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In The News

In The News - 2008

  News from 2009
December 26, 2008 Treasury Rally Takes Holiday Rest - The Wall Street Journal
December 9, 2008 Market Finds Problems In Primary, Secondary - The Bond Buyer
November 18, 2008 Connecticut to Borrow Amid Lowest Muni Yields in Seven Weeks - Bloomberg
November 3, 2008 Prices inch up before deals debut - Reuters
October 29, 2008 Market Close: Munis Mixed; FOMC Cuts 50 BPs to 1.00% - The Bond Buyer
October 23, 2008 Munis Rally As Demand Roars Back; Several Large - The Bond Buyer
October 22, 2008 Muni Bonds Jump Most in More Than 8 Years Amid Yield 'Grab' - Bloomberg
September 22, 2008 Market Close: Munis Finish Weaker - The Bond Buyer
September 11, 2008 Moody's Loses Credibility as Municipal Ratings Mean No Savings - Bloomberg
August 20, 2008 Arizona Hospitals Borrow; New York Thruway Expands Muni Sale - Bloomberg
July 23, 2008 Port Authority Borrows as Insurer Woes Send Muni Yields Higher - Bloomberg
July 10, 2008 Assume "Defensive" Muni Posture, Miller Tabak's Pietronico Says - Bloomberg
June 12, 2008 Miller Tabak's Pietronico Says Moody's Bowing to Pressure - Bloomberg
June 1, 2008 Sea Change - American City and County
May 21, 2008 Boston's CareGroup Borrows as Fixed-Rate Muni Sales Fall 20% - Bloomberg
May 19, 2008 UPDATE:High Court Upholds In-State Tax Exemptions For Muni Bonds - Dow Jones
May 8, 2008 UBS Muni Move Could Be Boon For Rich Clients - Dow Jones
March 19, 2008 Miller Tabak's New Unit Specializes in Handling High-Quality Munis - The Bond Buyer

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Treasury Rally Takes Holiday Rest - The Wall Street Journal
Prices Drop a Bit, but Underlying Demand for Government Paper Remains

Friday, December 26, 2008
By Deborah Lynn Blumberg

Treasury bond prices slipped Wednesday as stock markets gained and trade slowed to a trickle ahead of the Christmas holiday.

Bond markets closed early at 2 p.m. EST Wednesday and were closed on Christmas. But bonds will have a regular schedule Friday (this is a change from an earlier plan for another early 2 p.m. close).


The low trading volumes and "general lack of conviction as the trading year winds down has us reluctant to take away too much meaningful insight" from Wednesday's session, said David Ader, head of government-bond strategy at RBS Greenwich Capital.

Five-year notes were under the heaviest pressure and were the most active issue, taking 46% of the market share, according to Mr. Ader, while two-years took 30% and 10-years 15%.

The benchmark 10-year Treasury note shed 6/32 point, or $1.875 for every $1,000 invested, to yield 2.181%. That was up from Tuesday's 2.163% as bond yields rise when prices fall. Five-year notes shed 8/32 point to yield 1.552%, while two-year notes lost 1/32 to yield 0.915%.

This week's lower prices come on the heels of the market's recent rally, which pushed yields to historic lows. The 10- and 30-year yields have dropped by about 0.30 percentage point each since the Federal Reserve cut its target rate to a 0% to 0.25% range from 1% and said it would continue to use alternative methods to help the economy and financial system heal.

The bond market largely shrugged off the day's early slew of economic reports, which were bleak overall. Weekly jobless claims rose to a 26-year high, while consumer spending dropped in November for the fifth month in a row. There was some good news on the inflation front, with the core personal-consumption expenditures price index, closely monitored by the Federal Reserve, flat on the month in November and up 1.9% on the year.

Treasurys response to the data provides a roadmap for trade into at least next Wednesday. The data do "not matter in these illiquid year-end conditions," Mr. Ader said, "and as the New Year approaches we'll continue to expect choppiness and little else."

Still, despite Wednesday's lower prices, an underlying bid for Treasurys remains given the bleak economic outlook. Treasury yields continue to hover near historic lows as many investors stick to safety, preferring still to preserve capital rather than garner hefty returns.

There are some signs that risk appetite could improve into 2009, which would be negative for government bonds. Some bond-fund managers -- emboldened by government efforts to help the economy and financial system -- are starting to tiptoe into the high-grade corporate-bond market where returns are more enticing than the Treasury market's ultralow yields.

For sustainable rallies in riskier assets to take hold though, investors will have to feel comfortable that the deterioration in the economy has stopped, said Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co. in New York.

"This hasn't happened yet, economic data continue to worsen," Mr. Crescenzi said. Data "need not get better to spark a rally; they need only stop getting worse."

S&P Cuts Ratings On AutoNation

Ratings firm Standard & Poor's lowered its credit ratings on AutoNation Inc. to "junk" territory and said the outlook for the nation's largest auto-dealership chain was negative amid slumping demand for vehicles in North America.

The ratings action followed AutoNation's weak third-quarter results last month, triggered by the economic downturn and tightening credit. The company booked a $1.46 billion write-down and posted a net loss for the quarter.

"There is an additional risk that the weak economy will cause consumers to defer the vehicle parts and service visits that are a key profit and cash flow driver," said S&P credit analyst Nancy Messer.

The ratings firm lowered its corporate credit rating one notch to BB+ and affirmed the company's senior unsecured debt rating at BB+. The ratings were removed from watch for downgrade, where they were placed Sept. 19.

Revenue and profitability in the auto-retail market are expected to be more volatile in the new year, and S&P said it expects new vehicle sales to fall 15% in 2009 to 11.1 million units.

AutoNation's ratings could face further cuts by S&P if the company isn't able to offset market deterioration and further pressures by controlling costs and reducing debt.

Auto sales have slumped as consumers have cut back their spending sharply in the face of massive job losses and reduced access to credit. General Motors and Chrysler are receiving aid from the federal government to stay afloat. The turmoil also prompted Toyota Motor Corp. on Monday to forecast its first annual operating loss since 1938.

—John Kell

Globex Bond Futures Are Felled by Outage

Trading on the CME Group Inc.'s Globex electronic platform was closed for about 3½ hours Wednesday for products including interest-rate as well as livestock futures.

The CME said the cause of the outage was a technical problem. "Our support team is investigating the problem," said CME spokesman Michael Shore.

Open-outcry transactions continued in the trading pit as Globex staff worked to restart the electronic platform. The outage started at 8:45 a.m. EST, just after the release of data that typically move prices in the interest-rate markets, which include short-term interest-rate and Treasury-futures products. That data included reports on jobless claims, durable-goods orders and personal spending.

Rate futures are among the most actively traded markets at the CME, though trade Wednesday was thin given the approaching Christmas holiday.

The technical malfunction also stopped electronic trading of dairy, housing and lumber futures, along with derivatives tied to the Goldman Sachs Commodities Index.

Agricultural grains, stock indexes, foreign exchange and metals and energy products on the New York Mercantile Exchange weren't affected by the shutdown, according to CME.

Trading resumed at 12:15 p.m. EST.

Technical snafus with Globex have been minimal since the exchange greatly expanded its product line following CME's merger with the Chicago Board of Trade and Nymex.

—Howard Packowitz

Write to Deborah Lynn Blumberg at

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Market Finds Problems In Primary, Secondary - The Bond Buyer

Tuesday, December 9, 2008
By Michael Scarchilli and Dan Seymour
The Bond Buyer

With the end of 2008 in sight, and only two more full weeks of market activity before the traditional holiday hiatus, market participants are finding it difficult to both deal with any significant supply in the primary market and to make profitable trades in the secondary market.

The municipal market experienced weakness of three to five basis points overall yesterday - with losses of as much as 10 basis points on the long end - as Chicago elected to avoid current market conditions and postpone its sale of $600 million of new-money and refunding general obligation bonds until 2009. The deal was slated to price today.

Michael Pietronico, chief executive officer of Miller Tabak Asset Management, said that, in the current primary market environment, "two deals might be one too many."

"The market doesn't have the institutional capability to handle any kind of meaningful supply, and I would expect that retail will remain buyers, but not in any significant enough way to handle any reasonably sized calendar," Pietronico said. "And you're seeing that in the price action."

Retail buyers continue to be the biggest faction that is in buying mode at the present time, according to Laura Milner, fixed income portfolio manager at SCM Advisors LLC.

"They're the main force in the market and sometimes it takes longer to clear issues when that's the case," Milner said. "Although we've seen demand from retail, it takes the market longer to digest heavy issuance when retail is the top buyer."

Pietronico said even though retail demand was strongest inside five years, buyers nevertheless were after quality credits.

"It's also very credit specific, and part of the problem is that anything that might have even a tinge of credit risk to it is being overlooked, and those bonds continue to get weaker on a relative basis," he said. "At some point, that will be overdone, but you would probably need to see better economic data for that to occur.

Any change in buying attitude was unlikely until at least January, according to Pietronico, as the large forward calendar weighed on market sentiment.

"What needs to be worked off is the large forward calendar, and the only way that will occur in any meaningful way is for a large segment of the market to re-emerge as buyers," Pietronico continued. "The mutual fund industry seems to be losing cash, and the property and casualty area of the market seems to be sitting on their hands at the moment, so something has to change. A crossover buyer that has not been involved lately needs to come back, or the market will just continue to drift lower until that occurs. It will occur at some point, but it seems more likely to be in January than December."

Meanwhile, Milner said she is "a little bit concerned" that all the deals scheduled to price through the remainder of 2008 can get done.

"A big question is whether or not the Street is willing to underwrite deals that aren't fully subscribed and so far they seem pretty reluctant to do that," she said. "The underwriters just don't have the balance sheet capacity that they did in the past to underwrite deals and sit on them. Their risk appetite is just going to be tied to overall credit market recovery. The risk tolerance out there is basically zero and nobody wants to get stuck owning a muni deal that's hard to hedge even in a perfect world."

However, she noted that not all issuers "have the luxury to come to market only when conditions are favorable."

