The municipal market was weaker yesterday, following Treasuries.

Traders said the market was off at least three basis points across the board. Lower quality bonds were off at least five to eight basis points, traders said.

"There's a lot of underwriting, and new issues are just blowing everything out of the water," a trader in New York said. "There's no reason to be joyous if you own bonds, considering that."

Traders reported several factors contributed to an overall sloppy tone.

"As simple as it sounds, there's not a fair balance between supply and demand," a trader in Chicago said. "There's an ongoing fear of what's going on with the [Federal Reserve]. There's a tug of war between growth and inflation. And there's the fear of insurance selling to shore up funds after these floods. It's a buyer's market."

The Treasury market also showed losses. The yield on the benchmark 10-year Treasury note, which opened at 4.14%, finished at 4.22%. The yield on the two-year note was quoted at the end of the session at 2.97% after opening at 2.85%. The yield on the 30-year finished at 4.76% after opening at 4.71%.

"We are seeing a fair-sized sell-off," said Eric Lascelles, chief economic and rates strategist at TD Securities in Toronto.

Part of the fall may be an unwind of gains that had been made over the past two days on the perception the Federal Reserve is not as likely to raise interest rates to fight inflation as it appeared to be last week, Lascelles said. The next Fed policy-setting meeting is scheduled for Tuesday and Wednesday.

Wednesday's prices of options on federal funds futures implied the market sees more than an 80% probability the Fed will keep rates steady at 2.0% at that meeting, according to data from the Federal Reserve Bank of Cleveland. The implied probability the Fed keeps rates the same during its August meeting is closer to 60%. Fed fund futures rates predict at least a 50 basis point increase in the target rate by the end of the year.

Economic data may also have put pressure on the Treasury market, Lascelles said.

Initial jobless claims dropped 5,000 in the week of June 14 to 381,000. Economists polled by IFR Markets had predicted 375,000 initial jobless claims. Continuing jobless claims also dropped, from 3.136 million to 3.06 million, which was lower than economists' estimates of 3.15 million.

Leading economic indicators rose 0.1% in May, the same gain they made in April, but higher than economists' estimates of no change. But the Philadelphia Federal Reserve Bank's regional manufacturing index showed a decline, coming in at negative 17.1 in June, down from negative 15.6 in April.

In new issues, JPMorgan priced $755.7 million in Prairie State Energy campus project revenue bonds for Ohio's American Municipal Power Inc. Bonds mature from 2013 through 2028, with term bonds in 2031, 2033, 2038, and 2043. Yields range from 3.69% on a 4% coupon in 2013 to 5.43% on a 5.25% coupon in 2043. Bonds maturing from 2013 to 2016, 2017, 2018 to 2020, 2023, 2028, 2033, and one term bond in 2038 are insured by Assured Guaranty Corp. The bonds, which are callable at par in 2018, have underlying credit ratings of A1 from Moody's Investors Service, A from Standard & Poor's, and A from Fitch Ratings.

JPMorgan also priced $437 million in midyear funding program notes for the Indiana Bond Bank. The notes mature May 2009 and yield 1.83% on a 3% coupon. The bonds are rated SP-1-plus by Standard & Poor's.

In addition, Morgan Stanleypriced $145.7 million of economic development revenue refunding bonds for the Pennsylvania Industrial Development Authority. The bonds mature from 2009 through 2013, with term bonds in 2016, 2017, 2020 and 2023. Yields range from 2.47% with a 5% coupon in 2009 to 5.17% with a 5.5% coupon in 2023. The bonds, which are callable at par in 2018, have underlying ratings of A3 from Moody's, A-minus from Standard & Poor's, and A from Fitch.

The University of Missouri competitively sold $100 million in capital project notes to Citi at a true interest cost of 1.6907%. The note matures June 2009 with a coupon of 3%. The note is rated MIG-1 by Moody's and SP-1-plus by Standard & Poor's.

Lehman Brothers priced $74.7 million of hospital facility refunding revenue bonds for Lake County, Ohio. The bonds mature from 2011 through 2019, with term bonds in 2024, 2029, 2038, and 2043. Yields range from 4.3% on a 4% coupon in 2011 to 6.125% on a 6% coupon in 2043. The bonds, which are callable at par in 2018, have underlying credit ratings of Baa1 from Moody's and A-minus from Fitch.

Citi priced $68.8 million in utility system revenue bonds for West Palm Beach, Fla., in two series. Bonds from the $53.98 million refunding Series 2008A mature from 2010 through 2029, with yields ranging from 2.83% with a 5% coupon in 2010 to 4.9% with a 5% coupon in 2029. The bonds, which are callable at par in 2018, are insured by Financial Security Assurance Inc. with underlying credit ratings of A1 from Moody's, AA-minus from Standard & Poor's, and AA-minus from Fitch.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.