Market Close: Cal. Sells $936M GOs, Munis Firm in Spots

A weaker-than-expected regional manufacturing report helped the municipal and Treasury bond markets to find their footing after a six-day decline, while in the primary California sold $936 million of general obligation and refunding bonds in the largest deal of the week. Traders said the bid side improved selectively with yields falling one or two basis points, while in the first part of the session the market looked poised to extend losses for the seventh consecutive day. "It didn't start the day like this, but it seems like the bid side is improving," a trader in Los Angeles said. Traders said the market was due for a rebound since prices have cheapened substantially since last Wednesday and municipal yields have risen between 16 and 17 basis points, according to Municipal Market Data. The six-day correction in the government market took the yield on the benchmark 10-year note as much as 35 basis points higher from a year low of 3.80% hit June 3. "People [thought] it's going to get cheaper, but it's always darkest before dawn," a trader in New York said. "From the technical standpoint we [were] fairly oversold, having been down so many days in a row. This extended period of lower prices depresses the oversold indicators to where technically we [were] due for a bounce." The market found a reason for a rebound when the Federal Reserve Bank of Philadelphia reported that manufacturing activity contracted in the Mid-Atlantic region in June. The general business conditions index measuring activity in the Federal Reserve Bank of Philadelphia's region was down 2.2 in June from 7.3 in May, while economists were expecting it to come in at 10 especially after a similar report from the Empire State showed a pick-up in manufacturing activity yesterday. Nevertheless, not everybody in the municipal bond market was responding to an upward move in Treasuries. "It depends on what you have," another trader in Los Angeles said. "If you have institutional block size that is attractive to those buyers, you probably have a better bid side. Since we turned around you are probably up one or two basis points. But if you are bidding retail I don't think it's any better at all." He said he was more interested in moving paper from his inventory and was not yet raising prices on his offerings. "We probably have gotten a little heavier [in the last few days] because of retail resistance, our turnover has significantly slowed. Where before you bring in bonds and you turn them over pretty quickly, now you are sitting with things and you are working at situations," he said. He said retail investors were also not very interested in the $936 million of California general obligation and refunding bonds that the state sold competitively this afternoon because of relatively low absolute yield levels, but the deal was probably well-received by arbitrage and crossover accounts who focus on relative "cheapness" of tax-exempt paper. And even though California legislators failed to pass the budget on time for the 19th consecutive time, investors are less concerned about credit risk. Merrill Lynch bought the Golden State deal and reoffered bonds in a $545 million new money series from 3.08% in 2009 to 4.50% in 2025. In the $391 million refunding series, Merrill reoffered bonds to yield from 2.60% in 2006 to 4.53% in 2027. Several maturities were not reoffered. California is rated A3 by Moody's Investors Service, A by Standard & Poor's and A-minus by Fitch Ratings. Refunding bonds of 2021, 2028 and 2029 were insured by MBIA Insurance Corp. Overall, the deal seemed to attract stronger demand that California's last competitive sale - a $764 million offering April 6 that was also bought by Merrill Lynch. The 5 coupon bonds reoffered in today's sale were spread 15 basis points over Municipal Market Data's triple-A scale, while 5s in the prior sale came 16 to 25 basis points over MMD. In the deal today, the most expensive bonds relative to MMD were two basis points over in the 2006 maturity of the refunding series. New money bonds of 2025 with a 4 1/2 coupon were the cheapest versus the scale at 35 basis points over. In the secondary today, California 5s traded from 19 to 21 basis points over MMD, according to Municipal Securities Rulemaking Board data reported by BondDesk's MuniTicker. Another Golden State issuer was in the market with a massive short-term offering. Lehman Brothers tentatively priced $811 million of California Statewide Communities Development Authority tax and revenue anticipation notes. The deal included 10 series, four of which totaling $178 million were federally taxable. Tax-exempt notes mature on June 30, 2006 and carry 4% coupons. They were priced to yield 2.60%, 2.62% and 2.65%. taxable notes had 3.90% coupons. Notes are rated MIG-1 by Moody's and SP-1-plus by Standard & Poor's. Both Golden State sales dwarfed new issues that were priced in the negotiated market. Lehman Brothers priced $208 million of North Carolina Capital Facilities Finance Agency revenue bonds for Duke University. Bonds of 2039 with a 4.5% coupon were priced to yield 4.625% while 5s of 2041 were priced to yield 4.43%. Bond proceeds will fund a number of renovation and construction projects and will also take out about $69 million of outstanding commercial paper. The university is rated Aa1 by Moody's and AA-plus by Standard & Poor's. Citigroup Global Markets repriced $151 million of Yonkers, N.Y., general obligation and refunding bonds, lowering yields by two to three basis points in three maturities but increasing yields by two to five basis points in much of the deal. A $73 million refunding series was priced to yield from 2.81% in 2005 to 4.08% in 2019. A $78 million new money series was priced to yield from 2.73% in 2006 to 4.29% in 2025. Term bonds of 2030 and 2035 were priced as 5s to yield 4.34% and 4.37%. MBIA Insurance Corp. guaranteed all bonds except the 2005 maturity of the refunding series. In the high-yield sector, Goldman, Sachs & Co. priced $91 million of New York State Dormitory Authority revenue bonds for Mount Sinai New York University Health Obligation Group. A 2011 maturity was priced as 5s to yield 4.40%, a 2013 maturity was priced as 5s to yield 4.60% and a 2026 maturity was priced as 5 1/2s to yield 5.22%. Bonds are callable in 2008 at par and are rated Ba1 by Moody's, BB by Standard & Poor's and BB-plus by Fitch. Bonds were spread 103 to 122 basis points over similar maturities on the Municipal Market Data scale. In other economic news, the Labor Department reported jobless claims in the week ended June 11 rose 1,000 to 333,000, in line with market expectations, but housing data was weaker than forecasts. The Commerce Department reported housing starts rose 0.2% to 2.009 million units in May from a downwardly revised 2.005 million-unit level in April. Meanwhile, building permits fell 4.6% to 2.05 million units in May, down from a revised 2.15 million level in April. Economists polled by IFR BondData Americas expected housing starts to rise to 2.05 million units in May, while housing permits were expected to ease to 2.11 million. The Bond Buyer's 30-day visible supply today decreased $2.27 billion to $8.05 billion. The calendar is comprised of $4.57 billion of competitive transactions and $3.48 billion of negotiated deals. Disclosure The Municipal Securities Rulemaking Board reported 30,712 trades Wednesday of 13,730 separate issues for volume of $19.79 billion. Of all bonds traded, 1,833 changed hands at least four times. Most active was Massachusetts Health and Education Facilities auction rate securities of 2040, which traded 157 times at par.