"If it's the kind of deal where they need the money to get the project going, then there's some urgency to get it done," Milner said. "They may have different regulations as to when a deal is authorized to come to market and when it actually needs to come to market. "

Marilyn Cohen, CEO of Envision Capital Management said that this month will not be an easy one for the muni market.

"I'm telling people how cheap [munis] are. If you don't buy munis now, what's it going to take? You want to buy them when all the news is bad, and it's terrible," she said. "The only positive prospects will be if retail crawls out from under its rock. The retail investor is the market. Are they going to have the appetite? I don't know because it's getting late."

In the secondary market, a trader in Los Angeles said that "a lot of people don't care" about secondary trading right now.

"It's getting to the point in the marketplace where people are starting to think more about Christmas presents than they are about buying bonds, and therein lies the problem," the trader said. "So, it's just sort of a lackluster market, and if they don't care, then there's not much we can do about it."

"There's been very little interest in the secondary market lately, mostly primary selling," a trader in New York added. "It's definitely weaker though. It just keeps deteriorating. You really can't sell anything, and that hurts."

The Treasury market showed some losses yesterday. The yield on the benchmark 10-year Treasury note, which opened at 2.70%, finished at 2.76%. The yield on the two-year note finished at 0.93%, after opening at 0.92%. And the yield on the 30-year bond, which opened at 3.12%, finished at 3.16%.

Yields on triple-A rated 10-year munis, which until this year rarely topped 100% of Treasuries by much, swelled to more than 160% last week, according to Municipal Market Data. Whereas munis have traditionally yielded less than Treasuries, the tax-free rate on a top-rated 10-year muni last week was a percentage point and a half higher than the rate on a Treasury note with a comparable maturity.

Cohen said the relationship between municipals and Treasuries right now is "the most out of whack I've ever seen it."

"Now this has been going on for a long time," she said. "The more Treasuries rally and munis don't do anything, that percent is just totally in the ozone."

In the new-issue market yesterday, JPMorgan priced for retail investors $308 million of general obligation bonds for New York City in two series. This was the second day of a two-day retail order period, preceding institutional pricing today. Bonds from a $300 million series of tax-exempt bonds mature from 2010 through 2031, with a term bond in 2035. Yields range from 2.70% with a 3% coupon in 2010 to 6.45% with a 6.25% coupon in 2035. The bonds, which are callable at par in 2018, are rated Aa3 by Moody's Investors Service, AA by Standard & Poor's, and AA-minus by Fitch Ratings. The deal also contains an $8 million taxable series, which matures in 2014 and 2015.

Wisconsin competitively sold $100 million of GO bonds to Barclays Capital, with a true interest cost of 5.30%. The bonds mature from 2012 through 2030, with yields ranging from 3.00% with a 5% coupon in 2012 to 5.76% with a 5.7% coupon in 2028. Bonds maturing in 2029 and 2030 were not formally re-offered. The bonds, which are callable at par in 2018, are rated Aa3 by Moody's, AA by Standard & Poor's, and AA-minus by Fitch.

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Connecticut to Borrow Amid Lowest Muni Yields in Seven Weeks

Tuesday, November 18, 2008
By Jeremy R. Cooke
of Bloomberg

Nov. 18 (Bloomberg) -- Connecticut will be among today's largest U.S. state and local government borrowers, after demand from individual investors helped to drive yields on top-rated tax-exempt bonds to the lowest in seven weeks.

Connecticut is selling $300 million of transportation revenue bonds to fund work on roads, bridges and rail lines. Institutions such as funds and insurers are scheduled to place orders today after individual investors asked for $160 million of the offering yesterday.

Also yesterday, Massachusetts attracted "retail" bond buyers for $241 million of a $553 million refinancing set to continue today and conclude tomorrow.

The rally that boosted benchmark municipal bonds since the end of October may falter as investors balk at lower yields after a drop from all-time highs relative to Treasuries last month, Municipal Market Advisors said in a report yesterday.

"The easy money has been made," Tony Crescenzi, chief bond strategist at Miller Tabak & Co., said in a Bloomberg Television interview. "Munis were yielding substantially more than Treasuries for a time. In the last month, they've recovered, because people are realizing the value there."

Yields on AAA general obligation bonds maturing in 10 years fell 2 basis points to 4.08 percent yesterday, according to Municipal Market Advisors, a Concord, Massachusetts-based research firm. A basis point is 0.01 percentage point.

That's about 112 percent of the yield on the taxable 10-year Treasury note, which compares with a record of 126 percent and a historical average of 86 percent.

Yield Index Steady

The 30-year yield index from Municipal Market Advisors held steady at 5.42 percent yesterday after falling 57 basis points in four weeks.

"In particular at the long end of the yield curve, muni prices are appearing too aggressive versus traditional investor expectations," Matt Fabian, managing director at the research firm, said in the report. "The leading edge of the rally may again be thin and subject to reversal should issuers or current holders look to sell too many bonds too fast."

Tax-exempt bonds have returned 1.9 percent in November, according to Merrill Lynch & Co.'s Municipal Master Index, weighted around bonds due in about eight years. State and local government obligations are recovering after the mid-September seizure in credit markets sent yields soaring.

Connecticut is selling its "special tax obligation" bonds through Citigroup Inc. The securities are payable from motor-fuel taxes, vehicle-registration receipts, levies on oil companies' earnings, licenses, permits, fees and other revenue in the state's special transportation fund.

Massachusetts Orders

The debt carries credit ratings of A1 from Moody's Investors Service, AA from Standard & Poor's and AA- from Fitch Ratings. Connecticut trails only Massachusetts among U.S. states with the highest net tax-supported debt per capita, according to an April report from Moody's.

Massachusetts, through a team of underwriters also led by Citigroup, will continue gathering retail orders today for its general obligation bonds, with institutional pricing tomorrow, according to a news release from the treasurer's office. The deal will refinance variable-rate debt issued in 1998 and 2002.

Like California, New Jersey and other states, Massachusetts is courting buyers of less than $1 million apiece with dedicated Web sites to shore up support for bond sales amid lackluster institutional demand.

Among other offerings, New York City plans a second day of individual orders for an offering of $400 million in tax-exempt and $25 million in taxable bonds run by Merrill.

--With reporting by Rhonda Schaffler and Kavitha Shastry in New York. Editors: Eric Morse, Stacie Servetah

To contact the reporter on this story:
Jeremy R. Cooke in New York at +1-212-617-5048 or

To contact the editor responsible for this story:
Michael Weiss at +1-212-617-3762 or

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Prices inch up before deals debut

Monday, November 3, 2008
By Michael Connor

MIAMI - U.S. municipal bond prices inched up on Monday as tax-free investors mostly sat on the sidelines awaiting trading and pricing clues from primary deals coming to market later this week.

Prices moved up along most of the top-rated curve enough to trim yields on most maturities by 1 basis point or 2 basis points, according to Municipal Market Data.

Yields on top-rated 30-year bonds were at 5.35 percent, off 1 basis point from Friday, according to MMD. Yields on 10-year bonds fell 1 basis point to 4.30 percent.

Trading was slow, with volumes on a dollar basis running at roughly two-thirds last week's daily average.

"The market is waiting until the new issues are priced during the week," said Michael Pietronico, chief executive at Miller Tabak Asset Management in New York. "That's when the tone will change, one way or another."

Muni prices have rallied in recent weeks but lagged Treasuries during October, partly because of an overhang of pending new issues that might soak up demand in the secondary market. Munis had a loss on a total return basis of 1.9 percent last month, according to Merrill Lynch indices.

Deals this week in the tax-free market were forecast to rise to more than $5.2 billion, with the addition by underwriters on Monday of a $1.01 billion offering of Tax Revenue Anticipation Notes from Puerto Rico set for Thursday.

Issuers from New York, Illinois, Massachusetts and Texas were among those scheduled to sell big bond deals on Wednesday and Thursday, after the U.S. presidential, congressional, and local elections are concluded.

Michigan will also move ahead with the sale of $600 million of a $1.42 billion general obligation note issue on Thursday, a spokesman for the state's Treasury Department said on Monday.

"We're in a position with our cash flow that we don't need to do the whole chunk now," said spokesman Terry Stanton. The notes will be priced through Goldman Sachs & Co.

Pietronico, whose firm caters to high net-worth individuals, said the overall performance of the primary deals on Wednesday and Thursday would be key for muni investors.

"The market will be looking to see where the deals price relative to the secondary market," he said. "The primary has been cheaper than the secondary, but (the new issues) have done well in the secondary afterward."

(Additional reporting by Karen Pierog in Chicago; Editing by Dan Grebler); +1 305 810 2688;
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Market Close: Munis Mixed; FOMC Cuts 50 BPs to 1.00%

Wednesday, October 29, 2008
By Michael Scarchilli
The Bond Buyer

NEW YORK - The municipal market was largely mixed today, after the Federal Open Market Committee opted to lower its federal funds rate target by 50 basis points to 1.00%.

Traders said tax-exempt yields ended slightly lower on the short end and slightly higher on the long end, after being higher across the board by about two or three basis points prior to the Fed's decision.

"The decision had a little bit of impact in that yields on the shorter end came down a little bit, but not much beyond that," a trader in Los Angeles said. "The market had pretty much priced in this cut already."

The FOMC unanimously voted to slash interest rates to 1.00%, and along with it, cut the primary discount credit rate 50 basis points to 1.25%.

In the accompanying statement, the Fed wrote that "the pace of economic activity appears to have slowed markedly, owing importantly a decline in consumer expenditures."

"In light of the declines of the prices in energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability," the statement reads. "Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain."

However, Bob MacIntosh, chief economist and co-director of municipal investments for Eaton Vance, believed the rate cut - which 100% of fed funds futures this afternoon, according to the Chicago Board of Trade, predicted would lead to another rate cut, of 25 basis points, at the Dec. 16 meeting - "won't do any good."

