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In The News - 2009

  News from 2010
December 31, 2009 Insurers' Obit Could Be Premature - The Bond Buyer
December 21, 2009 Treasury Yield Curve Steepens to Record Amid Growth Outlook - Bloomberg
December 11, 2009 Tax-Exempt Muni Bond Sales Rise 64%, Led by More Refinancing - Bloomberg
December 4, 2009 Jobless Recoveries: The New Normal, It Seems - The Wall Street Journal
November 30, 2009 Downbeat Data to Test Optimistic Investors - The Wall Street Journal
November 24, 2009 Treasury Urge: Investors Still Hungry for Notes, as Sale Goes Well - The Wall Street Journal
November 20, 2009 Yields in a Falling Mood As Market Grows Firmer - The Bond Buyer
November 20, 2009 Muni Bond Yields Slide to Four-Week Low as Sales Outlook Falls - Bloomberg
November 9, 2009 Investors Hope It's a 1983 Flashback but... - The Wall Street Journal
November 7, 2009 Treasurys Split on Jobs, Sales - The Wall Street Journal
November 3, 2009 FSA Gets New Name as Part of Assured Family - The Bond Buyer
October 28, 2009 Treasury Prices Up As Weak Data, Stocks Lift 5-Yr Note Auction - The Wall Street Journal
October 23, 2009 Yields Mixed; Refundings Pulled From Primary - The Bond Buyer
October 9, 2009 California Sale Pushes Munis Down, Lifts Yields Most Since June - Bloomberg
October 6, 2009 UPDATE: Munis Pull Back; First Slip Since Aug For 10-Yr -MMD - Dow Jones Newswires
October 2, 2009 Tax-Free Bond Yields Reach a 40-Year Low - The Wall Street Journal
October 2, 2009 Indexes: 40-Year Lows - The Bond Buyer
October 1, 2009 (Mis)leading Indicator: Factory Data, Maybe - The Wall Street Journal
September 15, 2009 Tit for Tat on Inflation-Deflation Front - The Wall Street Journal
August 31, 2009 As BAB Deluge Eases, Projected Volume Slips to $2.49 Billion - The Bond Buyer
August 24, 2009 Budget-Less Pennsylvania Seeks Savings in Refunding - The Bond Buyer
August 3, 2009 Record Treasury Debt Seen to Have Minimal Short-Term Effect on Munis - The Bond Buyer
August 1, 2009 Financial Lockdown - American City & County
July 24, 2009 Munis Buoyed by Below-Average Week of $5.6 Billion in Offerings - Bloomberg
July 8, 2009 California Debt Tempts Bargain Hunters - The Wall Street Journal
June 24, 2009 Calif To Issue IOUs If No Budget, Cash Resolution - Dow Jones Newswires
June 24, 2009 Muni Market Quiet; California Bonds May Offer Opportunity - Dow Jones Market Talk
June 12, 2009 Yields Climb Amid New Deals and Weaker Treasuries - The Bond Buyer
June 10, 2009 Puerto Rico to Sell Largest Tax-Exempt Bond Deal in 10 Weeks - Bloomberg
June 9, 2009 Muni Yields Rise to Eight-Week High as Texas, Washington Borrow - Bloomberg
June 4, 2009 Miller Tabak's Crescenzi Moving to Pimco as a Senior Vice President - The Bond Buyer
May 22, 2009 Munis Flat as Treasuries Tumble - The Bond Buyer
May 22, 2009 Yields Mostly Decline as Munis Firm in 'One-Way Train' - The Bond Buyer
May 20, 2009 Yields May Signal Recovery - The Wall Street Journal
May 15, 2009 San Diego Leads Rise in Muni Sales as Yields Reach 8-Month Low - Bloomberg
May 11, 2009 Government Holds Strings to Markets - The Wall Street Journal
May 8, 2009 Treasuries Entering Bear Market as Bonds Trail Stocks (Update1) - Bloomberg
May 4, 2009 Sales Have Treasury Chasing Its Tail - The Wall Street Journal
April 20, 2009 Calif., N.J. BAB Deals Lead Week; Total Volume Over $10 Billion - The Bond Buyer
April 17, 2009 Muni Watch: Get Ready For Flood Of Build America Bonds - Dow Jones Newswires
April 9, 2009 Munis Advance for Second Week Amid $5.4 Billion in Bond Sales - Bloomberg
April 9, 2009 Yield Indexes Narrowly Mixed Amid String of Slightly Firmer Sessions - The Bond Buyer
April 6, 2009 Munis Quiet As $583M NYC Deal Draws Retail - Dow Jones Market Talk
March 27, 2009 Muni Borrowers Sell Most Since 2006 as Demand Caps Yield Rise - Bloomberg
March 20, 2009 California to Launch $4 Billion Bond Deal - The Wall Street Journal
March 12, 2009 Prices little changed as deals flow - Reuters
March 2, 2009 Maryland Leads $5 Billion in Muni Sales Amid Record Yield Gap - Bloomberg
February 25, 2009 Market Wonders If NYC Bonds Are Overrated - Dow Jones Newswires
February 19, 2009 Passage of California Budget Could Unleash Supply - Dow Jones Market Talk
February 13, 2009 Most Indexes Down With Munis Flat or Firmer in Each Session - The Bond Buyer
February 9, 2009 Bond Insurers Go Off the Cliff, And LOCs Take Up Some Slack - The Bond Buyer
January 27, 2009 Yankees Face Higher Muni Borrowing Costs to Complete Stadium - Bloomberg
January 9, 2009 Munis Firmer; Yields Lower 5-6 Basis Points - The Bond Buyer
January 9, 2009 Bond Buyer Indexes Up Following Four Firmer Sessions - The Bond Buyer
January 5, 2009 State, Local Borrowers Plan Most Bond Offerings in Four Weeks - Bloomberg
  News from 2008

