited to "a couple of the usual suspects in the morning," a second trader said. The trader said accounts probably realized they would just get terrible bids, and decided to forgo the exercise. He added that customers had already done a considerable amount of selling earlier in the week.

While players said light volume on Friday made getting a read on municipal cash difficult, one analyst gauged yields on high-grade issues higher by seven basis points overall, with further weakness seen on the long end. Dollar bond prices fell a point overall to more in spots, he said. Discount bonds were particularly big losers, the analyst said.

"Just as they run to the coupon in a strong market, they run away from the coupon in a down market," he said.

In debt futures, the December municipal contract settled down nearly 1 5/8 points Friday at 87 29/32. The December MOB spread was negative 380, compared with negative 382 on Thursday. The 30-year Treasury bond closed down more than 15/8 points to yield 7.70%.

The overall PPI showed a 0.6% rise in August, much higher than the 0.4% increase economists had expected. The index's core rate, which excludes food and energy, posted a 0.4% rise, versus the 0.3% to 0.2% forecast.

"Certainly it was higher than we had forecasted, and there were a couple of areas that did surprise us," said Michael J. Moran, chief economist at Daiwa Securities America.

Moran said he expected the increase in gasoline and auto.prices, but the increases in coffee and tobacco prices came as more of a surprise.

The surge in coffee prices reflects the "residual effect" of the Brazilian frost, the economist said, while tobacco prices tend to jump around. The tobacco prices increase may be a reaction to declines in those prices reported in the past two months, Moran said.

"I think the bond market is probably looking ahead to the [Consumer Price Index] after this, and looking ahead to a bad report," he said.

Moran said fear is building that the price increases seen in various commodities indexes are feeding their way through to broader measures such as PPI and CPI.

The economist expects tomorrow's consumer price index to show a 0.4% increase in the overall rate, and 0.3% rise in the core rate. That increase should be well built in after Friday, he said.

Turning to the week's new issues, Wednesday's $351 million State of Washington offering tops the competitive calendar. The second biggest competitive deal is Tuesday's Alaska Housing Finance Corp.'s $130 million offering.

On the negotiated side are two New York State Medical Care Facilities Finance Agency deals. Bear, Stearns & Co. will manage a $173 million deal for the agency, while J.R Morgan Securities Inc. will bring a $140 million deal. Austin will also sell $139 million of combined utility system revenue refunding bonds through Bear, Stearns & Co. Also this week, the Tempe Union High School District, Ariz., will sell $101.9 million of school improvement and refunding bonds through Peacock, Hislop, Staley & Given Inc.

Meanwhile, flows into municipal bond funds continued the fiat to negative pattern that has characterized the summer, according to Robert Adler, president of AMG Data Services in Arcata, Calif.

"Net new money coming in has virtually dried up in the municipal market," Adler said.

For the five-week period from the week ended Aug. 10 to the week ended Sept. 7, flows have ranged from flat to $500 million of net redemptions, Adler said. He said the bias probably leans toward some slight net redemptions over the last five week because the number assumes that dividends are reinvested.

In other news Friday, the 30-day visible supply of municipal bonds totaled $2.73 billion, up $843.8 million from Thursday. That comprised $1.23 billion of competitive bonds, down $18.6 million from Thursday, and $1.499 billion of negotiated bonds, up $862.4 million from Thursday.

Standard & Poor's Blue List of municipal bonds was down $25.1 million Friday to $1.69 billion.

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.