"They could cut rates to negative 1.00% and pay everybody to borrow and it wouldn't do any good," MacIntosh said. "That's not the issue. This is the proverbial pushing on a string. If there's a psychological aspect to it, maybe there's a tertiary impact to the positive, but I don't see how this does any good."

"The level of the fed funds rate is not the problem," he continued. "The problem is getting prudent, intelligent people to take prudent, intelligent risks, and they're just simply not doing it."

In a written report, Tony Crescenzi, chairman of Miller Tabak Asset Management, wrote that "these days, it goes without saying that what the Fed does is abundantly more important than what it says," adding that the Fed's "purchase of commercial paper this week was far more important than" the rate cut.

"Nevertheless, the Federal Reserve delivered a policy action and statement that met squarely with expectations, with the modest exception of the way in which the statement indicated that the Fed would likely keep rates low for an extended period of time," Crescenzi wrote.

"The most glaring evidence of this is the Fed's use of jargon it typically uses when wanting to signal the potential for further cuts in interest rates, or at least the bias toward such. This is of course accomplished whenever the Fed says about the economy as it did today that 'downside risks remain,'" he wrote. " The inclusion of that key jargon more than neutralized the Fed's references to its previous actions, which is a tactic the Fed often uses to say, essentially, that 'hey, look at all we've done here, we're going to sit back and wait and be watchful.'"

The Treasury market was mixed today. The yield on the benchmark 10-year Treasury note, which opened at 3.83%, was recently quoted at 3.85%. The yield on the two-year note was quoted recently at 1.54%, after opening at 1.64%. And the yield on the 30-year bond, which opened at 4.19%, was quoted recently at 4.23%.

In the new-issue market today, the New Jersey Environmental Infrastructure Trust competitively sold $134.6 million of environmental infrastructure bonds to JPMorgan, with a true interest cost of 4.79%. The bonds mature from 2010 through 2028, with yields ranging from 3.53% with a 5% coupon in 2013 to 5.15% with a 5% coupon in 2028. Bonds maturing from 2010 through 2012 and from 2019 through 2023 were not formally re-offered. The bonds, which are callable at par in 2018, are rated triple-A by all three major ratings agencies.

Citi priced $105 million Nebraska's Omaha Public Power District. The bonds mature from 2018 through 2028, with term bonds in 2033, 2035, and 2039. Yields range from 4.71% with a 4.6% coupon in 2018 to 5.80% with a 5.5% coupon in 2039. The bonds, which are callable at par in 2018, are rated Aa1 by Moody's Investors Service and AA by Standard & Poor's.

Bergen County, N.J., competitively sold $68.1 million of general obligation bonds to UBS securities LLC, with a net interest cost of 4.44%. The bonds mature from 2009 through 2023, with coupons ranging from 4% in 2009 to 4.75% in 2023. None of the bonds were formally re-offered. The bonds, which are callable at par in 2018, are rated triple-A by Moody's.

In economic data released today, durable goods orders climbed 0.8% in September, after a revised 5.5% drop the previous month. Economists polled by Thomson Reuters had predicted a 1.2% decline.

Also, excluding transportation, durable goods dropped 1.1% in September, after a revised 4.1% decrease the prior month. Economists polled by Thomson Reuters had predicted a 1.5% dip.

Visible Supply

The Bond Buyer's 30-day visible supply fell $882.7 million to $17.324 billion. The total is comprised of $1.304 billion of competitive deals and $16.019 billion of negotiated bonds.

Previous Session's Activity

The Municipal Securities Rulemaking Board reported 48,763 trades yesterday of 15,083 separate issues for volume of $13.19 billion. Most active was Illinois Housing Development Authority 5.2s of 2038, which traded 369 times at a high of 79.700 and a low of 77.700.

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Munis Rally As Demand Roars Back; Several Large

Thursday, October 23, 2008
By Michael Scarchilli
The Bond Buyer

A dramatic plunge in yields yesterday continued a two-day surge as the municipal market roared back to life with a staggering rally that saw huge demand for bonds in both retail and institutional sectors.

The Bond Buyer 40 Municipal Bond Index rose 4-26/32 - its largest one-day increase since the index began in 1984. The previous record was Tuesday, when it rose 2-25/32. Before that, it was 2-21/32 for the original version of the Index on April 16, 1987.

The declines of 69 basis points in the average yield to par call and 38 basis points in the average yield to maturity were also the largest one-day drops on record. The previous records were set on Oct. 20, 1987, when the yield to par call fell 44 basis points, to 10.05% and the yield to maturity fell 32 basis points to 9.37%.

Yesterday's trading session also saw several large deals come to market to take advantage of the much lower rates, some ahead of schedule, as tax-exempt yields plummeted by 15 to 20 basis points on average, with munis firming as much as 25 basis points on the long end, according to traders.

Evan Rourke, portfolio manager at MD Sass, said the rally seems to be "broadly based."

"We seem to be seeing it from all different areas. We had at least one big crossover buyer, but it seems like there are other buyers all around," Rourke said. "Late last week into early this week, it seems there has been a feeling to sell 5s to buy better structure when the new issues come. But then this rally may have caught some of those people flat-footed, so some people may have oversold a bit, and are now scrambling a bit to put money to work. But we certainly feel pretty good right now."

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said that both the sell-off in the last month, and "the reversal in the market's fortune" yesterday and Tuesday, is "very much linked to Libor."

"Tell me what Libor is going to be in three or four weeks, and I'll tell you where rates will be," Pietronico said. "The asset class is too cheap relative to the Treasury market, that's for sure. The question is, does Libor behave? And that's open to interpretation. The immediate expectation is that Libor is trending down, and that takes the pressure off leveraged accounts to sell.

"The sell-off in September and this month didn't seem that fundamental at the time; it seemed more like a credit event, in regards to funding," he added. "So as long as funding costs come under control, I can't see any reason why this rally shouldn't continue. The market got to yields that were unsustainable, and given the high quality nature of the asset class, I would expect the rally to continue as long as Libor behaves."

Rourke agrees that the rally "could continue for a while."

"Because of relative cheapness, we're still attractive," he said. "Munis at a 6% were very, very cheap, but even long munis at a 5% in the current environment are still pretty attractive, especially when you look at them on an alternative investment basis.

"There's a pent-up calendar, though, and if that comes through all at once, you may have a problem," Rourke added. "I think what we're going to see going forward is that liquidity is different than it used to be. With the loss of some dealers and arb accounts, and you're just going to see kind of a different world. Munis may have hellacious sell-offs, followed by gapping-up rallies, and that just might be the way it is."

Rourke also said that the rally was "really accelerated when you saw institutions start to participate as well, because they have the firepower to really move the market faster."

"Not that retail wasn't doing tremendous volume. The retail bid on the new issues helped make that happen," he said. "In some cases, institutions were barely able to buy bonds because retail orders were so strong."

"Retail demand has just been overwhelming," Pietronico said. "As we rally some more, I think you'll find that institutions might be selective sellers. But it's retail that's really driving the market both up and down, and right now they seem to be buyers."

Dominick Mondi, senior managing director of municipal trading at Mesirow Financial in Chicago, believes the rally stemmed from an end to deleveraging and a "roar" of retail buyers into the market at the fastest pace in a generation.

"The key ingredient in munis is that they've always had a foothold in retail investors [who] came in and bought a ton of very attractive bonds," Mondi said.

As mutual and hedge funds were forced to sell assets from deleveraging and liquidity pressures, the muni market experienced 18 days of falling prices. The selloff sent short-term debt "rocketing down" and created a "perfect storm" for retail buyers, according to Mondi.

Investors have been selective and are "extremely credit conscious," he said. If investors continue to buy attractive yields at the A-rated and lower quality levels, the rally could be sustainable, Mondi said. But the deleveraging has diminished and $19 billion in pent-up new issuances will come into the market, he said.

"The muni market is very frisky," a trader in New York said. "The return to order has become a major market rally."

In the new-issue market yesterday, M.R. Beal & Co. priced $536 million of first resolution bonds for the New York City Municipal Water Authority. The issuer began a retail order period Tuesday, which continued through institutional pricing yesterday. At re-pricing, yields were reduced by 13 basis points in 2017, 15 basis points from 2019 through 2022 and in 2024, and by 45 basis points in 2040. Yields in final pricing ranged from 4.87% in 2017 to 5.90% in 2040. The credit is rated Aa2 by Moody's Investors Service, AAA by Standard & Poor's, and AA by Fitch Ratings.

Thomas Paolicelli, executive director of the authority, said about $200 million of the deal went to institutional buyers, while $336 million went to retail. Institutional buyers mostly bought from a $390 million 2040 maturity.

"We had a great day," Paolicelli said. "Municipals continue to be a very safe investment and perhaps retail investors are looking for that quality that they can't find elsewhere right now."

Siebert, Brandford Shank & Co. priced $500 million of general obligation bonds for Connecticut. The bonds mature from 2009 through 2028, with yields ranging from 2.10% with a 3.5% coupon in 2009 to 5.23% with a 5.25% coupon in 2028. Yields were selectively lowered by five to 23 basis points at re-pricing. The bonds, which are callable at par in 2018, are rated Aa3 by Moody's and AA by Standard & Poor's and Fitch.

Goldman, Sachs & Co. priced $410.8 million of bonds for the South Carolina Public Service Authority, known as Santee Cooper. The deal was originally slated to be priced for retail investors yesterday, with institutional pricing today, but the schedule was accelerated. It was also up-sized at re-pricing from $308.1 million, while yields were lowered roughly 15 to 20 basis points. The bonds mature from 2010 through 2012, from 2015 through 2018, with term bonds in 2023, 2028, and 2038. Yields range from 3.00% with a 5% coupon in 2010 to 5.75% priced at par in 2038. The bonds, which are callable at par in 2019, are rated Aa2 by Moody's, AA-minus by Standard & Poor's, and AA by Fitch.

Merrill Lynch & Co. priced $296 million of revenue bonds for the California Health Facilities Financing Authority.