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Insurers' Obit Could Be Premature - The Bond Buyer
Assured Is Optimistic, and Other Firms Eye Entrance

Thursday, December 31, 2009
By Patrick McGee
The Bond Buyer

As 2009 draws to a close, the outlook for the municipal bond insurance market is looking uncertain.

Insured bonds reached a peak of 57.1% of new issuance in 2005, but as most insurers were downgraded after they unsuccessfully ventured into the hazardous territory of structured finance, that number dwindled to just 8.7% this month, according to Thomson Reuters.

However, the one company still writing new insurance believes the market is far from dead. Assured Guaranty Ltd. - parent of Assured Guaranty Corp. and Assured Guaranty Municipal Corp., formerly Financial Security Assurance - believes the insured portion of new issuance will more than triple in the next five years to eventually become a third of the issuance pie.

They are not alone. Other companies are working to enter the market, vowing to stay within the confines of public finance and reiterating the mantra that they will insure only investment-grade debt.

One example is Municipal and Infrastructure Assurance Corp., an insurance neophyte backed by Macquarie Group and Citadel Investment Group. MIAC has recently received financial strength ratings but has not released the information to the public yet, according to vice chairman Richard Kolman. He said the company plans to enter the market in the first quarter of 2010, backed by capital "multiples above" statutory requirements.

Other possible entrants are former players in the game tired of sitting on the bench.

MBIA Inc. - which saw its portfolio implode and company stock tumble by more than 94% from January 2007 owing to its backing of mortgage-related structured finance bonds - has created a public finance-only entity, National Public Finance Guarantee Corp., with hopes to begin writing new policies "sometime in 2010," according to spokesman Kevin Brown.

Ambac Assurance Corp., which currently is at risk of having its stock delisted by the New York Stock Exchange, also attempted to reenter the market with a new public finance subsidiary earlier this year, but it was unable to raise enough capital for the restructuring. More recently, the company warned that it may have to file for bankruptcy protection as liquidity could dry up by mid-2011. Ambac declined to comment for this article.

Financial Guaranty Insurance Co., once the fourth-most active bond insurer, was suspended by New York state regulators in late November from paying claims until it repaired its tattered balance sheet. The company, which did not return calls for comment, has until Jan. 5 to submit a "surplus restoration plan." Meantime, most of their public finance business has been reinsured by NPFG.

For all potential players, the lure of the market is clear. To start with, the risk is relatively small. Moody's Investors Service data from 1970 to 2006 show the historical default rate of investment-grade municipal bonds - rated Baa or higher - was just 0.07% over a 10-year horizon, compared with 2.09% for corporate debt. Secondly, insurance can be a triple-win situation for all parties in the transaction. The insurer earns a premium for wrapping the credit, the lender gains the security of timely payments, and the borrower saves money by entering the market at a lower yield.

