Tax-exempt prices drifted lower yesterday in light activity, pressured by a weak Treasury market, and fears of what upcoming economic reports will bring.
Tax-exempt dollar bonds were quoted down a 1/2 point on the day with high-grades off five basis points.
"At this point, there's no one great explanation for where we are," one trader said. "There's just an overall gloom in the market."
Much of the municipal market's decline was attributed to the downturn in Treasury bonds. Prices on the 30-year Treasury bond fell 3/4 of a point to yield 8.04%
Municipal market players had hoped for a technical bounce from the long bond's breach of the 8% barrier, but any bounce will be "shallow," traders said, because of uncertainty about the timing and size of the Federal Reserve's next tightening.
Bid-list activity was modest yesterday, but it was enough to keep the pressure on prices as fund managers continue to sell into a secondary market already heavy with lists, one trader said.
"Everybody's got the bear suit on right now, but there's no panic selling. There's still a bid side," he said.
Standard & Poor's Corp.'s Blue List rose $9.2 million yesterday to reach nearly $2.1 billion.
The December Municipal futures contract closed down #20/31 at 85.07, off a high of 85.27 and a low of 85.04.
"It's a totally demoralized municipal bond market," said one veteran market participant.
Not surprisingly, the one large deal of the day in the new issue sector struggled to find support.
A group led by Merrill Lynch & Co. priced and repriced a $179.2 million offering of revenue bonds by the Missouri Health and Educational Facilities Authority.
In the morning, serials were tentatively priced to yield between 4.10% in 1995 and 6.50% in 2014. A $38.9 million term bond was priced to yield 6.75% in 2020.
At the repricing, yields were lowered five basis points in 1995, but raised 10 basis points on serial bonds maturing from 2002 through 2009, and by five basis points on serials maturing in 2011 through 2014 and on the term bond.
The final offering had serials priced to yield between 4.05% in 1995 and 6.55% in 2014. The term bond was priced to yield 6.80% in 2020.
"We made some adjustments to reflect the reality of a bear market. Based on that, we're seeing some good institutional interest," said David F. Anderson, managing director of national underwriting at Merrill Lynch. "There's good interest but buyers aren't given any incentive because every day they wait [the market] gets cheaper. That's what you're up against."
Anderson said the decision to bring the Missouri deal to market yesterday was made because Merrill Lynch wanted to get the deal done ahead of today and tomorrow's two- and five-year Treasury note auctions.
"There wasn't any real rationale to wait, the market is going to continue to drift lower," he said. "It's a difficult environment."
The bonds are rated double-A by both Moody's Investors Service and Standard & Poor's Corp.
Municipal prices were done in by continued softness in Treasury market, which fell prey to a variety of factors.
Last Thursday, the long bond went into a free fall when the Commerce Department reported that housing starts jumped 4.4% in September to their highest level since December 1993. The long bond broke through the 8% barrier before a short-covering rally Friday stabilized the benchmark security.
Yesterday, prices fell on the aftershocks of the September housing report and on fears of what this Friday's GDP report will hold.
"This was sort of predictable," said Carol Stone, senior economist at Nomura Securities. "I think today the glass is half empty. There is a whole variety of anxieties. A lot of things to make [the market] feel uncomfortable."
Stone noted that most economists have revised their predictions for this Friday's gross domestic product report upwards to a consensus of closer to 3% from 2.5% last week. She noted that commodity prices have rebounded, and that the dollar is soft.
The Commodity Research Bureau's index closed up 1.41 points yesterday at 233.04.
Anthony Chan, chief economist at Bank One Investment Advisors, attributed the Treasury market decline in part to a "lack of perceived resolve at the administration vis-a-vis the exchange value of the dollar, [which] has hurt the credibility of the administration [and raises] the prospects for continued weakness in the dollar."
On Thursday, Treasury Secretary Lloyd Bentsen said the administration would not seek intervention to strengthen the dollar, but then reversed his stance on Friday, Chan noted.
The Treasury market's drop yesterday also stemmed from uncertainty about the timing and size of the Fed's next tightening and the market's fears of what this week's economic data will bring, he said.
This week holds a slew of economic reports, including the third-quarter employment cost index for September and existing home sales -- both to be released today, as well as the durable goods report tomorrow, and the third-quarter real GDP and implicit price deflator reports on Friday.
Coming into that maelstrom are a few large deals in the tax-exempt market.
Today, Merrill Lynch is expected to price $290 million of Chicago O'Hare General Airport second lien revenue bonds. Tomorrow, BA Securities is slated to price $280 million of California State Public Works Board lease revenue bonds, which carry insurance from Municipal Bond Investors Assurance Corp. Also tomorrow, Donaldson Lufkin & Jenrette Securities Corp. is expected to price $138 million of MBIA-insured West Virginia School Building Authority bonds.