The Treasury market likewise showed sizeable gains. The yield on the benchmark 10-year Treasury note, which opened at 3.74%, finished at 3.60%. The yield on the two-year note, which opened at 1.61%, finished at 1.52%. The yield on the 30-year Treasury bond, which opened at 4.22%, finished at 4.06%.

Patrick Temple-West and Ted Phillips contributed to this column.

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Muni Bonds Jump Most in More Than 8 Years Amid Yield 'Grab'

Wednesday, October 22, 2008
By Jeremy R. Cooke
of Bloomberg

Oct. 22 (Bloomberg) -- U.S. municipal bonds rallied the most in at least eight years on investor demand for tax-exempt yields that reached record highs above taxable Treasuries.

New York's Municipal Water Finance Authority sold $536 million of revenue bonds, after getting more than enough orders from individual investors to boost the offering from $200 million. Connecticut doubled its general obligation bond sale to $500 million today, bolstered by "retail" orders yesterday.

Resurgence in retail demand, coupled with buying from institutional investors finding value in high yields on even AAA tax-exempt debt, is thawing the market for new municipal issues and tempering borrowing costs. Fixed-rate bond sales have been stuck below half of the weekly average since mid-September, according to data compiled by Bloomberg.

"It's a bit of a grab fest today," said Mike Pietronico, chief executive of Miller Tabak Asset Management, a New York-based municipal-bond investment adviser. "Yields got to levels that made quite a bit of sense relative to equity returns."

The Standard & Poor's 500 stock index declined 6.1 percent today and 39 percent in the past 12 months. Average yields on AAA rated, 30-year municipal bonds fell 21 basis points to 5.67 percent today, according to Municipal Market Advisors. The 10-year yield index fell 11 basis points to 4.54 percent. A basis point is 0.01 percentage point.

The 30-year index remains at about 140 percent of the yield available on comparable-maturity U.S. bonds, compared with a record 143 percent last week and a historical average of 96 percent. Municipal bonds typically yield less than federal securities because of the tax exemption.

Rebounding From Turmoil

State and local government bonds are rebounding from the worst rout in at least two decades, sparked by turmoil in the global financial markets. Merrill Lynch & Co.'s Municipal Master Index plummeted more than 11 percent in the month after Lehman Brothers Holdings Inc. declared bankruptcy Sept. 15, prompting borrowers to delay hundreds of bond deals.

"We went from sellers in a vacuum to buyers with no offerings," said Evan Rourke, a municipal portfolio manager with M.D. Sass Associates in New York.

Connecticut, one of the three wealthiest states by median income along with Maryland and New Jersey, drew enough demand to cut the yield its underwriters had to offer on long-term bonds by as much as 22 basis points, Bloomberg data show.

The state's 10-year tax-exempt yield of 4.69 percent was still 70 basis points higher than what Connecticut agreed to pay to sell similar securities in June. Siebert Brandford Shank & Co. managed the offering of debt rated AA by Standard & Poor's and Aa3 by Moody's Investors Service.

New York Water

Yields on the New York water deal ranged from 4.87 percent on bonds due in 2017 to 5.90 percent on debt due in 2040, according to a city release. Underwriters led by M.R. Beal & Co. dropped yields by 13 basis points to 45 basis points on various maturities, the authority said.

Proceeds of the bonds, rated AAA by S&P and Aa3 by Moody's, will fund improvements to a water and sewer system that serves 9 million people in and around New York City.

Also today, Seattle-based nonprofit hospital system Providence Health & Services sold $350 million of revenue bonds in California, and South Carolina's state-owned Santee Cooper utility offered about $411 million in debt.

--Editor: Beth Williams, Michael Weiss

To contact the reporter on this story:
Jeremy R. Cooke in New York at +1-212-617-5048 or

To contact the editor responsible for this story:
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Market Close: Munis Finish Weaker

Monday, September 22, 2008
By Michael Scarchilli and Jack Herman

NEW YORK -- The municipal market was weaker today, with bigger losses situated on the long end.

"We weren't seeing much earlier on, but as the day wore on, more of that weakness came through," a trader in Los Angeles said. "I'd say we're down two or three basis points overall, but I've seen it as much as five or six basis points weaker on the very long end. It's just very illiquid still."

New-issue volume in the municipal market was tremendously impacted by last week's instability. Several large negotiated deals were placed on standby in light of the massive flight-to-quality in the Treasury market and extreme market dislocation following the latest fallout from the sales of two banking behemoths.

Many municipalities opted to put deals on the sidelines that would have otherwise been priced last week or this week due to the tumultuous environment that developed after the news of Lehman Brothers Inc.'s bankruptcy and subsequent agreement to sell substantially all of its North American businesses and operating assets to Barclays Capital, which coincided with Bank of America's planned purchase of Merrill Lynch & Co.

Those events were then topped off by the news that the Federal Reserve decided on an $85 billion bailout of American International Group Inc. as well as the announcement of an overall market rescue plan by federal officials Friday.

Deals began being postponed - or significantly reduced in size - by mid-week and that scenario appears to be the case again this week, as many of the largest deals are without a specific sale date and instead are being considered for pricing on a day-to-day basis, depending on market conditions.

Today, a number of additional deals were postponed, the largest of which was a $500 million New Mexico competitive note sale slated for tomorrow, also delayed are two separate competitive deals from Wake County, N.C., worth $354.5 million and $69.9 million, both slated to sell tomorrow, and two series of New York competitive bonds worth about $160 million scheduled to sell tomorrow.

Volume was expected to be an estimated $2.41 billion this week, compared with a revised $2.43 billion last week, according to Thomson Reuters. This follows $17.07 billion being sold in the municipal market in September through last Friday.

Underwriters say they are closely monitoring the market with the hope of seeing enough stability, liquidity, and demand for new issues to be priced.

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said, "what's really complicating the market's current status is the proximity to quarter end."

"So I think from an issuer's point of view, you need to effectively write off the rest of the month of September if you're seriously considering doing deals, just because generally speaking, as you progress toward the end of a given quarter, the market tends to be less liquid," he said. "Managers begin to do a little bit of window dressing, if you will. But with all of the occurrences in the last five to eight business days, you would see that particular trend really accelerate, and I would think that the market doesn't truly get more liquid until the early part of October."

However, Pietronico doesn't think the "window" for deals to price will open dramatically in October.

"I think the better credits will see market access, and I think the marginal credits will have difficulty, which really has been the case for a good deal of this year," he said. "I think the bankruptcy of Lehman and the conversion of Merrill into Bank of America has seriously reduced the liquidity in the market, and that is going to be particularly difficult for the marginal issuers, or the below investment grade issuers."

Pietronico also said it wouldn't surprise him if the market stays illiquid into 2009.

"That's obviously a fairly long distance away, but at this stage, so much has happened that I just don't think there's a lot of risk appetite in the market for putting capital to work, and I think that a lot of folks are just going to try to get to the end of the year without seeing any more upheaval," Pietronico said. "So it's going to be very difficult I think for the next three months, although I would expect to see the market open a little bit more in October. I just don't see it being buoyant until there's more players and more capital available for the market. Right now, that's been reduced rather dramatically in the last 10 days."

The Treasury market was mixed today, after posting losses earlier in the session. The yield on the benchmark 10-year Treasury note, which opened at 3.81%, was recently quoted at the same level. The yield on the two-year note was quoted recently at 2.09% after opening at 2.17%. The yield on the 30-year Treasury was quoted recently at 4.39% after opening at 4.38%.

"If you look at the bailout, in and of itself, I think the fear is it's going to be somewhat inflationary, that it's going to increase issuance and debt outstanding. So I think that's why we were weaker early on," said Bill Hornbarger, a fixed-income strategist at Wachovia Securities in St. Louis. "On top of that, oil has been everywhere today. I think that's a big concern."

However, Hornbarger said, offsetting that is the stock market being down, which he said is "behind why the market's come back a little bit."

"There's still this big fear premium that's willing to rush into the market. And I think that's really what's happened," he said. "You've got another little flight bid coming back into Treasuries."

Moving forward, Hornbarger said he believes Treasuries are still "obviously very captive to the headlines and what's happening in the other markets, to the extent that if we can get some clarification and some stabilization in those markets, I think it would help Treasuries."

"I think it's all tied together at this point," he said. "As long as these markets are volatile and illiquid, I think you're going to see the same in Treasuries."

The economic and new-issue calendars were light today.

Visible Supply
The Bond Buyer's 30-day visible supply fell $239.6 million to $13.229 billion. The total is comprised of $1.348 billion of competitive deals and $11.881 billion of negotiated bonds.

Previous Session's Activity
The Municipal Securities Rulemaking Board reported 38,735 trades Friday of 12,423 separate issues for volume of $20.8 billion. Most active was insured Kansas Development Finance Authority 5.25s of 2028, which traded 398 times at a high of par and a low of 97.750.

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Moody's Loses Credibility as Municipal Ratings Mean No Savings

Thursday, September 11, 2008
By Jeremy R. Cooke and Darrell Preston
of Bloomberg

Sept. 11 (Bloomberg) -- Moody's Investors Service is about to tell as many as 29,000 U.S. state and local government borrowers that they have higher credit ratings. That doesn't mean taxpayers will enjoy lower borrowing costs anytime soon.

Next month Moody's will start changing how it assesses tax-exempt bonds, a move that will boost ratings by an average of one to two grades for cities and towns. Even with the expected increases, a tax-exempt borrower currently rated A is being charged an extra $6 million in annual interest to sell $1 billion of bonds, up from about $2 million a year ago, according to Lehman Brothers Holdings Inc. data compiled by Bloomberg.

Borrowers such as California that lobbied for the ratings changes may not get the savings they sought because Moody's may not go so far as to judge their debt by default risk alone. Also, the slowest-growing economy since 2001 and a decline in the reliability of the ratings companies following the subprime-mortgage market collapse means the higher rankings may prove worthless to taxpayers.