And it shouldn't be forgotten that none of the fallen insurers left the market because of events within the public finance market. It was tasting the toxic flavors of structured finance that fatally compromised them.

Still, a number of analysts have doubts that the market for municipal bond insurance can be revived. After all, the low default rates that attract insurers are also a reason why borrowers can skip out on insurance altogether.


Michael Pietronico - Miller Tabak + Co., LLC

Michael Pietronico, chief executive officer of New York-based Miller Tabak Asset Management, predicts that the insured market "will continue to dwindle as a percentage of outstanding debt" as investors will prefer to purchase bonds based primarily on the underlying credit.

"When you're contemplating, as an issuer, buying insurance, the first assumption would be that it would lower borrowing costs, but we haven't seen any indication that insurance - in the primary or the secondary market - lowers borrowing costs," he said.

"If anything, the case can be made that it raises borrowing costs, because investors are trying to diversify away from insurers," Pietronico said. "So it becomes a situation of why would you be looking at it in the first place, as an issuer, when you could borrow, on your own merits, at an overall lower interest rate without it?"

The argument is borne out by recent market data. A prime reason to buy insurance is that it pushes down yields and saves the borrower money, yet despite heightened default concerns in the wake of a massive, global financial crisis, uninsured bonds are coming to market at historically low yields.

In mid-December 2006 - well before the credit crisis - the triple-A scale in 10 years was at 3.64%, according to Municipal Market Data. Today, a world where about 90% of the muni market is uninsured, similar bonds come to market at just 2.88%.

It would seem that a market without insurance is certainly viable, just as it was before the product was introduced in 1971 by the American Municipal Bond Assurance Corporation, or Ambac.

But responding to claims that the insurance market has a much-diminished future, Dominic Frederico, chief executive officer of Assured Guaranty Ltd., has a pretty simple reply.

"If there are naysayers, I would say, 'Okay, then: explain my third quarter,' " he told investors in a conference call last month.

Assured, which operates the only two legacy insurers to have made it through the recession with investment-grade ratings, saw operating earnings - excluding net-realized investment gains and losses - jump to $70 million last quarter, compared to $26 million in the third quarter of 2008.

"With all sorts of issues hanging over our heads, we still had a very strong production quarter," Frederico added. "As a matter of fact ... for the combined companies, it will be the greatest year on record for municipal production save for 2008."

The implications of that likely go far beyond earnings projections for next year, he said. But who, exactly, is buying insurance, and why?


For issuers rated triple-B and below, the desirability of insurance is clear.

Data from Thomson Reuters show that in January 2007, months before the credit crisis, the spread between 10-year triple-B rated credits and insured bonds was around 25 basis points. As of this week, that spread is now 142 basis points, indicating that lower-graded credits entering the market without insurance are paying a hefty penalty.

"The problem is, if it turns out that those are the only sectors where bond insurance is going to be in demand, bond insurers are going to have a problem," said Richard Larkin, director of credit analysis at Herbert J. Sims & Co., an investment banking firm headquartered in Southport, Conn.

He noted that the issuers in most need of insurance are those that do have risk behind them, such as hospitals, nursing homes, private colleges and senior living facilities. But if insurers are only involved in those sectors they won't be able to build up capital and receive high ratings, even though Moody's default rate on Baa-bonds averaged just 0.13% on a 10-year timeline between 1970 and 2006.

Small surprise, then, that in the third quarter of 2009 Assured wrote insurance on 340 issues, but no more than 20 credits, or less than 6%, were rated triple-B or lower by Standard & Poor's or Moody's. And according to Assured's third-quarter investor presentation, standards are being tightened.

Similarly, MIAC only plans to "insure investment-grade municipal credits," and executives at NPFG have said the "sweet spot" is the single-A range.

In Larkin's view, the insurers will only put a large footprint into the triple-B market if much of their portfolio stems from backing general obligation, utility, and education bonds.

But that looks to be a bygone era. For each year in the 2004-2007 period, over 40% of MBIA-insured U.S. public finance debt was double-A rated or higher. But in the final month of 2009, credits with double-A ratings currently come to market at a yield 52 basis points lower than an insured bond, according to Thomson Reuters.

"The market has basically bifurcated and said they will support [double-A] credits at levels where, basically, insurance would make no sense," said Mark Young, a principal at Gardner, Underwood & Bacon LLC, an independent public finance advisory firm. "I really don't see those types of issuers and credits needing bond insurance going forward."

