Prices are expected to remain in a narrow range, but yields will probably move slightly higher during the third quarter as heavy supply in both the tax-exempt and government bond markets keeps upward pressure on rates.
Although some economists are steadfast in their belief that the economy is still in a recession and that interest rates will be significantly lower at the end of the year, several traders argued Friday that this won't happen in the third quarter. New price lows will be tested before rates start going down again, they predicted.
William D. Byrne Jr., senior vice president in the municipal bond department at Cowen & Co., said Friday that he didn't expect any slowdown in tax-exempt supply over the last half of this year. Long-term volume has been running at an annual clip of $140 billion in 1991.
Mr. Byrne noted that "there is still a lot to do.' He cited municipal floaters and refundings and noted that infrastructure financings were starting to pick up. But he warned that the "Street is heavy" and that the yields for the upcoming supply will "have to be attractive."
On the plus side, the risk is "easier to take" and it now is "cheaper to carry bonds," Mr. Byrne continued. But in order to handle the big third-quarter supply, particularly in governments, "higher yields will be needed," he concluded.
Louis A. D'Andrea, senior vice president and manager of municipal trading at Prudential Securities Inc. is in basic agreement with Mr. Byrne. But he predicted that when prices move lower and yields higher during the third quarter, "municipals will outperform governments."
Because of the recent heavy supply, most traders have a "short horizon," Mr. D'Andrea noted. They will be acting "very cautiously" over the near term, he added.
Long-term tax-exempt supply has ballooned in the past two months of this year. The $13.3 billion volume in May was the largest for this year and the second highest on record for that month.
And during the first three weeks of June, more than $9 billion has reached the market. There are at least $2.5 billion up for public sale this week and after late starters are added, June's volume should have no problem going over $12 billion.
Tax-exempt prices closed last week with gains of about 1/2 point on average as talk of continued recession and subdued inflation resurfaced. There are indicators due out this week important enough to influence prices significantly, traders said Friday. The next major market mover will be the July 5 release of June employment data, and it may be important enough to persuade some traders to cut short their long Independence Day weekend.
Last week's issues were "priced to sell," one veteran bond trader said Friday. One of the hottest deals of the week was the $558.2 million New York Local Government Assistance Corp. offering, which was increased in size from $450 million and had yields reduced five to 10 basis points on the serials and a couple of basis points for the term maturities.
The offering carried a maximum yield of 7.595% for $253.9 million term bonds of 2020 priced at 98 7/8 as 7 1/2s. After being freed from syndicate price restrictions on Friday, the 7 1/2s moved up to 99 1/4-1/2, trimming the yield to 7.54%.
The LGAC issue was marketed through an account headed by Lehman Brothers. The bonds were rated A-plus by Standard & Poor's Corp. and Fitch Investors Service and A by Moody's Investors Service.
In the short-term market, a Merrill Lynch & Co. syndicate priced $3.9 billion New York State tax and revenue anticipation notes at 100.337 as 5.40s to yield 4.95% to the March 31, 1992 maturity. Sales accounted for only about half the issue the first day and notes subsequently traded within the take-down with a lot of business around a 5.15%. But by Friday, strong follow through sales rallied the notes back to a 5.10% bid, 5.08% market for regular delivery and a 5.08% bid, 5.05% market for settlement on July 1.
Secondary bond activity was very quiet Friday, prompting one trader to say "not only is today the longest day of the year as far as daylight goes, but it felt like the longest trading session also." Prices tried to do better at the opening, almost succeeded, and then faded back to unchanged with nothing happening after lunch, he added.