"The ratings agencies have far less credibility than they did three years ago," said Mark McCray, a managing director who oversees about $18 billion in municipal bonds at Pacific Investment Management Co. The Newport Beach, California-based firm also manages the world's biggest bond fund.

The difference in borrowing costs for top-rated debt on the current municipal grading scale and A rated tax-exempt bonds in the $2.66 trillion municipal market has widened, rather than narrowed, leading up to when the new higher ratings take effect. The so-called spread has expanded to an average 60 basis points this month, according to Lehman data. A basis point is 0.01 percentage point.

No Benefit

Interest costs on 15-year debt for Nebraska's largest public power utility, rated A1 on Moody's municipal scale, have more than doubled from a year ago relative to top-rated tax-exempt bonds, climbing to 52 basis points, data compiled by Bloomberg and Municipal Market Advisors show.

"We have not witnessed any material tightening in the asset class as a result of the potential recalibration of muni ratings," said Peter DeGroot, head of the municipal strategies group at New York-based Lehman.

The ratings transition may be read by some individual investors as actual upgrades, suggesting that municipal finances are improving. That's confusing at a time when at least 29 states face $48 billion in combined budget shortfalls for fiscal 2009, according to the Center on Budget and Policy Priorities.

'Mixed Message'

"I couldn't think of a worse time to send the message to potential buyers of municipal bonds that we're going to, almost across the board, in a big swipe, upgrade everything," said John Flahive, who oversees more than $16 billion of municipal bonds as director of fixed-income at BNY Mellon Wealth Management in Boston. "To say it's a mixed message would be an understatement."

For about a century, Moody's used a separate rating scale for tax-exempt bonds to serve groups of issuers, buyers and broker-dealers who typically operated independently from other capital markets, such as those for corporate and mortgage bonds. The municipal ratings measure how close a borrower is to fiscal distress, while the global scale judges borrowers on their default probability and loss given default.

Borrowers from California to Connecticut rebelled against the dual standard earlier this year. Insurance they felt compelled to buy to increase their ratings, even though issuers with Moody's investment grades have historically defaulted less than 0.1 percent of the time, backfired.

California's Savings

Five of the seven top-rated guarantors, including MBIA Inc. and Ambac Financial Group Inc., were downgraded, in some cases lower than the municipal borrowers, amid losses on subprime securities they insured. The reductions pushed interest rates on some types of variable-rate debt up as much as fourfold, to 20 percent.

California Treasurer Bill Lockyer said in March that getting a Aaa rating may save taxpayers more than $5 billion over the life of the $61 billion in additional borrowing approved by voters. He also said the state paid $102 million from 2003-07 to buy bond insurance, which would have been "unnecessary" if the state had a top rating.

Moody's relented, and in mid-June said it would move its tax-exempt ratings onto a single "global scale" to allow for easier comparisons with corporate and sovereign debt. Since March 2007, the company had been offering to assign global ratings only to taxable bonds sold by state and local government borrowers who opted to pay extra for them.


The unit of New York-based Moody's Corp. in a Sept. 2 news release said the new public finance ratings would likely rise by an average of one to two grades when they are revised. More than 15 issuers who paid for a Moody's global ranking on their taxable debt had their ratings increased by one to five levels from their municipal assessment.

"They're not upgrading munis nearly as much as their original map implied," said Matt Fabian, managing director at the Concord, Massachusetts-based research firm Municipal Market Advisors. "It's very disappointing."

Moody's spokesman Tony Mirenda said it may be too soon to draw conclusions about where ratings will end up on the new scale. "It seems premature to go down this road," he said.

The taxable global ratings rolled out last year were to be used by investors in tandem with the municipal grades, not on their own, Moody's said.

"At the time that we do the recalibration of the muni ratings, we will also address those outstanding issues," said Gail Sussman, the group managing director for U.S. public finance at Moody's, whose founder created credit rankings.

No 'Credit'

California won a Aaa rating for its taxable debt in 2007, four grades higher than where Moody's rates the most populous U.S. state on its municipal scale. Under the new system, the state may be rated instead at Aa2, based on the average, two grades below the top, said Tom Dresslar, Lockyer's spokesman.

"They are not giving credit where credit is due," Dresslar said. "The only promise we make to investors is that we will pay you your money on time and in full. California has never failed to do that."

New York-based Fitch Ratings said on July 31 it was collecting feedback on a plan to move municipal ratings onto the same scale as corporate bonds.

Standard & Poor's, a New York-based unit of McGraw-Hill Cos., says it uses one scale and has upgraded more than 6,000 public finance credits based on "criteria changes and strong credit performance" since 2000. Upgrades outstripped downgrades by almost 14-to-1 in the first half of the year.

Under Fire

The changes come at a time when the ratings companies are under fire from lawmakers, investors and borrowers for not anticipating the meltdown in the market for subprime mortgages and the credit-market fallout. Coding errors by Moody's on securities called constant proportion debt obligations led to inaccurate ratings and the ouster of its structured finance head.

The firms assigned the highest ratings to securities backed by home loans to people with poor credit and were slow to downgrade them as delinquency rates began rising last year. Financial institutions have recorded more than $500 billion in losses and writedowns since the beginning of 2007.

When New York Attorney General Andrew Cuomo reached a settlement with the rating firms in July, after finding they improperly managed conflicts of interest, he cited internal e-mail messages including one by an analyst who wrote that some securities "could be structured by cows and we would rate it."

Waiting Game

Municipal borrowers may have to wait until the ratings are changed before costs go down. That's because institutions would then be able to use high-rated securities as collateral to borrow from money-market funds, analysts at New York-based JPMorgan Chase & Co. analysts said in an Aug. 22 report.

"The mapping of municipal credits to the global scale by Moody's should have been done many years ago as the U.S. economy was growing strongly," Mike Pietronico, chief executive officer of Miller Tabak Asset Management in New York, said in an e-mail. "We believe investors will balk at accepting lower yields with inflated ratings, and Moody's has further damaged their franchise by bowing to political pressure."

--With reporting by Christine Richard in New York. Editors: Beth Williams, Robert Burgess

To contact the reporters on this story:
Jeremy R. Cooke in New York at +1-212-617-5048 or
Darrell Preston in Dallas at +1-214-954-9454 or

To contact the editor responsible for this story:
Beth Williams at +1-212-617-2307 or

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Arizona Hospitals Borrow; New York Thruway Expands Muni Sale

Wednesday, August 20, 2008
By Jeremy R. Cooke
of Bloomberg

August 20 (Bloomberg) -- Arizona's Banner Health led U.S. tax-exempt borrowers today, and the New York State Thruway Authority boosted the size of its bond sale, as municipal securities at some maturities advanced.

Phoenix-based Banner, operator of 22 hospitals in seven states, sold $918 million of fixed-rate bonds to fund the acquisition of two hospitals, pay for capital projects and replace higher-interest debt. The Thruway agency almost doubled its offering today to $659 million to refinance debt as well as fund road and bridge project spending.

"There are some refunding opportunities that cropped up," John Bryan, chief financial officer of the authority, overseer of the longest toll-highway system in the nation, said in an interview. "The market's relatively stable today."

Yields on top-rated state and local government bonds due in five years fell today by 1 basis point, or 0.01 percentage point, to 3.02 percent, the lowest since early June, according to data compiled by Municipal Market Advisors.

The gap between tax-exempt yields on benchmark two- and 30-year bonds tightened today after reaching the widest since late 2004. Demand for the safety of short-term investments amid concern inflation may quicken and dilute longer-term, fixed-income investments has steepened the so-called yield curve, investors said.

"To the extent that you want to avoid the volatility on credits and inflation, you move shorter on the curve," said Michael Pietronico, chief executive of Miller Tabak Asset Management, a New York municipal-bond investment advisory firm.

The tax-exempt yield curve touched 254 basis points yesterday, before tightening to 252 basis points today.

"Steepening Bias"

"Unless you see the Fed begin to take back some of the rate cuts, there's going to be a continued steepening bias to the market, just because of the high readings we're having on inflation," Pietronico said.

JPMorgan Chase & Co. municipal analyst said in a Aug. 15 report that they expect the Federal Reserve to be neutral on interest rates until the first quarter, and Treasuries "to be range-bound in the near term."

Futures on the Chicago Board of Trade showed an 79 percent chance the U.S. central bank won't change its 2 percent target rate for overnight lending by its Dec. 16 meeting, up from 65 percent odds a week earlier. Policy makers next meet Sept. 16.

Since mid-year, Merrill Lynch & Co.'s total-return index of municipal bonds due in one to 10 years gained 2.2 percent, while its gauge of tax-exempt securities due in 22 years or more rose 0.4 percent.

In the two largest new municipal issues today, underwriters received enough investor demand to raise prices and cut yields on some maturities after initial pricing.

Banner Health

Morgan Stanley trimmed yields by 2 to 5 basis points on Banner Health bonds due in the next seven years, and Goldman Sachs Group Inc. made selective cuts of 1 to 2 basis points for the New York deal, according to data compiled by Bloomberg.

The Banner Health bonds, rated AA- by Standard & Poor's and issued through the Arizona Health Facilities Authority, offered yields ranging from 2.16 percent on one-year securities to 5.67 percent on debt due in 2038.

Ten-year bonds offered 85 basis points more than the yield on Municipal Market Advisors' scale, more than double the 39 basis-point spread at another bond sale in May 2007.

"On a spread basis, it's quite an adjustment," Pietronico said of municipal health-care bonds. "I'm not sure the depth of the institutional demand is that great for the sector."

Ten-year Thruway bonds rated AA by S&P and AA- by Fitch Ratings were priced to yield 3.89 percent, 15 basis points more than benchmark tax-exempt debt.

Individual Investors

The New York authority received $232 million of orders from individual investors before offering the bonds to institutions today, according to Bryan, who said the amount of so-called retail demand was "well within the traditional range."

The Thruway plans to sell at least an additional $363 million in bonds next week in an offering managed by Merrill and backed by personal income tax revenue from New York state. That deal's size may also increase, depending on refinancing opportunities, Bryan said.