Larkin added:"I think the bond insurers and the rating agencies killed the goose that laid the golden egg when they got messed up in structured finance."

Even so, Young called it reasonable to assume that insurance could, within five years, absorb up to 30% of total new issuance based on the needs from smaller, lower-rated issuers.

"I think there's always going to be some market for the lower underlying rated and less frequent issuer," he said. "It would surprise me if that part of the market wouldn't always have some benefit from the insurers."


Indeed, small-scale, single-A issuers are a target market for insurers.

According to Assured's record of primary market deals for the third quarter, 75% of issues rated by Standard & Poor's wereA, while 19% were AA. Of the credits rated by Moody's, 83% were A and 4% were Aa.

At first glance, the concentration on single-A credits seems to make little sense for the issuer, at least in terms of saving on borrowing costs in the market.

For a 10-year bond issued in late December, the yield improvement between an insured credit versus an uninsured single-A rated issuance was only 16 basis points, according to MMD. So the market gain from wrapping bonds is relatively insignificant in that range - the compression of yields and the low absolute levels means the savings might not justify paying an insurance premium.

However, those numbers miss the fact that many single-A, small-scale issuers cannot actually come to market at the single-A scale, according to Nicholas Sourbis, managing director of NPFG.

Many issuers would like to issue debt in that range but there are too many credits for investors to keep track of, he said, so even with high ratings "a lack of familiarity among investors normally results in wider credit spreads."

That's where insurance comes in. Beyond lowering yields, Sourbis said what bond insurance does is create "a distinguishing characteristic" that can "improve the security's liquidity in the market."

Aside from anecdotes, confirming that many small-scale issuers are unable to enter the market is a bit tricky, but in 2006 the average single-A or lower-rated deal in the primary market was $29.0 million, according to Thomson Reuters. By contrast, through Dec. 15 this year the average deal was $50.9 million, which could imply that smaller-scale borrowers are indeed having difficulty entering the market.

The target deal for insurers going forward, Sourbis said, is roughly in the $17 million to $25 million range, compared with MBIA's average deal size of $38 million in 2006 and 2007.

"Almost regardless of their rating," he continued, "issuers with less name recognition will likely always be interested in utilizing bond insurance."

If so, the future of bond insurance could be quite bright. While only about 5% of the new issuance market is rated triple-B or below, according to Thomson Reuters, issuers rated single-A and below make up about 25% of issuance, which gives plenty of room for the insurance industry to grow.


Several other factors could help bond insurers blossom. One of them is if leverage returns to the municipal market. Leveraged investors, who use borrowed money to invest - for example, with tender option programs - helped commoditize muni bonds earlier in the decade, according to Matt Fabian, senior analyst at Municipal Market Advisors.

"The current class of investors who are buying bonds value insurance a lot less than they used to, like the mutual funds or the separately managed account guys," he said. But "when you have more of a leveraged based investor … those people may rely on [insurance]."

With more reliance on leverage, investors may want an easy way to purchase bonds in bulk without performing meticulous research on each credit. Before the financial crisis, when insurers had triple-A ratings, investors often ignored the underlying ratings of issuers under the assumption that insurance acted like a credit substitution.

Fabian said it would be a mistake to return to that style of thinking, but added that markets have short memories.

"People won't, like they did before, completely disregard the underlying rating, but if the rating agencies can come to grips with putting high, stable ratings on the bond insurers, then over time, the over-reliance on the underlying rating will begin to fade away," Fabian said. "So long as insurance could provide a higher or more stable rating, then people will buy it."

Executives from Assured, however, said the future of the business is not in any way dependent on whether leverage returns to the market. Of more significance is greater recognition that insurers provide more than just a guarantee of remediation in the case of default.

Sean McCarthy, Assured's chief operating officer, said the insurers also analyze risk, structure products, and perform constant surveillance for the full term of the bond.

"Our view would be that municipal credits are going to be under greater stress in 2010 and 2011 than 2009, and the benefits we provide in addition to our guarantee are our surveillance and proactive remediation to fix problems even before they occur," he said.

Similarly, NPFG's Sourbis said that when an issue is close to defaulting, an insurer can speak with one voice on behalf of the investors rather than have "dozens or even hundreds of different investors" try to get the issuer back on track.

