Selling pressure increased yesterday in the face of the first of the week's hefty slate of new issues.
Traders said bids were markedly weaker than late last week, when municipals first showed serious signs of a selloff in the face of nearly $10 billion of new supply. Among the issuers coming to market is New York City, with roughly $700 million of general obligation bonds slated for sale today.
Prices opened mixed in quiet trading amid increased bid-wanted flow. But trading was dull as players waited in a vacuum for new issues to reset the market.
The outlook for municipals grew dark in July after an expected increase in demand from cash heavy bond funds failed to materialize.
Market conditions worsened enough yesterday for Wisconsin officials to withdraw $283 million non-callable general obligation refunding bonds from the primary market - the first deal to be pulled on this downtick.
A syndicate led by M.R. Beal & Co. had tentatively priced serial bonds to yield from 2.30% in 1993 to 5.30% in 2012. The managers said they expected the bonds to be rated double-A by Moody's investors Service and Standard & Poor's Corp.
Futures prices, meanwhile, opened unchanged, but headed lower by mid-morning as the supply pressure and dearth of buyers continued to feed the bears.
Tax-exempts suffered an additional jolt when the Treasury market turned south from its recent highs, thanks to rising commodities prices.
Governments recovered because there was plenty of investor demand at the price dip. But any losses in that market send shock-waves through the tax-exempt arena because municipal prices are dependent on Treasuries as the market prepares to shoulder nearly $10 billion of new issues expected to be priced this week.
Municipal prices gapped down throughout the session and were quoted down 1/4 point on average, but some dollar bonds fell as much as 3/4 point and high-grade yields were up five basis points on the day.
Debt futures also dropped, sending the MOB spread to another record low. The September municipal contract settled down 7/32 to 101.30. The MOB spread widened negative 450 from negative 448 Friday.
Reflecting the weakness in the cash market, bonds that freed from last week's deals generally sank in price in secondary trading.
Merrill Lynch & Co. freed $1.1 billion Puerto Rico Highway and Transportation Authority highway revenue and revenue refunding bonds from syndicate restrictions.
The 5 1/2s of 2019 were quoted late in the day at 5.71% bid, less 1/2, while the 5 1/4s of 2021 fared slightly better, priced at 5.72% bid, less 1/8 to the net. The 5 1/4s were originally priced to yield 5.72% and the 5 1/2s were originally priced to yield 5.71%.
In other action, Goldman, Sachs & Co. freed $572 million Salt River Project, Ariz., refunding revenue bonds to trade.
The 5 1/4s of 2019 were quoted at 5.50, less 3/4, less 1/2, where they were originally priced to yield 5.50%.
Finally, Morgan, Stanley & Co. freed $223 million East Bay Municipal Utility District water system subordinated revenue refunding bonds from syndicate restrictions.
The 5 1/4s of 2019 were quoted at 5.67% bid, 5.65% offered. Those bonds were originally priced to yield 5.62%.
Away from the dismal short-term prospects for municipal prices, some observers insist investors will have cash to put to work from heavy bond calls and municipals will recover.
"We suspect the municipal bond market will begin to outperform Treasuries over time," said George D. Friedlander, managing director of Smith Barney, Harris Upham & Co.'s fixed income portfolio strategy group.
"Rate-shock will eventually give way to the crying need of investors to put cash to work, particularly as a result of continued heavy bond calls," Friedlander said.
"Individual investor rate shock tends to recede once investors become accustomed to a new lower level of rates - particularly in an environment where alternative investments also seem pricey, and the yield on cash equivalents remains painfully low," he said.
But the continued decline in long-term fixed income yields has pushed up supply and depressed demand for the moment.
The Bond Buyer's 20- and 11-bond indexes have been under 6% for 23 consecutive weeks, which has not occurred since all of 1977 and the first 20 weeks of 1978.
Looking ahead to supply, The Bond Buyer calculated 30-day visible supply at $8.6 billion, a formidable mark.
Refunding volume has already broken through the $100 billion barrier, coming in at $103.62 billion as of July 16, a 72% increase over the same period last year when it totaled $60.25 billion. For all of 1992, a record year for refundings, the total amount of deals was $117.25 billion.
The second quarter of 1993 was the second heaviest on record, with $80.49 billion issued, trailing only 1985's fourth quarter when $110.16 billion was sold.
Since the fourth quarter of 1991, quarterly volume has not been below $50 billion.
Traders reported more bid-wanted flow, but few bonds were changing hands in the suffering market.
As a result, secondary supply has been on the increase as reflected by The Blue List of dealer inventory, which rose $58.7 million yesterday, to $1.79 billion.
In secondary dollar bond trading, prices were quoted down 1/13 to as much as 3/4 point, depending upon the name, traders said.
