Tax-exempt bond prices continued to move in a very narrow range last week and traders are not expecting any significant change over the next couple of weeks.
Although long-term yields have been gradually declining for the last five weeks, the recent heavy municipal supply and a stubborn government bond market have capped any meaningful rally. Last Friday, traders said that they are not expecting any significant price gains until after the Treasury refinancing in August.
traders pointed out, however, that municipals have been outperforming governments over the last five weeks, with tax-exempt yields falling 10 to 15 basis points compared to only a three basis-point drop for Tresuries in the cash markets. The same is true in the debt futures markets where the MOB -- municipals over the government bond -- has improved to negative 64 at last week's close from negative 90 on June 13. And some futures analysts are predicting a positive MOB before the government's August refunding.
Right now, the municipal markets appears to be "positioned better," a GO serial bond trader suggested Friday. There has been and there will continue to be heavy supply, but "there are enough buyers to absorb it," he argued. Governments are another story and dealers are worrying about who is going to take the massive doses of securities, he added.
In any event, municipal bond traders were in basic agreement late last week the municipals will continue to outperform governments until after the August refunding. If Treasuries register any sharp price declines, tax-exempts will signficantly outperform them, they reasoned.
On the economic front, Philip Braverman, chief economist and senior vice president at DKB Securities Corp., said Friday that the recent data indicated economic recover, but did not resolve continuing doubts over the recovery's sustainability and that it is "still vulnerable to slipping back to a recession."
But the "key element" in the government market is supply, Mr. Braverman said. Over the next three weeks there will be $71 billion in one-year bills and coupons and the "market is telling us something because it's not giving up ground." If not for the supply, "the government market would be up on the good inflation data and quality concerns," he argued.
Dealers do not fear the recovery because it is a weak one, and inflation is modest, Mr. Braverman said, pointing to the Commodity Research Bureau index now down to 208.7. The CRB normally shows a bubble in the early stages of a solid recovery, he pointed out.
Mr. Braverman said he expects the government rally to begin a sustained rally after the big August supply. He is looking for a 1% drop in interest rates with the yield on the 30-year bond eventually falling to 7 1/2%.
As for this week's data, Mr. Braverman is looking for a 1% decline in durable goods orders to be released on Wednesday and a sanpback in initial unemployment insurance clains on Thursday. He is alsoc callin for a "short-lived" 0.5% rise in second quarter real GNP on Friday.
Activity was extremely light in the tax-exempt secondary on Friday. Some traders suggested that after hearing the weather forecast, predicting close to 100 degree temperatures, many traders with vacation time decided to stay home.
Dollar bonds were essentially unchanged, but a couple of issues did manage to inch 1/8 point higher. There were some New Jersey Turnpike Authority 7.20s of 2018 out for the bid and the 103 bid was proven, one trader said. The late market was quoted at 103-103 1/2 to yield 6.60% to the 199 par call and 6.62% to the premium call in 1993.
In other dollar bond activity, New York LGAC 7s of 2016 were at 96 1/2-5/8 to yield and South Carolina Public Service Authority 7.10s of 2021 were at 99 3/4-par to yield 7.10%
Syndicate price restrictions were removed from Wednesday's Phoenix, Ariz., term bonds with the 6 1ss of 2011 quoted in the free market at 95 3/4-96 to yield 6.87%.
In the note market, yields moved up one or two basis points, traders said, but trading was at a standstill. The market for New York State March tax and revenue anticipation notes was quoted at 5.47% bid, 5.43% offered. New Jersey notes were at 5.15%, 5.13%. And Los Angeles County notes at 5.13%, 5.10%.
This week, long time volume will subside from last week's 1991 high of $3.6 billion, but there is still a formidable $2.3 billion on tap.
Florida State Board of Education tops the competitive calendar, with $200 million on Wednesday, and Minnesota is up tomorrow with $190 million, bot GO bond sales.
In the negotiated sector, a Lehman Brothers account is expected to price $200 million Puerto Rico Electric Power Authority avenue bonds.