One recent example where insurers have stepped in was in mid-November when the Rolling Meadows Park District in Cook County, Ill., was unable to make a $300,000 debt service payment on a $4.46 million issuance from 2004. NPFG, which last year reinsured the debt originally secured by FGIC, acted to make sure investors were paid on time while the district waited for property taxes to flow in.

Another factor that could boost the outlook for insurance is, quite simply, the successful entry of competitors.

"Obviously, there [are] not many industries of one, so we would not at all be opposed to seeing competition," Assured's Frederico told investors last month. He said the market "is attractive enough to bring in new players and we would expect to see them start to emerge hopefully sometime in 2010."

In fact, the market has already seen how new competition can help. When billionaire investor Warren Buffett opted in with the creation of Berkshire Hathaway Assurance Corp. in early 2008, regulators expedited the company's licensing process to help tame turmoil in the market.

Since then the stabilization impact has been minimal, as Berkshire - rated AAA by Standard & Poor's - has not insured any municipal securities in the primary market since mid-April, according to Thomson Reuters. The company did not return calls for comment.

In a recent interview Frederico said that, given the risks for municipalities emerging from the financial crisis, insurers able to receive ratings and enter the market should see high demand.

"When credit issues are paramount, spreads gap out, and we then become the method of choice to put an issuance out to the marketplace," he said.

MIAC's Kolman said it is already clear that the market is indicating a preference for corporate bonds, which highlights the need for municipal insurance to play a role in lowering yields.

A recent research note from JPMorgan, for instance, shows that the spread between taxable municipal issues and corporate bonds rated triple-B widened to more than 125 basis points in December, compared with less than 80 basis points three months before. The spread for single-A issues widened about 15 basis points in that same period.

"With the decline in revenues and tax receipts as well as falling property values, I think there's a feeling that it's going to take longer for state and local issuers to come out of this recession, which puts a premium on the need for insurance, particularly for mid- to small-size issuers in the A-rated category," Kolman said.


Another factor in favor of an optimistic scenario is simply the lack of credit-enhancement alternatives.

When multiple insurers experienced grave difficulties in late 2007 and 2008 - including MBIA, Ambac, Financial Security Insurance, FGIC, Radian Asset Assurance Inc., Syncora Guarantee Inc., CIFG Assurance NA and ACA Financial Guaranty Corp. - it looked as though letters of credit might fill the void.

Use of LOCs, a guarantee of payment usually issued by a commercial bank on behalf of the borrower, rose by more than 240% to an all-time high of $71.5 billion in 2008, covering nearly one-fifth of the market compared with just $20.7 billion in 2007.

But through Nov. 30 this year LOC enhancements fell 74% to $18.7 billion - about 5% of the market, according to Thomson Reuters.

"LOC banks have not demonstrated an ability, or at least a willingness, to pick up where bond insurance left off," said Thomas McLoughlin, chief executive officer of NPFG.

Other potential alternatives to an entirely private insurance market have included a proposal from the National League of Cities to establish a bond insurer funded by the U.S. Treasury. Another idea, floated by Denver-based financial consulting firm HRF Associates LLC, was for $25 billion of TARP funds to be used to create a public-private insurer.

Also, in a move aimed to increase the capacity of private insurers, Rep. Barney Frank, chairman of the House Financial Services Committee, drafted legislation to provide $250 billion in federal reinsurance for new credi- enhanced muni bonds over five years.

In recent months though, none of these proposals have gained much traction, and according to Fabian they are unlikely to ever advance beyond the drafting stage.

"I think the government's interest in intervening in our market is abating," he said. "I don't see them interested in funding up the National League of Cities, I don't see them funding up another private insurer or providing guarantees themselves."


One scenario that could hurt the potential for bond insurers to grow their market share is if rating agencies introduce global-scale ratings - the effort to recalibrate muni ratings to a scale that is uniform across asset classes.

Supporters of the scale argue that if muni ratings were in line with corporate sector ratings, municipal credit quality grades would rise due to their lower default risks. Higher ratings on municipal debt, relative to corporate debt, would be expected to lower the cost of borrowing for municipal issuers, thereby reducing the need for insurance.

"If a lot of triple-B and single-A issuers now start getting rated double-A and possibly triple-A, you can make the case: what does the bond insurance give you?" Sims' Larkin said.

"I thought over a year ago that if the rating agencies seriously went to these global scale ratings, that ultimately could be the final nail in the coffin for bond insurers," he added. "I think that's going to come, I just don't know when."

