It appears there is at least one and possibly two bulls in Yellowstone Park.
Joe Deane, a managing director and portfolio manager of Smith Barney Shearson Managed Municipals Fund, thinks current sentiment in the bond market is "way too negative."
"I think people are still very concerned, very cautious, in fact they're probably scared to death, but somewhere in here, maybe not right away, you might get a positive piece of news about the bond market." Should that happen, the bears' short positions are going to get squeezed, Deane said, and if there's one "real nasty trade" left in 1994, it could be when "a violent rally kills the shorts." If the bears are right, they won't be right by much, but if they are wrong, they are going to be wrong "big time," Deane said.
While Deane doesn't subscribe to it, he said he understands the bears' sentiment.
"Traders on the street have had such a difficult year, and as you get toward the end of the year they're most likely going through battle fatigue, and I can't blame them," Deane said, "It's been a tough year for everybody."
But while no one can predict for sure where the bottom is, "when you start to feel like you are in the neighborhood, you have to start positioning yourself because the market is trading extremely thin," Deane said,
"And at some point in time, if this market ever takes off, you're not going to able to buy squat. That's why between now and yearend, I don't care what economic number comes out, you won't catch me short in this market," he said.
Deane noted the 30-year Treasury bond's yield hit the 7.50% level in an intraday trade on April 4. Yesterday, the long bond posted a closing yield of 7.88%
As for the economy, "it's doing pretty well, but it's not going crazy," Deane said.
"I think he's right on target," said Robert W. Chamberlin, senior vice president and supervisory municipal analyst at Dean Witter Reynolds Inc. Chamberlin noted that in October of 1993 Deane recognized that governments had peaked and shortened up his portfolio "so he's a man I would be inclined to pay attention to."
At present, Chamberlin said, the municipal market is indeed bearish. "I think the market is decidedly bearish, and it is bearish because the Treasury market is bearish, and we really can't go sailing off all by ourselves."
The analyst added, however, "there is no question but that our market is high priced, and is going to stay high priced for exactly the same reasons that we've been citing for most of 1994."
Those reasons include "the continuing strangulation that we've got in new issue supplies," and the money that is drawn out of the market each time advance refunded bonds mature.
The market is "just getting tighter and tighter on technicals," Chamberlin said.
The problem is that with the market continuing to get "socked by positive news," it's difficult to convince retail of the value, he said.
"We're simply telling retail that the time to buy bonds is when others are not," Chamberlin said.
A trader said it's possible that Deane's prediction about shorts could come true, but it would take a lot to jolt the market from its current negative bias.
"It's certainly possible when everybody's leaning to one side if something happens to come the other way it can cause real problems," the trader said, "But I think inside of that there's still a scenario that we're in a bear market."
Bearish sentiment runs so deep, he said, "that it would take a tremendous number on the other side or a series of numbers to get the shorts to really cover." Because the bearish sentiment is so ingrained, "I'm not so sure [Deane is] right," the trader said.
As for yesterday's session, secondary activity was light, with yields on high-grade issues higher by roughly three basis points, and dollar bonds losing 1/4 to 3/8 points.
Some traders, however, judged the market down 1/2 point to more in spots.
"I'd say in some discount names you're down a point, and in more popular items your definitely [down] every bit of a 1/2," one trader said, adding,"I get the impression some folks threw in the towel today."
The trader said he thinks the current levels are ones the market was supposed to have seen already, and municipals may just be catching up with Treasuries.
"I guess our market's reflecting lack of interest in fixed income that we've seen in the taxable markets."
A second trader said that anywhere one looks the market is getting hit with more economic news that shows a stronger economy and points toward higher inflation.
While the market largely ignored yesterday's 0.6% gain in the index of leading indicators, news from automakers and the Johnson Redbook Retail Sales report fed jitters ahead of Friday's employment report.
In the primary market, a municipal analyst described yesterday's deals as "remarkably strong" overall.
In debt futures, the December municipal contract closed down more than 1/2 point at 86 23/32. Yesterday's December MOB spread was negative 372, compared to negative 364 on Monday.
Today's competitive calendar features $160 million Maryland general obligation bonds and $100 million Port Authority of New York and New Jersey revenue bonds. On the negotiated side, a Dillon, Read & Co. group is bringing $240 million highway bridge and tunnel trust fund bonds.
In other news yesterday, the 30-day visible supply of municipal bonds yesterday totaled $3.03 billion, up $127.6 million from Monday. That comprised $1.682 billion of competitive bonds, up $51.6 million from Monday, and $1.351 billion of negotiated bonds, up $76 million.
Standard & Poor's Blue List of municipal bonds dipped $60.7 million yesterday to $1.92 billion.