Market Close: Supply, CPI Sinks Munis

The municipal market sold off today, as a surge of supply and bid-wanteds hit the market just as a report of rising consumer inflation increased the likelihood that the Federal Open Market Committee would continue tightening monetary policy at the end of the month. Traders said tax-exempt yields increased by four to six basis points as prices plunged. "It seems like there were some people diving for cover today," a trader in New York said. "Some deals are getting postponed and others are getting cheapened at repricing. It's certainly hard to find buyers." Adding to the supply pressure of two-billion-dollar deals, Employers Reinsurance Corp. began circulated a bid-wanted list of about $350 million, traders said. Bids would be accepted tomorrow on the list, which is the second of a series that reportedly totals $7.5 billion. Yesterday's list was approximately $350 million and included blocks of $3 million to $5 million. The bonds were high grade, and many offered premium coupons of 5.25% or 5.5%. The liquidation comes after General Electric Co. on Monday finalized its sale of ERC to Swiss Re. Another trader in New York said tax-exempt activity dried up as the government marked lost ground. "We were trading earlier in the day, but it seems like it's totally stopped with the downtick in governments," he said. "It seems like we're so tied to governments that the minute you see a downtick everyone runs. The bid side drops a lot quicker than the actual market drops. The CPI number kind of hurt us a little, but I don't personally think it's that bad yet. You can't convince anyone to buy bonds right now, though." Treasuries sunk today, with the yield on the two- and 10-year notes increasing seven and nine basis points to 5.10% and 5.06%, as the May consumer price index confirmed the fears of many investors. Driven by rising energy and transportation costs, CPI increased 0.4% in May, while core CPI, which excludes volatile food and energy prices, rose 0.3% for the third month in a row, according to the Labor Department. IFR Markets' poll of economists had predicted a 0.4% increase in CPI and a 0.2% rise in core rate. "I think what we're seeing is a firming of inflation trends across a pretty broad variety of goods and services, which isn't surprising given that the economy is running pretty near capacity," said Alan Levenson, chief economist at T. Rowe Price Associates Inc. in Baltimore. Levenson said the CPI number could force the FOMC to increase the pace of monetary tightening. "I think it raises the possibility of a 50 basis point move at the end of this month. If these trends were unwelcome in April, then they're even less welcome now," he said. "If the Fed wants to walk the walk rather than just talk the talk, and if they're serious about not allowing these price increases to persist, then they have to put a policy in place that has a reasonable chance of moderating growth. "If they want to even consider the possibility they can pause in August, my suggestion is do the August increase on June 29. Do the two steps as one." Meanwhile, in the new issue market, Lehman Brothers repriced $1.35 billion of Florida Hurricane Catastrophe Finance Corp. revenue bonds, which mature from 2008 through 2012, with yields ranging from 3.77% with a 5% coupon in 2008 to 3.95% with a 5.25% coupon in 2012. Yields were raised by two to three basis points at repricing. The bonds are not callable, and are rated Aa3 by Moody's Investors Service, and AA by both Standard & Poor's and Fitch Ratings. Among 5% coupons, bonds maturing in 2011 and 2012 were weakest to today's Municipal Market Data triple-A yield curve, with yields 25 basis points above the curve. Bonds maturing in 2008 were tightest to the curve, at 20 basis points higher. California sold $1.01 billion of general obligation bonds in two series. Merrill Lynch bought the deal with a true interest cost of 4.66%. A $700 million series of various purpose new-money bonds matures in 2006, 2011 through 2017, 2026 through 2033, and 2035, with yields ranging from 3.91% with a 5% coupon in 2011 and to 4.54% with a 5% coupon in 2027. Bonds maturing in 2006, 2016, and 2028 through 2035 were not re-offered. Also, a $311.8 million series of refunding bonds matures from 2006 through 2030, with yields ranging from 3.55% with a 4% coupon to 4.62% with a 4.75% coupon in 2028. Bonds maturing in 2006, 2023 through 2026, and 2029 and 2030 were not re-offered. Portions of the deal are insured by Ambac Assurance Corp., and the underlying credit is rated A1 by Moody's Investors Service, and A-plus by both Standard & Poor's and Fitch Ratings. All bonds are callable at par in 2016. Among 5% coupons, bonds maturing in 2011 were weakest to today's Municipal Market Data triple-A yield curve, with yields 28 basis points above the curve. Bonds maturing from 2013 through 2015 were tightest to the curve, at 24 basis points higher. California last competitively sold GO bonds in April. Citigroup Global Markets won that $537.6 million deal with a TIC of 4.6847%. Bonds from that deal mature in 2006, 2011 through 2023, 2031, 2032, and 2035. Yields range from 3.75% with a 5% coupon in 2011 to 4.83% with a 4.75% coupon in 2035. Portions of this deal were also insured by Ambac, and all bonds are callable at par in 2016. Among 5% coupons, bonds maturing in 2013 were weakest to that day's Municipal Market Data triple-A yield curve, with yields 18 basis points above the curve. Bonds maturing in 2011 were tightest to the curve, at 10 basis points higher. Also, Bear, Stearns & Co. tentatively priced $260.5 million of Massachusetts Bay Transportation Authority senior sales tax bonds, which mature from 2007 through 2028, with term bonds in 2031 and 2034. Yields range from 3.55% with a 4.5% coupon in 2007 to 4.63% with a 5% coupon in 2034, after being selectively raised by one to two basis points at repricing. Bonds are callable at par in 2018, and are rated Aa2 by Moody's, and AAA by Standard & Poor's. M.R. Beal & Co. priced $235 million of Connecticut GO bonds, which mature from 2007 through 2026. Yields range from 3.63% in 2008 to 4.55% with a 4.75% coupon in 2026. Bonds maturing in 2007 were not re-offered, and all bonds are callable at par in 2016. Portions of the deal are insured by Financial Security Assurance, and the bonds carry underlying ratings of Aa3 from Moody's, and AA from both Standard & Poor's and Fitch. And, Citigroup Global Markets priced $133 million of Charleston, S.C., Educational Excellence Financing Corp. installment purchase revenue bonds, which mature from 2019 through 2028, with a term bond in 2031. Yields range from 4.45% with a 5% coupon in 2019 to 4.71% with a 5% coupon in 2031. Bonds are callable at par in 2016, and are rated A1 by Moody's and AA-minus by Standard & Poor's. Visible Supply The Bond Buyer's 30-day visible supply fell today by $770.9 million to $10.259 billion. The total is comprised of $3.014 billion of competitive deals and $7.244 billion of negotiated bonds. Previous session's activity The Municipal Securities Rulemaking Board reported 34,166 trades yesterday of 15,038 separate issues for volume of $23.30 billion. Most active was insured Indianapolis, Ind., Local Public Improvement Bond Bank 4.7s of 2037, which traded 130 times at a high of par, and a low of 96.450.