Still, executives at NPFG aren't too concerned about the ratings scale, noting that the idea has been around for five years with little tangible development.

And even if a global scale is implemented, the market could be more confused than enthused, according to McLoughlin.

"If everybody's a double-A, what's a double-A?" he said, noting that the market has never been in that position. "Is this going to make it harder or easier for investors?"

Moody's said in March 2007 it was implementing a global scale but plans were postponed with the onset of the financial crisis. Earlier this month, the agency said it was back on track to recalibrate the scale, adding that guidelines could be issued as early as next quarter.

Fitch Ratings also postponed implementation plans last year and more recently has said it continues to review the municipal rating framework. Meanwhile, Standard & Poor's maintains that is already uses a uniform scale.

A more immediate concern for the insurance market is Build America Bonds, the popular taxable program which, under the Obama administration's American Recovery and Reinvestment Act, gives a 35% subsidy to qualified offerings.

Since BABs hit the market in late March $64 billion has been sold, accounting for 15.8% of all issuance this year and more than one-fifth of deals since the program's inception. To put that into perspective, $64 billion is almost double the $35.3 billion of debt insured in the primary market through Dec. 22, according to Thomson Reuters.

The popularity of BABs, which to date have sold largely without insurance, poses three problems for insurers. One, the subsidy allows BABs to come to market at higher yields, which can be attractive enough to investors without an insurance wrap. Two, as taxable bonds they garner a broader base of investors than traditional munis. And three, most BABs are high-grade - more than 65% of deals to date have been rated double-A or better, according to Thomson Reuters.

Assured's McCarthy acknowledged that insurance penetration in the BAB market has been minimal, but he said "we will play an active role" in the program if issuance "expands beyond the double-A credit category."

MIAC's Kolman added that lower-graded BABs pay a higher yield than comparable corporate bonds because some investors are unfamiliar with the municipal market. With insurance, borrowers could save money by coming to the market at a lower yield but retain investors because of the added security.

"Potentially, you have a group of BAB investors that could use insurance because it's an extra set of eyes that do know the credits and can help them understand that there is value here," he said.

Jerry Ford, president of Ford & Associates Financial Group LLC, a financial services firm in Tampa, Fla., said the public finance market can be highly adaptive and it is possible for other enhancement products to replace insurance. So far, though, he hasn't seen a credible alternative.

While insurance penetration stays around 10%, the market is craving stability, he said. And if bond insurers can convince investors and rating agencies that they are strong, demand for insured securities will return.

"I wouldn't characterize myself as an optimist," Ford said, "but I would say my sincere hope is that these guys make a comeback and that they come back strong because I think that would be good for the marketplace - it adds greater access for issuers.

"I don't think you'll see a day again - at least I hope not - where purchasers in the market, be they institutions or individuals, ignore underlying ratings and just say 'it's insured so it's fine,' " he said. "It shouldn't have happened before and it certainly shouldn't happen again ... [But] the market has fundamentally changed in the past and it could fundamentally change in the future ... The jury is still out."

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Treasury Yield Curve Steepens to Record Amid Growth Outlook

Monday, December 21, 2009
By Cordell Eddings
of Bloomberg

Dec. 21 (Bloomberg) -- The Treasury yield curve, a barometer of the health of the U.S. economy, widened to a record as investors bet an accelerating recovery will fuel inflation and hurt demand for unprecedented sales of government debt.

The difference between 2- and 10-year Treasury note yields increased to 281.4 basis points before the government announces Dec. 23 how much it plans to auction in 2-, 5- and 7-year securities next week. It rose from 145 basis points at the beginning of the year, with the Federal Reserve anchoring its target rate at virtually zero and the U.S. extending the average maturity of its debt. A report tomorrow is forecast to show the world's largest economy expanded in the third quarter.

"If you are going to have a recovery you are going to have higher inflationary pressures, so the curve should continue to steepen from here," said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. "The curve could reach 300 to 325 basis points."

The yield on the benchmark 10-year note climbed 10 basis points, or 0.10 percentage point, to 3.64 percent at 12:21 p.m. in New York, according to BGCantor Market Data, the highest level since Aug. 13. The 3.375 percent security due November 2019 fell 25/32, or $7.81 per $1,000 face amount, to 97 27/32. The two-year yield rose five basis points to 0.84 percent.

