Weak money supply data increased hopes for yet another ease in monetary policy Friday, and yields continued to drop, despite heavy issuance that totaled $4.2 billion last week and is expected to top $3.4 billion this week.
Treasury prices moved higher, with municipals lagging, on Friday after speculation that the Federal Reserve would have to ease monetary policy on recent weak money supply figures. The Bond Buyer's 40-bond index dipped to 6.92% last week, the lowest level since it was created in 1985.
"There's still a good chance we'll see the funds rate drop again soon," said James L. Kochan, head of fixed-income research at Robert W. Baird & Co. "The key is going to be the subsequent economic data we get in early October, including this week's consumer spending data."
Although the market consensus seems to be that the Fed will lower interest rates soon, municipal traders across the country say the any rise in prices may be limited because of heavy supply.
The secondary market stumbled for several days last week as it choked on more than $500 million of securities out for the bid.
Banks and funds apparently have been liquidating large portions of their inventory, and, last Thursday alone, between $300 million and $400 million crowded the bid wires.
National traders reported some back up in yields as great as 20 basis points on off-the-run names as investors balked early in the week. The market seemed to recover late in the week as investors moved in to buy attractive short-term paper from several big lists, but supply remains heavy and may become a hurdle.
"We've had a long steady run-up since July without a correction of any significance," one trader noted. "With all these bonds it might sell off. It probably won't happen, but it is a distinct possibility."
But buy siders note that funds have cash to spend and municipals remain attractive as investors continue to move out along the curve.
The Bond Buyer placement ratio -- the percentage of the dollar volume of the week's new competitive issues, totaling at least $10 million, placed with permanant investors -- was calculated at 82.8% last week.
"We're comfortable with the supply going forward," said David Hamlin, assistant vice president of portfolio management at the Vanguard Group. "Cash flow has been good in both the open- and closed-end funds. Generally, it seems you still have investors moving out on the yield curve, which is causing a fair amount of cash flow on the long end."
To date, volume this year is 23.6% greater than last year with new issuance totaling $111 billion in 1991 compared to $89 billion last year.
Standard & Poor's Corp.'s Blue List of municipal bonds rose $95 million to $1.4 billion on Friday, and supply shows no signs of abating as interest rates head lower. The 30-day visible supply calendar totaled $3.7 billion on Friday, and $3.4 billion of securities are slated to be priced this week alone.
The negotiated sector features $400 million Washington Public Power Supply System refunding revenue bonds, to be priced by Goldman, Sachs & Co., $300 million New York City Municipal Water Finance Authority, water and sewer system revenue bonds, to be priced by Smith Barney, Harris Upham & Co., and $266 million Connecticut special tax obligation bonds, to be priced by Dponaldson, Lufkin & Jenrette Securities Corp.
The competitive sector features $524 million California various purpose bonds and $340 million District of Columbia general fund recovery bonds.
Trading was active in the morning and subsided toward the afternoon session. The bid wires were brisk, and traders reported good going-away business.
In the debt futures market, the December municipal contract settled up 5/32, to 94.02, with the December MOB spread widening from negative 157 Thursday to 162 on Friday.
Quoted dollar bonds posted slight gains of 1/8 to 1/4 point.
Late Friday, New Jersey Turnpike Authority 6.90s of 2014 were quoted unchanged at 99 5/8-7/8 to yield 6.90%. New York LGAC 7s of 2021 were quoted up 1/4 point, at 98-99 1/8 to yield 7.07%, while New York LGAC 7s of 2016 were quoted unchanged at 98 7/8-99 1/4 to yield 7.06%. Puerto Rico Electric Power Authority 7s of 2021 were quoted up 1/8 point to 100-100 1/8, where they returned 6.98%. And Colorado River Authority insured 6 5/8S of 2021 were quoted up 1/8 to 97 5/8-98 to yield 6.78%.
In the short-term sector, yields fell five basis points in spots.
In late secondary-market trading, Pennsylvania 5 1/4% Tans were quoted at 4.63% bid, 4.60% offered, while Texas 5% Trans were quoted at 4.49% bid, 4.45% offered. March New York State Trans were quoted at 5.15% bid, 5.13% offered and Los Angeles notes were quoted at 4.52% bid, 4.50% offered.