In late action, Cook County, Ill., GO MBIA 5 3/8s of 2018 were quoted at 5.75% bid, 5.74% offered; WPPSS MBIA 5.60s of 2015 were quoted at 5.79% bid, 5.74% offered; and New York LGAC 5 1/2s of 2018 were quoted at 5.74%s bid, 5.72% offered.
In short-term note action, yields were unchanged to slightly better on the day, after selling off last week, traders said.
In late action, Iowa notes were quoted at 2.95% bid, 2.90% offered and New York State notes were quoted at 2.47% bid, 2.40% offered.
New York City is expected to price $675 million in general obligation bonds today. The offering will be underwritten by a syndicate group led by First Boston Corp.
Moody's affirmed its Baa 1 rating in conjunction with the sale. Standard & Poor's affirmed its rating on city GOs at A-minus with a negative outlook. And Fitch Investors service, in a first, rated the city's GOs, tagging them with a A-minus.
The deal, according to market sources, is expected to include $225 million of fixed-rate current interest bonds, down from the $525 million slated for sale on the city's preliminary official statement dated July 9.
Preliminary price talk yesterday called for a maximum yield of 5.90% on the longest fixed-rate bonds.
But traders decried that level, noting that outstanding bonds were trading at 5.95% or 6% on Friday, before the market dropped another 1/4 point.
Other market players said that because the issue could include a sizable number of derivative products, an aggressive price for fixed-rate bonds could be set.
The issue is also expected to feature $70 million in NYC BONDS, $100 million in adjustable rate bonds, and an unspecified amount of derivatives, bond dealers familiar with the transaction said.
Prudential Securities Inc. will serve as senior manager for the $70 million of NYC BONDS. This is the fourth time since March of 1992 that the city has offered the bonds. The program was designed to diversify the city's investor base and attract small retail investors. The mini-bonds are sold in small denominations.
The offering will bring to $360 million, or $725 million upon maturity, the total of NYC BONDS sold to investors, according to a joint press release from Mayor David N. Dinkins and city Comptroller Elizabeth Holtzman.
Mayor Dinkins and Comptroller Holtzman also said that the city increased the size of the NYC Bonds by $20 million to total about $70 million because of "exceptional interest" in these securities.
The city also plans for the first time to sell variable rate debt maturing in 20 and 30 years using letters of credit. Letters of credit were secured from a number of banks, including Chemical Bank, Morgan Guaranty, and the Industrial Bank of Japan, according to the press release.
Market sources on the deal said the city is likely to sell between $100 million and $200 million of derivative products.
The city considered 11 proposals for derivatives after passing out a request for ideas late last month. But sources close to the deal said the city would rely on products that it has used in the past.
Proposals for step-up floating rate bonds, that use different formulas to calculate interest rates during different years, and for a variety of non-traditional swaps, will be left on the drawing board, sources said.
Instead, the city will consider auction-based inverse floating rate bonds, swap-based floating rate bonds and other "tried and true" structures, a source said. Final decisions on the derivatives will be made at the pricing today.
Municipal Market Data
General Obligation Yields
Figures are for 4:30 p.m. EST, July 16, 1993. These data are provided by Municipal Market Data, (617) 542-2277, and are considered proprietary. Although they have been obtained from sources considered reliable, there is no guarantee of completeness or accuracy. AAAYear AAA (ins) AA A1994 2.40 2.60 2.50 2.651995 3.15 3.35 3.25 3.401996 3.55 3.75 3.65 3.801997 3.85 4.05 3.95 4.101998 4.05 4.25 4.15 4.301999 4.20 4.40 4.30 4.452000 4.35 4.55 4.45 4.602001 4.45 4.65 4.55 4.702002 4.55 4.75 4.65 4.802003 4.65 4.85 4.75 4.902004 4.75 4.95 4.85 5.002005 4.85 5.05 4.95 5.102006 4.95 5.15 5.05 5.202007 5.05 5.25 5.15 5.302008 5.10 5.30 5.20 5.352009 5.15 5.35 5.25 5.402010 5.20 5.40 5.30 5.452011 5.25 5.45 5.35 5.502012 5.30 5.50 5.40 5.552013 5.30 5.50 5.40 5.552014 5.35 5.55 5.45 5.602015 5.35 5.55 5.45 5.602016 5.40 5.60 5.50 5.652017 5.40 5.60 5.50 5.652018 5.40 5.60 5.50 5.652019 5.45 5.65 5.55 5.702020 5.45 5.65 5.55 5.702021 5.45 5.65 5.55 5.702022 5.45 5.65 5.55 5.702023 5.45 5.65 5.55 5.70