The yield curve reached its previous record of 281 basis points on June 5, when Treasuries plunged after a government report showed the smallest decline in U.S. payrolls in eight months. Ten-year note yields touched 4 percent the following week, the highest level so far in 2009.

Less Money

Treasury officials on Nov. 4 announced a long-term target of six to seven years for the average maturity of Treasury debt and said the department wants to cut back on its issuance of bills and two- and three-year notes. The shift to longer-maturity debt has raised concern that investors will demand higher yields to offset the risk of inflation as government spending drives the deficit to a record $1.4 trillion.

President Barack Obama is borrowing unprecedented amounts for spending programs. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year. Treasuries of all maturities have fallen 2.4 percent this year through Dec. 18, according to Bank of America Corp. Merrill Lynch indexes.

Government securities fell as Chinese central banker Zhu Min on Dec. 17 said that the U.S. can't expect other nations to increase purchases of Treasuries to fund its entire fiscal shortfall.

Efforts by the U.S. to cut its current-account deficit mean other nations accumulate fewer dollars through trade, leaving them with less money to buy Treasuries, Deputy Governer Zhu said at a forum in Beijing.

$7.17 Trillion

"The Chinese story is a reiteration of the concern that the Treasury Department might have reached its saturation point with foreign investors that have to grapple with their own internal financing problems," said Ian Lyngen, senior government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. "The Treasury has a lot of supply that needs to be taken down next year."

A Commerce Department report on Dec. 23 will show consumer spending rose 0.7 percent in November, the same as the previous month, according to the median estimate of 60 economists in a Bloomberg survey.

"Household spending appears to be expanding at a moderate rate," the Federal Open Market Committee said in a statement on Dec. 16 after its meeting. Interest rate futures show a 44 percent chance the Fed will raise the rate by June, from 31.4 percent odds a month ago.

Spark Declines

The gap between yields on Treasuries and so-called TIPS due in 10 years, a measure of the outlook for consumer prices, closed above 225 basis points for four days last week, the longest stretch since August 2008.

That's the low end of the range in the five years before Lehman Brothers Holdings Inc. collapsed, and shows traders expect inflation rather than deflation in coming months, said Jay Moskowitz, head of TIPS trading at CRT Capital Group LLC in Stamford, Connecticut.

Fed Chairman Ben S. Bernanke has cited a tame inflation outlook for keeping the target interest rate for overnight loans between banks at a record low range of zero to 0.25 percent. TIPS show the improving economy may change sentiment and spark further bond declines.

The 10-year breakeven rate was little changed at 230 basis points today, up from 9 basis points on the last trading day of 2008.

--With assistance from Theresa Barraclough in Tokyo and Daniel Kruger in New York. Editors: James Holloway, Dave Liedtka

To contact the reporter on this story:
Cordell Eddings in New York at +1-212-617-7344 or

To contact the editor responsible for this story:
Dave Liedtka at +1-212-617-8988 or

Top Of Page 

Tax-Exempt Muni Bond Sales Rise 64%, Led by More Refinancing

Friday, December 11, 2009
By Jeremy R. Cooke
of Bloomberg

Dec. 11 (Bloomberg) -- U.S. municipal issuers sold about 64 percent more fixed-rate, tax-exempt bonds this week than last as New York City and Maryland capitalized on a drop in borrowing costs to refinance more debt than previously planned.

States and local government debt sales rose to $8.5 billion of tax-exempts this week from $5.2 billion the previous week, based on preliminary data compiled by Bloomberg. The most populous U.S. city and the state with the highest median household income sold a combined $1.5 billion in refinancing deals, 21 percent more than preliminary documents indicated. Taxable issuance including Build America Bonds totaled $4 billion, compared with $3.6 billion last week, the data show.

Benchmark indexes reversed direction as new tax-exempt supply rose and investors balked at how far yields had fallen. The BarCap Muni 10-Year Aa3 Plus index of general obligation bond yields rose 6 basis points, or hundredths of a percentage point, to 3.234 percent from a two-month low on Dec. 8.

"This is some participants sitting on their hands and waiting for better opportunities," said Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York.

Returns on tax-exempt bonds are positive for the month, even with the latest decline. The BofA Merrill Lynch Municipal Master Index, which advanced 0.65 percent last month, has gained 0.72 percent in December.

