Comparatively attractive yields drew investors to $2.7 billion in new supply last week, but disappointing economic data depressed prices Friday, putting more importance on the upcoming jobs report.
Friday, the composite index of leading indicators increased 0.6% to 142.2 in April, the third increase in a row. The index rose a revised 0.7% in March, originally reported as 0.5% and 1.2% in February, for a total 2.4% jump in the last three months.
But disappointment hit the Treasury market hard when the Chicago Purchasing Managers Report showed an increase to 47.7% in May from 42.1% in April.
Municipals fell only 1/8 point in sleepy trading, while the government sector plummeted. The June municipal futures contract settled down 5/32 to 92.19 with the June MOB spread calculated at negative 101.
The market had all but ignored the economy over the last two weeks as the primary sector took center stage. But traders note that new supply is beginning to shrink.
Supply had topped the $2.5 billion mark three weeks in a row, but The Bond Buyer 30-day visible is down to $3.1 billion from $3.5 billion a week ago.
As supply dissipates, Friday's employment data became more important as the markets try to decipher whether the economy is slowing down, hit bottom, or is making an upward move.
But William Sullivan, a money market economist at Dean Witter Reynolds, acknowledged that predicting the employment data is a tough call for several reasons, including the return of students to the work force. He said the employment rate is expected to hit 6.8% with non-farm payrolls declining by 100,000.
"The employment numbers aren't going to clear up the issue about the direction of the economy," Mr. Sullivan said. "You're going to see the labor force continue to struggle, but the decline in the payroll report won't be as severe and will probably signal the end of a switfly falling economy. Most people are sensing a turning point arriving."
Mr. Sullivan noted that financial indicators may even indicate another dip in the economy ahead.
"Although some economic indicators are showing a turnaround, we're fearful of a double-dip because the financial indicators have not flashed green at all," he added. "Moribund bank credit, decelerating money growth and flat commodity prices all seem to suggest that the economy doesn't have the where-with-all to sustain a rebound and may be pointing to weakness later in the year."
Secondary acivity was lackluster Friday as trading ended around noon.
In secondary dollar bond trading, Florida State Board of Education 7 1/4s of 2023 were quoted unchanged at 102 7/8-103 1/4 to yield 6.87% to the 2004 par call. New Jersey Turnpike Authority 7.20s of 2018 were unchanged at 101-1/8 to yield 7.01% to the 1999 par call, while Port Authority of New York and New Jersey AMT 6 3/4s of 2026 were unchanged at 96 1/2-5/8 to yield 7.01% to maturity.
In follow-through business, Prudential Securities, senior manager for $300 million Florida Department of Natural Resources Preservation 2000 revenue bonds, reported an unsold balance of $49 million.
BT Securities, senior manager for $125 million Illinois general obligation bonds, reported an unsold balance of $13.9 million.
Short-term note traders reported yields unchanged on the day in light trading.
California notes were quoted at the end of cash at 4.85% bid, 4.80% offered. December New York State Trans were quoted at 4.10% bid, 4% offered.
Prerefunded bond yields were also unchanged. Prerefunded bonds with national names, callable in 1995, were quoted at the end of cash at 5.77% bid, 5.73% offered.
Looking ahead to supply, New York City will come to market with about $600 million tax-exempt and $115 million taxable GOs.
Traders said they expect plenty of demand for the issue, despite the city's budget woes. A maximum yield of around 8.5% to 8.55% was expected, last Friday.
Also to be priced in the negotiated sector are $150 million Rhode Island Depositors Economic Protection Corporation special obligation bonds.
The competitive sector is dominated by $155 million Washington various purpose GO bonds.
Market participants said they expected to see more interest from bond funds and the retail sector as municipal yields continue to look attractive. According to an April report by the Investment Company Institute, tax-free municipal bond funds pulled in $3.2 billion of tax-exempt securities in April alone.