Leading bond sales that investment banks bid to underwrite today was a $280 million offering by Maryland for transportation projects in the state.

Citigroup Inc. was the winning bidder, reoffering to investors bonds due in 10 years at 3.74 percent, matching the Municipal Market Advisors' index at that maturity.

Florida finance officials today gave notice they plan tomorrow to sell $200 million of bonds payable from lottery revenue via competitive bidding among underwriters, according to an e-mail. The deal will fund state education projects.

--Editors: Michael Weiss, Greg Storey

To contact the reporter on this story:
Jeremy R. Cooke in New York at +1-212-617-5048 or

To contact the editor responsible for this story:
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Port Authority Borrows as Insurer Woes Send Muni Yields Higher

Wednesday, July 23, 2008
By Jeremy R. Cooke
of Bloomberg

July 23 (Bloomberg) -- The Port Authority of New York and New Jersey leads tax-exempt borrowers offering debt via competitive bidding, as the prospect of downgrades at two top-rated bond insurers threatened to send municipal yields higher.

The Port Authority, owner of the New York City area's three biggest airports and the World Trade Center site, will sell $500 million of bonds today backed by operations that include bus and sea terminals, bridges, tunnels, and rail lines.

The agency is tapping the municipal market two days after Moody's Investors Service said two bond insurers that retained Aaa ratings through the subprime mortgage crisis may lose their top grades. The scrutiny may lead to higher interest costs for lower-rated state and local government borrowers, Michael Pietronico, chief executive of Miller Tabak Asset Management in New York, said in an e-mail.

"We think it means quality prevails, and insurance disappears in munis," Pietronico said. "Credit spreads within the municipal market are on the cusp of a violent move wider as investors value all bond insurance at zero," he said, referring to the extra yield offered by lower-quality debt above top-rated state and local government bonds.

Tax-exempt bonds rated AAA have gained 0.2 percent during the year so far, outpacing a 0.1 percent gain among securities from the A category and a 3.2 percent drop in debt ranked BBB, according to Merrill Lynch & Co. total-return indexes.

Yields on top-ranked general obligation bonds rose 5 basis points, or 0.05 percentage point, to 4.95 percent yesterday, the highest in three weeks, based on data compiled by Municipal Market Advisors.

Higher Costs?

Moody's decision to place Financial Security Assurance Inc., or FSA, and Assured Guaranty Corp. under review for possible downgrade "may well be the end of bond insurance as we know it," Municipal Market Advisors, a Concord, Massachusetts-based research firm, said in a research note yesterday.

If downgrades occur, the municipal market may see a decline in overall bond issuance and higher interest costs, CreditSights analysts led by Rob Haines in New York said in another research note yesterday.

"The municipal markets could shift to a AA model in the near term, but this shift would still mean higher financing costs at a time when municipal tax revenues are declining," the analysts said.

Berkshire Hathaway Assurance Corp., the bond insurer created in late December by billionaire investor Warren Buffett, remains unchallenged with a top rating, though it probably won't "ever participate in the primary market in a meaningful way," according to the Municipal Market Advisors note.

Shrinking Market

Berkshire has focused on insuring existing municipal debt, backing just $361 million of new issues during the first half, based on data compiled by Thomson Reuters.

Municipal borrowers' use of bond insurance overall dropped more than 50 percent during the period to $54 billion among $228 billion in debt sales, Thomson data show.

Investors in recent months ran from bonds insured by MBIA Insurance Corp. and Ambac Assurance Corp. to the guarantees of FSA and Assured Guaranty, Pietronico said, "without giving thought to the validity of the industry," adding: "We believe Berkshire Hathaway is a 'sell'."

The Port Authority is offering bonds that carry the fourth-highest of 10 investment grades from Moody's, Standard & Poor's and Fitch Ratings.

At the authority's $400 million tax-exempt offering on Dec. 5, uninsured 30-year bonds were priced to yield 4.55 percent, 10 basis points more than Municipal Market Advisors' index.

Twenty-year securities insured by Ambac yielded 6 basis points more than the firm's top-rated index that day; they traded in a $14 million block on March 4 at a spread of 37 basis points, according to Municipal Securities Rulemaking Board data.

In February, some of the Port Authority's MBIA-backed auction-rate securities soared in cost to 20 percent and became emblematic of the collapse in that market, sparked in part by investors fleeing insured debt threatened with downgrades. Those taxable bonds were refinanced in March.

--Editor: Beth Williams

To contact the reporter on this story:
Jeremy R. Cooke in New York at +1-212-617-5048 or

To contact the editor responsible for this story:
Beth Williams at +1-212-617-2307 or

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Assume "Defensive" Muni Posture, Miller Tabak's Pietronico Says

Thursday, July 10, 2008
By Jeremy R. Cooke
of Bloomberg

July 10 (Bloomberg) -- Michael Pietronico, chief executive of Miller Tabak Asset Management, an investment advisory unit of New York-based Miller Tabak & Co., comments on a possible bailout of Fannie Mae and Freddie Mac, the two biggest providers of home-loan financing in the U.S.

Former St. Louis Federal Reserve President William Poole said the federal government may need to bail out the companies because they don't have enough capital.

On investing in state and local debt:
"We are advocating an immediate defensive posture in municipal bonds due to the potential for a U.S. government bailout of Fannie Mae and Freddie Mac."

On direction of interest rates:
"A 'dilution' of the existing supply of U.S. Treasuries will cause the rate structure in this country to rise as the balance sheet of the U.S. government becomes increasingly strained. This would also cause a rapid adjustment in municipal bond yields as 'AAA,' federally guaranteed debt saturates the fixed-income landscape."

On relationship between tax-exempt and taxable bonds:
"Investors should look at where municipals currently trade on a relative basis to agency debt to gauge where the 'realignment' of taxable versus tax exempt ratios may be headed."

--Editors: Michael Weiss, Stacie Servetah

To contact the reporter on this story:
Jeremy R. Cooke in New York at +1-212-617-5048 or

To contact the editor responsible for this story:
Beth Williams at +1-212-617-2307 or

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Miller Tabak's Pietronico Says Moody's Bowing to Pressure

Thursday, June 12, 2008
By Jeremy R. Cooke
of Bloomberg

June 12 (Bloomberg) -- Michael Pietronico, chief executive officer of Miller Tabak Asset Management, a municipal-bond investment advisory unit at New York-based Miller Tabak & Co., comments on proposed changes in Moody's Investors Service's U.S. public finance credit ratings.

Moody's said today it would continue collecting comments through June 30 on a revised plan to rate U.S. municipal bonds on the "global scale" used for corporate and sovereign debt.

On reasons for the change:
"Moody's has bowed to political pressure and has decided to uniformly upgrade vast amounts of municipal credits just as state and local budgets are weakening due to falling property and sales tax rates."

On timing of the announcement:
"While we have long believed that municipal bonds were of superior quality to similarly rated corporate debt, the timing of this move in philosophy by Moody's again raises the issue of who they are working for. Is it the issuer or the investor?"

--Editors: Michael Weiss, Dennis Fitzgerald

To contact the reporter on this story:
Jeremy R. Cooke in New York at +1-212-617-5048 or

To contact the editor responsible for this story:
Beth Williams at +1-212-617-2307 or

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Sea Change

Sunday, June 1, 2008
By Robert Barkin
American City and County

When Virginia Beach, Va., went out to the municipal bond market in late April to refinance $52 million in general obligation bonds, finance officials were pleased by the market's reaction. A record 13 bidders took part, and the city was rewarded with more than $2.4 million in savings. "There were good conditions for a refunding," says Patricia Phillips, the city's director of finance.

Of course, Virginia Beach's top-notch AAA rating did not hurt a bit. With some cities tottering on the brink of bankruptcy because of market turmoil, states arguing with rating agencies about the fairness of their ratings, and even the municipal bond insurers themselves staring at balance sheets replete with over-valued securities, a solid gold rating is needed to receive any respect in a financing world that many have been taking for granted.

In today's municipal bond market, even Virginia Beach's high rating has its limits. The city had several other candidates for refunding that it decided to delay for another time. "The market was too choppy," says Richard Dunford, the city's debt financial service administrator.

While Virginia Beach has managed to save money in the market, many more cities have not been as fortunate. With borrowers (mostly mutual funds and hedge funds) concerned about the credit markets in general, government offerings have carried a higher interest rate - as compared to U.S. Treasury securities - some of the highest in a decade. Those unwilling to pay the higher rate, like some of the bonds in Virginia Beach, are waiting for market conditions to improve.

Meanwhile, the California Treasurer is arguing that investment ratings from New York-based Moody's Investors Service and Standard & Poor's are hurting bond offerings and taxpayers, and the rating methods should change. In addition, subprime mortgage failures and risky investments have called into question the safety net municipal bond insurers offer. The typically calm industry that many were content to leave to the number crunchers has turned rocky, and local governments are holding on for a topsy-turvy ride.

Not worth the cost of paper

It might seem a long way from the wobbly balance sheet of the United Bank of Switzerland or Bear Stearns to a sewer project on Main Street. Yet, the entire subprime mess that has plagued the world since last summer has demonstrated that the credit markets essential for the workings of the world economy are part of a vast global soup. The $2.6 trillion municipal bond market is just part of the mix.

The subprime crisis affects the municipal bond market in several ways. First, the banks that are the first tier of the credit markets are so consumed with the falling value of the mortgage bonds on their books that they are reluctant to lend out money to any borrower, regardless of their creditworthiness. Second, cities and counties with low credit ratings rely on bond insurers to guarantee the payment of the security's principal when they issue bonds. Though they pay premiums to the insurers, cities and counties can borrow at a lower cost than if they had to rely on their own credit rating. But, the two biggest municipal bond insurers - Ambac Financial Group and MBIA - revealed late last year that their own balance sheets were filled with overvalued securities, and the market grew less certain about whether they could make good on the municipal securities they backed.

