The bulls that charged through the tax-exempt market last week took a breather yesterday, but the tone remains strong as traders anticipate a Fed ease and further good news from Friday's inflation data.

Weak employment data Friday convinced the market that the federal funds rate would be lowered 25 basis points to 5% this week. Activity was minimal yesterday compared to last week, and traders said the market is content to glide into Friday's data.

Bond prices managed 1/8 point gains in spots, while short-term note yields dropped 10 basis points on average in thin trading.

Investors still have plenty of cash, traders said, and demand remains strong on all fronts as municipals remain attractive to other instruments, despite lower rates.

"The market has talked itself into an extremely bullish psychology," acknowledged James L. Kohan, head of fixed-income research at Robert W. Baird & Co. "Investors are getting hurt by lower interest rates in other instruments. It would take a couple of bad numbers to knock this market off the top."

Reflecting that strength, the December muncipal futures contract settled up 5/32 to 95.05 yesterday, with the December MOB spread calculated at negative 168.

In light new-issue activity, Seattle-based Security Pacific Securities Inc. as sole manager tentatively priced $50 million Washington general obligation college savings bonds.

The offering consisted of zero coupon bonds only, tentatively priced to yield from 5.60% in 1998 to 6.60% in 2011.

The bonds are non-callable and rated double-A by Moody's Investors Service, Standard & Poor's Corp., and Fitch Investors Service.

A Security Pacific officer said late yesterday that the order period will be terminated Wednesday and that the bonds were being offered only to in-state residents.

Secondary activity was limited to a smattering of small bid-wanted lists and odd lots in light trading. In secondary dollar bond trading, traders said some bonds improved 1/8 point in spots in light trading.

East Bay California 6 1/2s of 2016 were quoted at 99 3/8-99 3/8 to yield approximately 6.55%. New York State LGAC 7s due 2021 were quoted at 99 3/4-100 to yield 6.99%. Insured Triborough Bridge and Tunnel Authority 6 5/8s of 2017 were quoted at 99 1/2-lock to yield 6.66%.

National traders reported a thin secondary inventory and light dealings yesterday.

Standard & Poor's Corp.'s Blue List of municipal bonds totaled $1.28 billion yesterday, down $8.9 million from Friday and $120 million from last Monday.

The market will get a momentary break from the deluge of new supply that has flooded the primary sector over the last month. The new-issue slate is lighter this week, with The Bond Buyer's 30-day visible supply falling $322 million yesterday to $2.07 billion.

In other action, short-trm note yields fell as much as 10 basis points yesterday in thin trading.

Note traders said that the market is very thin, with few floating rate securities around.

In late secondary trading, Los Angeles notes were quoted at 4.18% bid, 4.15% offered, while March New York State Trans were quoted at 4.90% bid, 4.85% offered. Texas notes were quoted at 4.18% bid, 4.15% offered and Pennsylvania paper was quoted at 4.22% bid, 4.20% offered.

New York City will tap the short-term sector tomorrow with a $1.25 billion offering of GO revenue anticipation notes, to be priced by Goldman, Sachs & Co.

Traders said they expected plenty of demand for the paper. In light trading late yesterday, New York City Tans, rated MIG-1, were quoted at 4.25% bid, 4.20% offered.

In addition, the city received some heartening news from two rating agencies yesterday.

Standard & Poor's Corp., which rated the last Ranoffering SP-2, boosted the city's rating to SP-1 on the new offering. The rating agency also affirmed the city's GO bond rating at A-minus with a negative outlook.

Moody's affirms its MIG-2 rating, while Fitch Investors Service assigned an F1-plus to the notes, its highest short-term rating.

In the prerefunded sector, yields dropped about five basis points on the day. Prerefunded bonds with national names, callable in 1995, were quoted in late cash trading at 5.18% bid, 5.15% offered, while bonds callable in 1996 were quoted at 5.25% bid, 5.20% offered.

Negotiated Pricings

William R. Hough as senior manager priced $42.4 million Monroe County, Fla., sales tax revenue bonds.

The offering was comprised of serial bonds only, and priced to yield from 4.50% in 1992 to 6.25% in 2004. The bonds are backed backed by the Municipal Bond Investors Assurance Corp. and rated triple-A by both Moody's and Standard & Poor's Corp.

PaineWebber Inc. as senior manager tentatively priced a $26 million Maine Municipal Bond Bank offering.

The issue included series D bonds tentatively priced to yield from 4.70% in 1992 to 6% in 2001, and series E bonds tentatively priced to yield from 4.70% in 1992 to 6.50% in 2006 and 6.60% in 2011.

The bonds are rated Aa by Moody's and A-plus by Standard & Poor's.

Ratings News

Moody's reported yesterday that of 121 revisions that were made to bond ratings during the third quarter, 80 ratings were raised and 41 were lowered.

The changes affected about 5% of rating activity, Moody's reported, totaling over $13.5 billion. Some $8.4 billion in bonds saw ratings improve, while $5 billion were lowered.

Moody's noted that the favorable ratio of upgrades to downgrades during the third quarter was significantly affected by upgrades assigned to 26 single- family bond programs of state housing agencies.

To date, Moody's has assigned over 6,100 municipal bond ratings, and 317 were revised, affecting about $45 billion of debt. Of that total, 175 ratings were raised, affecting about $20 billion, while 142 were lowered, affecting over $25 billion.

Volume at a Glance

Long-Term Municipal issues ($ Bil.)

(Private Placements EXCLUDED)

January 7.75 120.80

February 11.88

March 11.02

April 11.79

May 11.79

June 15.25

July 12.76

August 17.61

Sept. 13.12 Year Year

October 1-4 1.48 To Date Earlier

Source: Securities Data Co./Bond Buyer

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