Municipal bonds climbed in sympathy with a Treasury rally yesterday that was fueled by a steep drop in oil and other commodities prices.
The value of oil began to decline after the Organization of Petroleum Exporting Countries failed Friday to cut production. Oil prices were also hurt by Iraq's apparent progress in convincing the United Nations to lift the post-Gulf War sales embargo.
Bonds made only marginal gains Friday, thanks to the Thanksgiving Day holiday, but made up for that yesterday. The government market jumped at the opening and municipals followed suit, although tax-exempt trading was termed light. Soon after the opening, the 30-year Treasury bond rose 21/32 to yield 6.19%. Municipal cash was quoted up 3/8 point, while futures rose 14/32 to 102.17.
The cheaper oil prices gave the market enough confidence to ignore existing home sales, which grew 3.6% in October to a seasonally adjusted annual rate of 4.08 million units, according to the National Association of Realtors.
By late morning, tax-exempts were quoted 3/8 to 1/8 point higher as lower commodities prices lent a helping hand. Optimistic traders reported increased business and they cautiously talked the market higher.
"Demand is building for a fewer amount of bonds and it looks like we're going to try to make a comeback," one trader said. "But nobody is making a big bet on the long side yet."
Indeed, profit takers took the market off the highs by mid-afternoon, partly in anticipation of signs of economic strength from this week's slew of indicators.
Traders termed action light overall and prices were quoted 1/4 to 3/8 point higher, on average, by session's end.
In secondary dollar bond trading, Los Angeles Wastewater FGIC 5.20s of 2021 were quoted at 5.57% bid, 5.52% offered; Orange and Orlando FGIC 5 1/8s of 2020 were quoted 5.52% bid, 5.48(%) offered; and Florida State Board of Education 5 1/8s of 2022 were 94 7/8-95 1/8 to yield 5.48%.
Also, Chicago O'Hare MBIA 5s of 2018 were quoted at 5.60% bid, 5.57%. offered, and Chicago GO FGIC 5 1/2s of 2024 were 5.68% bid, 5.65% offered.
In the debt futures market, the December municipal contract settled up only 4/32 at 102.07, after posting a high of 102.23. The MOB spread widened to negative 447 from negative 446 on Friday.
In the short-term note sector, yields were mixed on the day. In late secondary trading, California Rans were quoted at 2.55% bid, 2.50% offered; New York City Tans were quoted at 2.55% bid, 2.50% offered, and Pennsylvania Tans were 2.50% bid, 2.45% offered.
The note market has recently seen good demand from institutional money managers, observers said, who have parked cash in the short end. Notes are currently trading at 72% of Treasury bills, which is the richer end of the historical range, according to one market player. "Normally, these levels only occur during the ~squeeze' months of January and July, when coupon payments, maturities and redemptions cause the market to trade on scarcity value," he noted. The strong demand for short paper has depleted supply, he said, which means investors are likely to snap up $1.3 billion of New Jersey notes, slated for sale later this week.
The issue is to be sold competitively and dealers will be able to bid the securities as weekly floaters, PSA Index notes, and/or fixed maturity notes.
Looking ahead, the market has still to face the bulk of the week's issuance and many economic indicators, which some players note will probably make for choppy going. More optimistic players say the market will be supported by stronger demand from traditional investors, who will be forced back into the market after a long absence.
As the administration of New York City mayor David N. Dinkins draws to a close, city finance officials are planning to sell about $1.5 billion in debt before the end of the year
The sales, which will come in a variety of structures, will probably occur before the new mayoral administration of Rudolph Giuliani takes over on Jan. 1.
Finance officials say the city on Dec. 7 is expected to issue at least $600 million in general obligation bonds, largely for new-money purposes. The city is expected to include in the offering at least $80 million in variable rate 30-year bonds, and $50 million in small denomination NYC Bonds, which are tailored for retail investors. Prudential Securities will serve as senior manager on the deal.
The long-term variable rate sale marks the second such issue in which the city has used an "evergreen facility." This feature, offered by letter of credit providers, allows the city to issue long-term floating rate securities.
In the summer, the city reached what one city official called "a break-through," when Chemical Bank and several others allowed the city to use its letter of credit on 30-year city bonds to create long-term floating rate securities. In the past, the city could use the LOCs only on short-term variable rate securities. Under the terms of the evergreen facility, the city can issue 30-year variable rate debt, while the banks renew their LOC commitments every three or five years, the official said.
New York City official said the city is negotiating with banks to have them write LOCs on an additional $150 million in long-term GO debt, which could expand the deal to $750 million. The $150 million will refund three and five year variable rate debt that will mature in the next two to seven years, allowing the city to reuse these LOCs to sell more 30 year floaters.
On Dec. 14, the city is planning to sell about $400 million in bonds through the New York State Dormitory Authority to finance the costs of state-mandated court improvements. The deal was recently revised to eliminate several derivative products, after the state legislative officials challenged the agency's authority to issue three municipal derivative products. The products were recommended for sale by officials in the city's Office of Management and Budget.
Also before the end of the year, the city's water authority is considering a commercial paper sale of $200 million to $500 million, and the city's Health and Hospitals Corp. may issue refunding and new money debt. The water authority mailed a request for proposals on the proposed paper sale last week. Officials at the Health and Hospitals Corp. did not return telephone calls regarding the potential hospital offering.