Third, local governments that had been wooed by Wall Street with promises that "auction-rate" bonds would cost less than traditional fixed-rate bonds learned that what sounds too good to be true usually is. Auction-rate securities are long-term bonds that are treated as short-term securities because investors sell them at auctions that take place every few weeks, which also resets the interest rate the bonds pay.

With lenders skittish, cities and counties that had relied on weekly auction rates rather than fixed interest rates for their bonds found out why they had been receiving such good news about what they paid on their bonds: They had been taking huge risks. Once the credit markets were frozen, no bankers wanted to bid on the floating rate securities. Unfortunately for the cities and counties that had them, the loans had provisions that if there were no auction-rate borrowers, they were obligated to pay unsustainable rates at two and three times previous levels.

Jefferson County, Ala., which used auction-rate bonds to finance sewer system repairs, is tottering on bankruptcy because its $3.2 billion in sewer bonds are costing far beyond the amount of revenue that could be expected from its user fees. At a minimum, county residents will be paying higher fees for many years to bail out the securities. (In addition, the Securities and Exchange Commission (SEC) sued the mayor of Birmingham, located in Jefferson County, in late April for his cozy relationship with the firm that sold the bonds. He has denied wrongdoing.)

The silver lining

Ironically, the problems of communities like Jefferson County may actually benefit others with sounder investment policies. Huntsville, Ala., about 100 miles north of Birmingham, is cautiously optimistic about its prospects for a bond offering in the fall. With its AA+ rating, the city's debt always has been attractive, says Randy Taylor, the city's director of finance. "We may be more so," he says. "With all of the news about the derivative-related markets, we're hoping that the market will see us as a safer bet."

Huntsville goes to the market every three to four years, on a planned schedule. "We're optimistic that the competition for our securities will be as high as in the past," Taylor says. "We understand that this is not the best of times. We hope the market improves."

As finance director, Taylor says the city's financial disclosure and budgetary prudence are critical, especially in tough market conditions. "We are a transparent organization," he says. "We exercise prudent, careful management. We have a conservative philosophy at the city."

Major buyers in the municipal market agree that the market has seen significant turmoil, but that the volatility has not been without rewards for savvy buyers. Michael Pietronico, a veteran municipal bond manager and the chief executive officer for Miller Tabak Asset Management, a New York-based municipal bond adviser, says that the strength of the issuer will be more critical than ever in the marketplace. "From the investor's point of view, what kind of financial operation they run will determine what kind of interest they will be paying," he says.

Rebuilding the system

In responding to the unsettled markets, state and federal officials have proposed changes that they argue will improve the bond market's efficiency. Last July, SEC Chairman Christopher Cox called for Congress to set new disclosure rules for municipal borrowers, saying there is an "urgent need" to improve the information that investors receive. The SEC has been concerned about disclosure because of instances where inadequate information led to defaults, such as in Orange County, Calif.'s bankruptcy in 1994. However, only 0.1 percent of municipal bonds have defaulted since 1970.

Others say that greater SEC regulation is not a panacea. "We advocate for the investor, and we're always for more disclosure," Pietronico says. "But, I wouldn't be too comfortable thinking that the government wouldn't make a mistake. After all, the subprime situation was a case of too little oversight. The idea that a government agency can handle the books rings hollow when you consider where it's coming from."

California Treasurer Bill Lockyer supports another proposal, where the rating agencies treat the municipal market the same way that they review private corporations' debt. "Under the current system, [ratings are] applied to corporate bonds on one yardstick, but municipal bonds on a very different yardstick," he wrote in a letter to Moody's Investors Service. He said treating the two markets with similar ratings would lower interest costs for municipal investors and "enable the market to function more efficiently."

Moody's has said that it intends to increase the availability of the corporate rating system for municipal bonds. The other rating agencies are studying the request.

Pietronico notes that the entire rating system has to be considered in light of an arrangement where the issuing municipality pays the agency to rate its bonds. Still, he says there is merit in some of what Lockyer is proposing, but again, the situation should be placed in context. "Municipals are safer than corporates," Pietronico says. "But when an issuer goes to an agency in an attempt to strong arm them into a higher rating and [the agency submits], it reflects poorly on the agency. And, it could backfire on the issuer."

That the municipal bond market can be convulsed by events both of its making and beyond its control has to be disturbing to the many staid investors who have relied on its dependability. But, like most bumps in the financial markets, many say the problems will eventually work themselves out. In the interim, cities and counties will have to tread lightly and learn from the mistakes that were made. "The market will snap back," Pietronico says, "but there's no question that the subprime problems are weighing heavy on the economy."
- Robert Barkin is a Bethesda, Md.-based freelance writer.

Supreme Court preserves needed break for local governments

As if the municipal bond market did not have enough worries in 2008, a case before the U.S. Supreme Court threatened to bring debt financing in state and local governments to a complete halt. Fortunately, the court ruled 7-2 in May to keep the world of municipal finance spinning. "The Supreme Court reaffirmed that government's floating debt securities for public works is a quintessential public function," says Jeffrey Esser, executive director/CEO of the Chicago-based Government Finance Officers Association (GFOA), a membership organization for public finance officials.

The ruling upholds the tax-free status for state-issued municipal bonds bought by residents of the issuing state. For example, New Yorkers who buy New York City bonds or Californians who buy California bonds do not pay any local or federal taxes on those investments. The state tax exemption for those residents does not apply to out-of-state bonds. Investors who buy out-of-state municipal bonds get federal tax breaks, but no breaks from their states or cities.

A Kentucky investor brought the case, claiming that the state's decision to tax him for out-of-state bonds was discriminatory. The Supreme Court heard arguments on the case late last year and reached its decision only a few months later. GFOA argued in a brief before the court that small and local governments need intrastate markets because they do not have access to national capital markets that larger issuers do. "The court recognized the effect that a contrary decision would have on small, local governments," Esser says, adding that the 7-2 decision "doesn't leave any doubt about the issue."
- Robert Barkin

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Boston's CareGroup Borrows as Fixed-Rate Muni Sales Fall 20%

Wednesday, May 21, 2008
By Jeremy R. Cooke
of Bloomberg

May 21 (Bloomberg) -- CareGroup Inc., a nonprofit health system that operates hospitals in the Boston area, led U.S. tax-exempt borrowers today, as sales of fixed-rate municipal bonds lag almost 20 percent behind last year's pace.

CareGroup sold about $501 million of fixed-rate bonds as part of its move to replace auction-rate debt whose interest costs rose to as high as 11 percent when investor demand and dealer support faltered three months ago. The parent of Harvard-affiliated Beth Israel Deaconess Medical Center also raised about $150 million for new capital projects.

Municipal bonds were little changed today, outpacing declines in U.S. Treasuries, as reinvestment demand meets with less fixed-rate issuance than last year. States, localities and other municipal borrowers sold $106 billion of fixed-rate bonds through May 15, down from $133 billion during the same period in 2007, based on data cited by Merrill Lynch & Co. this week.

"It's a fairly low supply environment, something that's pretty conducive to bringing new issues," said Michael Pietronico, chief executive of Miller Tabak Asset Management, a New York-based municipal-bond investment adviser.

Average yields on top-rated, 10-year general obligation bonds held at 3.71 percent today, their lowest since February, after falling 3 basis points yesterday, according to Municipal Market Advisors. A basis point is 0.01 percentage point.

"The market has been rather subdued today; there doesn't seem to be the volume that there was yesterday," Pietronico said. "Munis are very much an offered market right now. You're not buying too many bonds on the bid side."

Variable-Rate Conversions

Fixed-rate issuance has been damped in part by municipal issuers choosing to convert their auction bonds into another form of variable-rate debt, instead of fixed-rate obligations.

Including variable-rate deals, long-term municipal issuance is much closer to last year's record pace, with sales totaling $155 billion, down less than 2 percent, according to the Merrill report, which cites data from Thomson Reuters.

Municipal bonds, aided by the lighter issuance, are headed for their best May performance in five years, advancing 1.2 percent for the month through yesterday, based on Merrill's Municipal Master Index, which accounts for price gains and interest income. The index returned 2.9 percent in May 2003.

Yields spiked three months ago after auction-rate bonds collapsed, hurting demand in the broader municipal market, and eventually led to hedge funds liquidating some of their tax-exempt holdings to meet margin calls.

State and local bonds have gained 5.6 percent since Feb. 29, as investors sought out tax-exempt yields exceeding those on U.S. Treasuries, a rarity for top-rated municipal securities.

Traditional Relationship

The 10-year yield tracked by Municipal Market Advisors represented 97 percent of the benchmark Treasury note today, compared with March's record 115 percent and an average of 87 percent since 2001.

"The traditional relationship between municipals and Treasuries is moving back toward a more historical alignment," Pietronico said.

In today's largest tax-exempt issue, CareGroup sold revenue bonds due from next year through 2038, with ratings of A3 from Moody's Investors Service and BBB+ from Standard & Poor's.

Thirty-year bonds were priced to yield 5.36 percent, 59 basis points more than Municipal Market Advisors' scale of top-rated general obligation debt. At the 10-year maturity, the so-called spread was 90 basis points.

The Massachusetts Health and Educational Financing Authority is issuing the hospital debt, and Citigroup Inc. marketed the bonds to investors.

Colorado Toll Road

Also today, the E-470 Public Highway Authority in Colorado converted $422 million of auction-rate debt issued last year into fixed-rate bonds. The state-created operator of a toll-road beltway around the Denver area moved to stem interest costs that rose as high as 12 percent. Morgan Stanley managed the deal.

The E-470 bonds carry municipal credit ratings of BBB- from S&P and Fitch Ratings and Baa2 from Moody's as well as insurance from MBIA Insurance Corp., rated AAA by S&P, Aaa by Moody's and AA by Fitch.

Yields on about half of the bond deal ranged from 2.77 percent on debt due this September to 5.26 percent on bonds maturing in 2024 that the authority can call, or buy back, beginning in 2015, preliminary data compiled by Bloomberg show. Eight-year bonds were priced at a spread of 118 basis points to the Municipal Market Advisors scale.

