Tax-exempts suffer indicator catatonia; question: will PPI have poisoned CPI?

September 13, 1994, 1:00 a.m. EDT 4 Min Read

Municipals ended unchanged to down 1/8 point yesterday as the market held its breath ahead of today's August consumer price index report.

The "market's sideways," one trader said. "No one's going to do anything before an important fundamental number."

Yields on high-grade issues were unchanged at the close of yesterday's lightly traded session, while uncertainty trimmed 1/8 point from dollar bond prices, a municipal analyst said. Customer selling was limited.

"There's been a few retail lists, but nothing overwhelming," one trader said.

In debt futures, the December municipal contract settled up nearly 1/8 point yesterday to 88. The December MOB spread was negative 377, compared with negative 380 on Friday. The 30-year Treasury bond was down nearly 1/8 point to yield 7.70%.

The consensus of economists and analysts calls for today's CPI report to show a 0.4% rise in the overall rate, and a 0.3% rise in the core rate. Today's news comes after the producer price index, another inflation barometer, cost municipals a point or more in spots on Friday.

Friday's August PPI showed 0.6% rise overall, and a 0.4% rise in the core rate, which excludes volatile food and energy prices. The 0.6% rise marked the biggest jump in nearly four years.

"There was a pyschological impact more than anything else to that," a municipal analyst said. "I think everybody was convinced that [the rise in the PPI! was going to be 0.4%."

Sentiment was divided on how the market would react if today's CPI report arrives on consensus, with some municipal market players expecting a "relief" rally, and others envisioning an unchanged to slightly lower market.

Another trader said municipal players are likely to view a favorable number as a selling opportunity.

"I think the number will be used, if it's a good number, to be sold into," the trader said. While the more liquid Treasury market offers greater maneuvering room, in the municipal market, especially after a bad day like Friday, "everybody just gets trapped."

While Friday's municipal selloff was overdone, buyers aren't rushing in either, he said.

"We are a little bit oversold, but at the same time we aren't overbought," the trader said.

The funds may be experiencing some redemptions, he said, and retail investors are likely to be scared off by what they see in the popular press.

"Markets like this really spook retail," he said.

The trader doesn't see a favorable CPI number sparking much of a rally in the Treasury market either.

"I don't think we are going to rally to a 7.50% [yield on the long bond]," he said. A unfavorable number could mean a replay of Friday, the trader said.

"I think we could perhaps test a 7.80% level," he said.

The trader said he was among those who bought into the argument that municipals would outperform Treasuries because the shortage of new supply shortage put munis on good technical footing.

"We all got duped into the technical play," he said. "We're outperforming, but we're still going down."

The trader added that while he hates to say it, a "tidal wave" of sentiment is building that another tightening of money policy is not far off. Friday's PPI number was a big scare, he said. While the index reports what is essentially old news and the Aug. 16 tightening move needs time to work, the Fed is likely to feel pressure to act. The trader, however, thinks any move will come later rather than sooner, he said.

"I think the Fed, if anything, will err on waiting a little bit longer," the trader said. With some congressional seats up for grabs in November, the central bank will likely remain on hold for as long as it can, he said.

Robert W. Chamberlin, a senior vice president and supervisory municipal analyst at Dean Witter Reynolds Inc., proved more optimistic about retail investors than the trader. With Treasuries trading at the cheap end of the range they've occupied for the past three months, once the market gets by today's CPI number, even if it comes in bad for the market, retail buyers could jump back in.

"With governments so cheap, it will bring back retail interest," Chamberlin said. Despite the battering the market sustained following Friday's number, and the difficulty it may see today, some forecasts see growth slowing for the remainder of the year.

Provided no doomsday scenario unfolds that would completely undermine the market, "I think we are presently in a range where things can get done," Chamberlin said.

On the new-issue front, a J.P. Morgan group priced and repriced a three-part New York State Medical Care Facilities Finance Agency revenue bond offering totaling roughly $140 million. Top yields ranged from 6.674% in 2024 for Series E, 6.35% in 2010 for Series F, and a FGIC-insured 5.75% in 2005 for the Series G piece. The bonds have an underlying rating of "Baal" from Moody's Investors Service, and a BBB-plus rating from Standard & Poor's Corp.

"I guess I would call it a fair sale," a source familiar with the offering said, adding that he expects good follow-through business. The agency decided to bring the deal yesterday because it wanted to ensure the sale was completed before Thursday, when Yom Kippur is observed, he said.

Turning to competitives, a $130 million Alaska Housing Finance Corp. offering is expected today. Tomorrow, Washington State is expected to sell $350 million of bonds.

In other news yesterday, the 30-day visible supply of municipal bonds totaled $2.81 billion, up $86.9 million from Friday. That comprises $1.599 billion of competitive bonds, which is up $369.9 million from Friday, and $1.215 billion of negotiated bonds, which is down $282.9 million from Friday.

Standard & Poor's Blue List inventory of municipal bonds was down $44.7 million yesterday to $1.65 billion.