Municipal bond prices picked up 1/4 to 3/8 points overall yesterday, while some aggressively priced new issues managed lure institutions off the bench.
"I guess the real story in all of this is the re-ignition of some institutional interest," said Robert W. Chamberlin, a senior vice president and supervisory municipal analyst at Dean Witter Reynolds Inc. "The overall indication just talking to the syndicate people is [the] Illinois [general obligation offering] sold well, with some indication that a lot of that is just going into stock," Chamberlin said. While Illinois might not be the best name one around, it is still a state name that dealers feel comfortable holding, he said.
Illinois "was a combination of going-away business and dealer stock," a source familiar with the deal said. He estimated that 60% of the offering was placed with permanent investors and about 40% went into dealer stock.
J.P. Morgan Securities Inc., which won the $300 million competitive deal, bidding a true interest cost of 5.8519%, reported a balance of $99 million late in the day. The Illinois offering carded a top yield of 6.15% in 2019. Goldman, Sachs & Co. had the cover bid with a 5.8564% TIC. CS Boston came next with 5.873%, followed by Merrill Lynch & Co. with 5.909%.
Yesterday's other sizable competitive offering, Massachusetts Water Resources Resources Authority's $150 million of revenue bonds had a late day balance of $33 million and drew what Chamberlin called "honest to goodness institutional interest."
Though institutional interest "wasn't overwhelming by any means," the MWRA deal saw demand from property and casualty insurers as well as from bond funds, a source familiar with .the deal said. He added that the offering saw healthy retail interest inside of 10 years.
Chamberlin said what maybe helping to lure institutional investors back into the market are indications of "tempered" economic growth and the perception that it is not a given that the Federal Reserve will raise the federal funds rate at the Aug. 16 meeting of the Federal Open Market Committee.
"People do not feel that they have to be quite as careful now," Chamberlin said. MWRA and Illinois are also good names, he said.
Another municipal analyst observed: "I would say that both Illinois and the Mass waters were aggressively priced."
He added that while neither deal blew out, both had "respectable balances" by day's end.
Goldman, Sachs & Co. won the $150 million MWRA revenue bonds with a TIC of 6.091%. The deal was reoffered to investors at a top yield of 6.12% in 2024.
Officials at the MWRA said they were pleased by the results of yesterday's sale and were impressed with the bids the authority received.
Lehman Brothers had the cover bid at 6.093%. Following Lehman were syndicates led by Merrill Lynch & Co. at 6.115%, Morgan Stanley & Co. at 6.118%, J.P. Morgan & Co. at 6.153%, Bear Stearns & Co. a 6.154%, and Prudential Securities at 6.155%.
MWRA officials viewed the aggressive bidding as a good sign since this was the authority's first foray into the competitive sales market.
"It's always gratifying to have a large number of firms involved in a deal," said Douglas B. MacDonald, executive director of the MWRA. "It is a key for us that the market reinforce their confidence in the progress we are making with the projects."
The MWRA was charged with financing the cleanup of the Boston Harbor and the construction of the Deer Island sewage treatment plant in the mid-1980's.
"We have many more financings to undertake and I think this is a good sign that the investment community is confident in our progress," MacDonald said.
One underwriting source in Boston said that the difference between the winning and cover bid resulted was a mere $2,500 in yearly debt service payments.
"You can say it was a pretty aggressive bidding," the source said.
Some traders expressed surprise that the winning syndicate insured the MWRA bonds. But the underwriting source said that the Municipal Bond Investors Assurance Corp. "very aggressively," pursued the deal.
This was also the first MWRA sale that was insured. MacDonald said that the authority will most likely not undertake another revenue bond sale until spring of 1995.
In negotiated action, a Smith Barney group priced and repriced $375 million of New York State Thruway Authority highway and bridge trust fund bonds. The offering contained serial bonds priced to yield from 3.75% in 1995 to 5.95% in 2011. A 2014 term, containing $53 million, was priced to yield 6.15%. At the repricing, yields in most cases were lowered by five basis points from 1996 through 2009 and in 2014.
Also in negotiated action, Harris County Health Facilities Development Corp. priced $470 million daily variable rate hospital revenue bonds for the Methodist Hospital through senior manager J.P. Morgan. The bonds, due in 2025, have an initial rate of 2.50%.
Margaret D. Patel, a portfolio manager at the Advantage Municipal Bond Fund, said that while yesterday's new issue prices looked high and yields looked low compared to last week's, they fairly represent the current market and will look quite appealing six months from now.
"Municipals are just going to get richer and richer relative to Treasuries," Patel said, "July supply is down 50%, so that trend is intact and isn't going to be reversed." While Patel expects bond yields overall to go higher, the upside in municipals will be limited to "slightly or moderately higher than current levels simply because of the supply constraints," she said.
Though Patel thought yesterday's new offerings came at fair levels, she wasn't a buyer.
"I'm fully invested at this point," she said, "I didn't have any cash to put in."
Patel manages three municipal bonds funds, a national fund as well as a Pennsylvania fund and a New York fund, which total just under $58 million.
Frank Lucibella, a portfolio manager at John Hancock Mutual Funds also held back yesterday.
"I didn't buy anything [yesterday]," Lucibella said,"I just think that this market has gotten a little bit ahead of itself here." Lucibella will wait to see what happens after Friday's July employment and next week's inflation figures. The market receives the producer price index next Thursday and the consumer price index next Friday.
Pricing aside, Lucibella found the structure of some of yesterday's offerings, which included negatively convex bonds, unappealing.
"Most of the deals were structured with par bonds at the long end which don't give you good performance characteristics in a volatile market," he said.
Lucibella manages the $500 million John Hancock Tax-Exempt Income Fund, and the $250 million John Hancock Managed Tax-Exempt Fund.
Turning to secondary activity, yields on high-grade issues improved by three basis points yesterday, while dollar bond prices rose 1/4 point. Trading was active in the morning and tapered off by afternoon.
"There's some decent two-way flow in the street," a municipal trader said, adding that the dealer inventories have diminished in recent days.
"The Blue List came down pretty precipitously in the last few days," he said. Standard & Poor's Blue List declined to $1.56 billion yesterday from $1.88 billion on Friday. The trader added that even though the dog days of summer have arrived retail demand remains "fairly strong."
In debt futures, the September municipal contract settled nearly 1/4 point higher at 92 6/32s. Yesterday's September MOB spread was negative 398, compared to negative 404 on Monday.
Patrick M. Fitzgibbons contributed to this column.
