Market Close: Munis Inch Higher, $779M Calif. GOs Sell

NEW YORK - The municipal bond market finished a touch higher today on the back of selective buying interest and minor gains in Treasuries, while California sold $779 million of general obligation refunding bonds in the competitive market. Traders said municipals were bid up, with yields lower by one or two basis points, with most gains in the intermediate sector. "I had the intermediate sector better by two basis points and the long end better by one basis point," a trader in New York said. "I think there is good relative value there and people are trying to taking advantage of that." Municipals underperformed their taxable counterparts last week, leaving 10-year municipal/Treasury yield ratios cheap to their three-month averages although on the long end ratios were not as attractive. This ensured some buying support at a time when the market is scrambling for any directional cues amid a lack of economic indicators or volatility in Treasuries. "It's not like the market is super robust, but it's pretty firm," a trader in Chicago said. "It feels pretty decent. Arbs had a good bid yesterday and it's still the same. We underperformed last week, so the arbs provide the bid side and you also had some insurance money that is starting to be put to work in the 10-year range." Traders reported there were large buy orders from a large insurance firm yesterday and the same trend continued today. This institutional buying led to narrower yield spreads between non-specialty states and triple-A paper. "I wouldn't say munis are taking off to the races, but there is more compression in spreads versus where they have been and liquidity is back in the marketplace and people continue to put money to work," a second trader in Chicago said. While new issue supply is not as heavy as it was in previous weeks, it was the busiest day on the primary calendar with California selling the largest deal of the week - $779 million of general obligation refunding bonds. Merrill Lynch won the deal and reoffered California GOs to yield from 2.99% in 2008 to 4.85% in 2030. The underwriter did not reoffer bonds maturing in 2006, 2007, 2015 to 2019, and 2022 to 2024. Bonds of 2008 were priced with the tightest spread -- 10 basis points -- to Municipal Market Data's triple-A yield curve scale while the 2029 and 2030 maturities, which were structured with 4 5/8s coupons, were 33 basis points above MMD. A 2028 maturity that pays a 41/2 coupon was insured by Ambac Assurance Corp. and came 16 over MMD. The rest of the bonds were 4s or 5s and had ratings of A3 from Moody's Investors Service, A from Standard & Poor's and A-minus from Fitch Ratings. The deal had a par call in 2015. In the negotiated sector, Bear, Stearns & Co. lowered prices and raised yields anywhere from two to five basis points when it repriced $123 million of Sacramento, Calif., Power Authority revenue bonds. The final scale contained bonds priced to yield from 2.45% in 2006 to 4.24% in 2019. Bonds maturing from 2020 to 2022 were not reoffered. Ambac is guaranteeing the deal, which has underlying ratings of BBB from Standard & Poor's and BBB-plus from Fitch. Bonds are callable at par in 2015. But J.P. Morgan Securities Inc. was able to raise prices and lower yields one to two basis points on selective intermediate maturities when it repriced $91 million of Oklahoma City general obligation refunding bonds. The final scale contained serials priced to yield from 2.70% in 2006 to 4.40% in 2021. Ambac insured bonds maturing after 2008. The deal has underlying ratings of Aa2 from Moody's and AA from Standard & Poor's and is callable in 2015 at par. And Merrill held a retail order period on part of a $300 million of refunding deal for Allegheny, Pa., Sanitary Authority before institutional pricing tomorrow. For retail, Merrill priced bonds to yield from 2.50% in 2005 to 4.52% in 2025. A 2030 maturity was not offered to retail. The deal is backed by MBIA Insurance Corp. Treasuries posted modest gains as participants exhibited what Ralph Axel, U.S. fixed income strategist at HSBC Securities, said could be the beginning of a "sea change" away from inflationary fears and toward anticipation of an energy-price-driven slowdown. "It seems that the tide is starting to shift ... to thoughts of the beginning of a global slowdown, perhaps led by energy prices," he said. "But at the same time, there's only so much Fed you can take out of the front end." Axel added the market might be reacting to a speech yesterday by Federal Reserve Board Chairman Alan Greenspan on energy that did not address inflation or monetary policy. "Greenspan's explicit avoidance of inflation issues in his oil speech may be playing into people's minds as well," he said. "Greenspan is certainly on record attributing the soft patch of summer '04 to the oil rise, and he's also on record observing the [similarity] of oil prices today versus oil prices then. You have to extrapolate from that that he's more concerned about a slowdown than about long-term inflation. Maybe the market is buying into that idea more over time." Greenspan made no mention of monetary policy or the economy during his second appearance this week, a speech this morning on regulatory reform of government-sponsored enterprises before a Senate committee. The Bond Buyer's 30-day visible supply calendar decreased $112 million to $7.8 billion today. The calendar is comprised of $2.3 billion of competitive deals and $5.5 billion of negotiated issues. Disclosure The Municipal Securities Rulemaking Board reported 30,989 trades Tuesday of 14,287 separate issues. Of all bonds traded, 1,784 changed hands at least four times. Most active was Illinois Finance Authority 5s of 2022, which traded 312 times at par.