The highway authority also sold debt with mandatory tender dates at which the interest rates can be changed again. Bonds due in 2039 that will be tendered in 2011 were priced to yield 4.50 percent; debt with a five-year tender yielded 4.75 percent.

--Editors: Beth Williams, Michael Weiss

To contact the reporter on this story:
Jeremy R. Cooke in New York at +1-212-617-5048 or

To contact the editor responsible for this story:
Beth Williams at +1-212-617-2307 or

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UPDATE:High Court Upholds In-State Tax Exemptions For Muni Bonds

Monday, May 19, 2008
By Mark H. Anderson
Of Dow Jones Newswires

WASHINGTON -(Dow Jones)- The U.S. Supreme Court on Monday voted 7-2 to uphold the tax exemption states and localities give to in-state municipal bonds.

The ruling overturns a Kentucky appeals court holding that had said the practice violates the U.S. Constitution because it discriminates against out-of-state bonds. The outcome means the opinion will require no changes in the current structure and operation of the market for public municipal bonds, including private-activity bonds.

"This decision keeps the status quo in the municipal bond market," said Michael Pietronico, chief executive of Miller Tabak's municipal asset-management division.

Justice David Souter wrote the main opinion for the court. Seven justices agreed that states and localities can give a tax break to purchasers of in-state bonds without violating the U.S. Constitution.

"Kentucky's tax exemption favors a traditional government function without any differential treatment favoring local entities over substantially similar out-of-state interests," Souter wrote. "This type of law does not discriminate against interstate commerce."

The majority opinion cited a Supreme Court ruling from the prior term - the United Haulers case - as the basis of its holding that municipal bond tax exemptions are acceptable in part because the tax breaks have a public benefit.

"This logic applies with even greater force to laws favoring a state's municipal bonds given that the issuance of debt securities to pay for public projects is a quintessentially public function," Justice Souter said.

The high court wasn't in complete agreement over how to resolve the case. Justice Souter's opinion includes a section in his opinion that drew only three votes of support. Chief Justice John Roberts Jr. and Justices Antonin Scalia and Ruth Bader Ginsburg all said this section wasn't necessary for the court to rule in favor of tax breaks for muni bonds.

It took the Supreme Court more than six months to decide the bond case. Souter's insistence in including the embattled language that triggered the partial dissents is one possible explanation for the delay.

Justices Anthony Kennedy and Samuel Alito dissented, arguing the majority was further weakening the power of interstate commerce provisions in the Constitution to encourage free and efficient markets.

The lawsuit began in 2003 when two Louisville residents, George and Catherine Davis, filed a class-action lawsuit against Kentucky, arguing it was wrong for the state to tax interest on their out-of-state bond investments while exempting in-state bond interest.

A trial judge ruled against them. But the Kentucky Court of Appeals reversed, ruling the state interest exemption violated the U.S. Constitution because the same break isn't extended to out-of-state bond products. The Kentucky Supreme Court in 2006 let the lower court ruling stand.

More than 40 states exempt interest on in-state municipal bonds from income taxes, creating what is a tremendous nationwide market for bond products carved up by state boundaries. According to the Bond Buyer/Thomson Financial 2007 Yearbook, state and local government bonds are increasingly popular, with $891 billion issued in 2005 and 2006 alone.

The case is Kentucky v. Davis, 06-666.

Mark H. Anderson
Dow Jones Newswires

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UBS Muni Move Could Be Boon For Rich Clients

Thursday, May 8, 2008
By Evelyn Juan
A Dow Jones Newswires Column

UBS Wealth Management US could be losing a key tool to luring the richest of rich as it starts to rely on trading municipal-bond products on the secondary market for its thousands of retail customers.

With UBS AG's (UBS) move to exit from underwriting municipal debt, the Swiss bank is planning to put around 60 to 70 municipal-bond traders in its US wealth management unit to facilitate clients' continued access to municipal bonds.

This isn't expected to be noticeable to the vast majority of UBS' retail brokerage clients and financial advisors who are now trading on the secondary market. Karina Byrne, a UBS spokeswoman, said more than 80% of its clients are accessing secondary inventory.

But, still, municipal-bond experts say reliance on the secondary market could be a boon for rich clients who could be looking for ways to offset their high income-tax bracket by turning to tax-free types of investments.

Municipal bonds are debt obligations issued by a state or local government to raise public funds for special projects. Interest received from investing into these bonds is generally exempt from certain income taxes, particularly Federal income tax.

A municipal-bond executive at a rival firm said bonds from internal inventory are often better priced than if the dealer has to go out and start marking up prices from the secondary market. Accessing municipal bonds though the secondary market could also pose a challenge for new-issue syndicates.

"You cannot successfully be in a municipal business unless you have three components: sales, trading and underwriting," said Alexandra Lebenthal of Lebenthal & Co. LLC, which specializes in municipal-bond trading for individual investors.

"If you take the three legs away, you still have a seat but if everybody else is seating on a stool; you are at a disadvantage," Lebenthal added.

UBS is so far the biggest investment bank to pull out of the underwriting business for municipal debt over the past two decades amid ongoing problems in the credit market.

This year, the Swiss bank was the fourth largest underwriter of municipal debt, based on issuance size, and last year was in the number-three spot, according to Thomson Reuters data.

Marten Hoekstra, head of UBS Wealth Management US, conducted a conference call with the company's more than 8,200 financial advisors this week to discuss the firm's efforts to maintain trading of municipal bonds for retail clients amid the firm's move to exit from the underwriting business.

"The brokers responded well to our commitment," spokeswoman Byrne said. "The message we want to get through is -- we consider this as a core component of their core portfolio."

With UBS' move to pull out of the underwriting business, the bank pledged to provide an "open architecture" platform that would allow clients to buy new issues underwritten by other firms.

Byrne said the Swiss bank also plans to enter into a preferred provider arrangement with these firms that would enable UBS to offer competitive prices for new issues underwritten by rival firms.

But some industry experts are skeptical about the strategy. A municipal-bond executive at a rival firm of UBS said many underwriting deals nowadays have retail-order periods, in which retail investors are given the opportunity to place their orders before the remainder of the deal is shown to institutions. He added that getting out of a block of bonds could also prove easier for an active underwriting firm compared to a marginal player on the sell side.

Availability of municipal-bond products could also be a challenge, particularly in high-tax states with limited inventory of municipal bonds.

Firms that end up taking table scraps from the secondary market in those states may not find the bonds that they want. And even if they do, the markups could be stiff.

"Retail investors tend to have narrow parameters as to couponing -- they want bonds prices near par," said the muni executive. "A lot of the inventory that floats around in the secondary doesn't meet these parameters."

But still, Michael Pietronico, chief executive of New York-based Miller Tabak Asset Management, said UBS' alternative is better than having no alternative at all. "It will put them at a slight disadvantage but they'll still be a formidable entity," he says.

It remains to be seen how UBS will fare in trading municipal bonds for retail investors. Relying on the secondary market could be a "nuisance" for UBS, Pietronico says. But overall, he adds, "they will survive."

(TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.)

(Evelyn Juan writes about financial advisors and their jobs, with a particular focus on the transformation of the brokerage business from a transaction-oriented model to fee-based financial advising.)

Evelyn Juan
Dow Jones Newswires

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Miller Tabak's New Unit Specializes in Handling High-Quality Munis

Wednesday, March 19, 2008
By Michael Scarchilli
The Bond Buyer

Citing an increased need for professional management of municipal bond investments an the increasingly volatile market, Miller Tabak & Co., LLC launched a subsidiary investment advisory firm specializing in the management of high-quality municipal bonds for individuals.

Miller Tabak Asset Management will be spearheaded by founding partners Tony Crescenzi, who has worked for Miller Tabak since 1986, and Michael Pietronico, who had previously been with Evergreen Investments and predecessor firms since 1992.

Crescenzi is the chairman of Miller Tabak Asset Management, which officially launched on March 10, the date Pietronico joined the company. Pietronico is the new subsidiary's chief executive officer.

"Miller Tabak wanted to branch out into the asset management side, and Tony and I had wanted to work together for quite some time, and the opportunity was right, as I left Evergreen, to do it now," said Pietronico, who was previously senior vice president and portfolio manager at Evergreen. "How we're going to operate is as a separate investment advisory firm of Miller Tabak. Tony and I are original founding partners of the firm, and Miller Tabak, the broker-dealer side, has an equity interest, obviously."

Pietronico said they will be managing individual accounts, and there will be no limit to the amount of assets they can take in.

He also said that with the "weakness in monoline insurers and the way that credit spreads in the market have been widening out, pretty much since last August, the need for professional management for individual municipal portfolios has gone up quite dramatically."

"We don't see that changing any time in the near future," Pietronico said. "We think that the market has changed permanently and, outside of a few certain instances, the need for credit work and the need for diligence on issuers' finances is going to remain high, and that's a perfect backdrop for professional management."

Additionally, Crescenzi said that he and Pietronico feel "there are opportunities to trade into securities that have the prospects to possibly ascend, in terms of reduced credit risk."

Crescenzi, who is also chief bond market strategist at Miller Tabak and will be holding a dual role, said that the new venture is exciting for him because he's "always had an inkling to manage money, because I've been lucky enough to have good calls on interest rates and other asset classes, and I would like to apply" the knowledge.

"People are always looking to do more in life, and this is one of those things, for me at least," Crescenzi said. "I've tracked markets for a long time, and had a good track record there, so I need to apply it more. I want to put more of what I know to work, into helping people make money. Because that's essentially what I've done since I started doing work in this interest rate field ... really help people to make good decisions in all asset classes."

Crescenzi said the firm is currently in the process of building its assets. He wrote the Strategic Bond Investor, which was published in 2002, and recently revised the 1,200-page book Stigum's Money Market, first published in 1978 by Marcia Stigum.

Michael Scarchilli
Senior Market Reporter
The Bond Buyer
One State Street Plaza, 26th Floor
New York, NY 10004

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