Supply pressure increased yesterday as forward supply hit highs not seen since 1985, and prices fell as a result.
The market had already suffered losses of as much as 1/2 point last Friday as the Street cheapened bond prices ahead of this week's new-issue calendar totaling $6.7 billion.
Supply increased considerably again yesterday when The Bond Buyer calculated 30-day visible supply at $8.15 billion. Yesterday's total was the highest since Nov. 11, 1985, when it totaled 8.19 billion, as issuers rushed to beat tax reform laws of 1986.
Prices that had opened 1/8 to 1/2 higher in sympathy with a higher Treasury market withered by mid-session, as the impact of the pending avalanche of supply hit the Street. By session's end, bonds were quoted down 1/8 to 1/4 point on average, but as much as 1/2 point, depending upon the name.
In the debt futures market, the December municipal contract settled down 5/32 to 97.09.
The December MOB spread widened to negative 288 from negative 272 Friday as Treasury prices rose and tax-exempts fell. The December MOB spread achieved the widest spread yet for that contract.
Meanwhile, the September contract settled down 4/32, to 98.10, and the September MOB spread was calculated at an all-time low of negative 296, the lowest ever for any contract.
"Futures prices were reflective of the supply pressure," said David Johnson, high-yield fund manager at Van Kampen Merritt. "It's a little scary, although it's hard to say whether municipals will suffer as much as they did last month, but the depth of buyers is not there."
Municipals fell around four points in as many days about one month ago as a wave of new deals caught the Street at high price levels.
Near the end of last week, traders said a firm Treasury market would be key support for municipals as new issues were priced.
The government market yesterday managed to close in positive territory, but traders noted that the taxable sector seemed weaker than expected, another bad sign for municipals, they added.
Tax-free secondary activity was muted during most of the session, but late in the day, traders said an insurance company released a bidwanted list totaling around $186 million, indicating building selling pressure.
"There is a real negative psychology out there and nobody is really willing to test it," said one trader. "You want to be light-footed in this market, stay in high-demand areas, be real selective trading from the long-side, and try to remain liquid."
Market sources said that the day's new issues saw mixed results and yields were expected to be raised on some deals in order to generate more investor demand.
Reflecting the effect of supply pressure in the primary sector, $113 million of Hennipin County, Minn., revenue refunding bonds, rated triple-A by both Moody's Investors Service and Standard & Poor's Corp., were tentatively priced 15 to 20 basis points higher in yield at the long end compared to Friday's triple-A scale, traders said.
Miller & Schroeder Financial priced the offering, which included serial bonds priced at par to yield from 2.80% in 1993 to 5.60% in 2004. A 2007 term was priced as 5 5/8s to yield 5.90% and a 2010 term, containing $27 million of the loan, was priced as 5 3/4s to yield 6%.
In other new-issue action yesterday, Kemper Securities as senior manager tentatively priced $208 million of Cook County, Ill., GO bonds.
The offering included serial bonds priced to yield from 2.90% in 1993 to 6% in 2007. A 2011 term was priced as 6 1/8s to yield 6.3061%; a 2014 term was priced as 6 1/8s to yield 6.24%; a 2019 term, containing $51 million of the loan, was priced as 5 1/2s to yield 6.2405%; and a 2022 term was priced as 5 1/2s to yield 6.3009%.
Bonds in 1994-2007, and 2019 are insured by Financial Guaranty Insurance Co., and bear triple-A ratings from Moody's, Standard & Poor's, and Fitch. The 2011 and 2022 term maturities are rated Al by Moody's and A-plus by Standard & Poor's and Fitch.
Goldman, Sachs & Co. as senior manager priced and repriced $153 million of Rhode Island Housing and Mortgage Finance Corp. homeownership opportunity bonds.
The final reoffering scale included serial bonds priced to yield from 3.15% in 1993 to 5.45% in 2000. A 2019 term bond was priced as a super sinker at par to yield 5.90%, a 2022 term was priced as 6 1/2s to yield 6.51%, a 2025 term was priced as 6.05s at par as a super sinker, and a 2027 term, containing $65 million of the loan, was priced as 6 1/2s to yield 6.51 %.
The bonds are rated Aa by Moody's and AA-plus by Standard & Poor's.
Potter Shupe & Associates tentatively priced $99 million of Allegheny County Sanitary Authority, Pa., sewer revenue bonds.
The offering included serial bonds priced to yield from 2.85% in 1993 to 5.65% in 2003. A 2012 term, containing $39 million of the loan, was priced as 6s to yield 6.109%. a 2015 term was priced as 5 3/4s to yield 6.11%, and a 2016 term was priced as 5 1/2s to yield 6.101%.
The issue is insured by Financial Guaranty Insurance Co. and triple-A rated by Moody's, Standard & Poor's, and Fitch Investors Service.
In follow-through business, Goldman, Sachs & Co. priced $389 million of New York Local Government Assistance Corp. bonds.
In late secondary trading, the 6s of 2018 were quoted at 96 1/2-bid to yield approximately 6.27% on the bid-side. The bonds were originally priced to yield 6.28%.
First Boston Corp. freed $216 million of Connecticut GOs from syndicate restrictions.
Traders said that bonds in 2009 were trading at the net bid, less 1/8.
Traders reported moderate bidwanted activity, although there were some sizable blocks of bonds changing hands.
In secondary dollar bond trading, Chicago AMBAC 5 7/8s of 2022 were quoted at 94 3/4-95 1/4 to yield 6.26%, Puerto Rico GO 6s of 2014 were quoted at 96 3/8-5/8 to yield 6.30%, and Florida Board of Education 6s of 2022 were quoted at 98 1/4-5/8 to yield 6.12%.
Short-term note yields were unchanged to five basis points higher on the day, traders said.
In late action, Los Angeles tax and revenue anticipation notes were quoted at 2.99% bid, 2.90% offered, Texas Trans were quoted at 2.99% bid, 2.92% offered, and Wisconsin notes were quoted at 3% bid, 2.95% offered. New York State Trans were quoted at 3.05% bid, 3% offered.