Municipal bonds firmed two basis points yesterday, while in the new-issue marketunderwriters held the first day of a two-day retail order period on $500 million of NewYork City general obligation bonds.
Treasuries rose, reversing earlier losses as Friday's rally continued with the help of a0.2% decline in the September index of economic indicators and cautionary comments byFederal Reserve Bank of Richmond president Alfred Broaddus about the economic outlook.
Early weakness in the government market was attributed to observations by TreasurySecretary John Snow made over the weekend that interest rates were likely to rise aseconomic growth accelerated.
"Once people dismissed Snow's comments or priced them in, that put the bid back into themarket," said James Caron, fixed-income strategist at Merrill Lynch & Co. "We've been ina trend toward higher rates for quite some time now and the rally should be viewed ascorrective movement in the market."
In the municipal arena, traders said the market firmed two basis points on the back ofrising Treasuries amid selective buying interest.
"The market seems to have caught a little bit more interest in terms of people lookingfor offerings," a trader in Chicago said. "Those who have to put money to work arelooking a little bit more now; those who don't are being patient."
Traders said the market was still in a good technical shape as new-issue supply appearedmanageable and there were not that many bonds in the secondary market.
"There is a little bit more of a calendar this week, but I don't think there is acrashing supply of new issues and secondary inventories are not that heavy," a trader inNew York said.
In the new-issue market, Citigroup Global Markets Inc. held the first day of a two-dayretail order period on $500 million of New York City GOs ahead of institutional pricingtomorrow. Underwriters received $138 million in retail orders yesterday.
Meantime, RBC Dain Rauscher Inc. priced $120 million of Plano, Tex., Independent SchoolDistrict school building and refunding bonds. No further details were available.
Finally, UBS Financial Services Inc. priced and repriced $69 million of King County,Wash., limited-tax GO and refunding 2003 Series A and B bonds. Serials were priced toyield from 1.45% in 2005 to 4.93% in 2023, while bonds due 2004 were not reoffered.
The issue is rated Aa1 by Moody's Investors Service and AA-plus by Standard & Poor's,while Series A bonds due in 2018 through 2021 are insured by MBIA Insurance Corp.
Meanwhile, municipal bonds continued to outperform their taxable counterparts last weekas Treasury yields moved higher, according to George Friedlander, fixed-incomestrategist at Citigroup.
In the firm's latest Municipal Market Comment, Friedlander said the short end of themunicipal yield curve had gotten increasingly rich versus taxables. For example, thefive-year municipal yield as percentage of Treasuries fell to 73% compared to 92% inJuly.
"This remarkable relative performance reflects, at least in part, a phenomenon thatseems unlikely to reverse any time soon: the continued search by individual investorsfor higher yielding alternatives to cash," he said.
However, intermediate maturities in the nine- to 14-year range have lagged behind inrelative performance because they are not considered alternatives to cash and do nothave obvious institutional end-use buyers, according to Friedlander.
Meanwhile, the long end has begun to perform better despite the lack of bond fund flows.
"Here, one key factor appears to be that as municipal yields breached the '5% wall' onthe upside - 5% including sales credit in the secondary market - individual investorshave come back, in substantial numbers," Friedlander said. "The other factor is simplylack of long maturity new-issue supply."