North Tarrant Expressway

Among the largest tax-exempt offerings not designed to refinance debt this week was a $400 million deal through a Texas agency for North Tarrant Express Mobility Partners, a group led by Madrid-based Grupo Ferrovial SA's Cintra. The state awarded the concession to the private group to rebuild and operate a highway northeast of Fort Worth.

The bonds, secured by toll revenue from the rebuilt highway known as the North Tarrant Expressway, carry the lowest investment grade of BBB- from Fitch Ratings and the next-higher Baa2 from Moody's Investors Service.

Thirty-year bonds were priced to yield 7 percent, 253 basis points more than top-rated municipal debt tracked by Bloomberg at that maturity.

Following are descriptions of some pending sales of municipal bonds; the timing and amounts may change.

BROOKLYN ARENA LOCAL DEVELOPMENT CORP. intends to issue $500 million of tax-exempt bonds to help finance construction of a new facility in New York City for the New Jersey Nets, which set a National Basketball Association record this month for the worst start to a season. The debt, rated at the lowest investment grades by Moody's and Standard & Poor's, will be backed by payments in lieu of property taxes, known as Pilots, derived from arena revenue. Forest City Ratner Cos. is developing the arena, Barclays Center, as part of the Atlantic Yards project in the city's most populous borough. Underwriters led by Goldman Sachs and Barclays Plc are marketing the bonds, which need to be sold by year-end to meet a deadline for tax- exemption rules. (Updated Dec. 9)

CONNECTICUT plans to sell $450 million of taxable Build America Bonds, for which the U.S. government pays 35 percent of the interest, next week through Morgan Stanley. Maturities will range from 2020 through 2029. The state is rated AA by S&P and Fitch and Aa3 by Moody's. Connecticut's net tax-supported debt load per capita of $4,490 was the highest among U.S. states, according to Moody's latest annual report on median debt measures. (Added Dec. 11)

To contact the reporter on this story:
Jeremy R. Cooke in New York at

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Jobless Recoveries: The New Normal, It Seems - The Wall Street Journal

Friday, December 4, 2009
By Mark Gongloff

The job market is getting less bad, but a full recovery remains a distant hope.

The Bureau of Labor Statistics releases November employment data Friday morning. Economists estimate that unemployment held steady at 10.2%, a 26-year high, and that nonfarm payrolls shed 125,000 jobs, bringing the job losses in this recession to 7.4 million.

Given the downturn's depth, some optimists think jobs will return quickly. They got some ammunition on Thursday, when new weekly claims for jobless benefits fell to a 14-month low. Payroll cuts, meanwhile, have steadily gotten less bad and could end soon.

But fast-snapback hopes are countered by a mountain of data suggesting the recovery from this recession will be just as jobless as the prior two.

The percentage of jobless workers on permanent layoff, with no hope of getting called back to work, is at a record 55.1%.

A record 9.3 million are working part time because there's nothing else available. Employers might work them harder before hiring more workers.

New claims are falling, but the number of people drawing regular or extended unemployment benefits is holding steady at nearly 10 million.

Since May, more than a million workers have left the labor force, which has essentially stagnated since November 2007, notes Miller Tabak economic strategist Dan Greenhaus. If and when people look for work again, they could push unemployment, which is a percentage of the labor force, much higher.

It is likely no accident that this and the prior two recoveries have been more or less jobless, with globalization and technology making it increasingly easy for companies to sharply cut labor costs.

Companies arguably fired workers too aggressively this time, but they show little inclination to rehire, even though the recession has supposedly been over for five months now.

Payrolls and employment have already taken longer to bottom than in traditional recessions, when they bottomed at or shortly after recession's end.

"With the third jobless recovery, you have to say we shouldn't have expected companies to behave as they did in the 1960s or the 1970s," said St. Louis Fed President James Bullard. "We should expect this as the normal state of affairs."

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Downbeat Data to Test Optimistic Investors - The Wall Street Journal

Monday, November 30, 2009
By Paul Vigna

Most economists don't expect a strong recovery. The question is whether stock investors will start to reach the same conclusion.

Of three important economic reports due this week, two are expected to show backsliding from recent improvements.

First out the door will be the Chicago Purchasing Managers Index, a regional report Monday morning that sometimes moves the overall market.

In October, the Chicago PMI rose above the demarcation line of 50 between expansion and contraction for the first time in more than a year.

A Dow Jones survey of economists predicts a slip to 53.5 for November from 54.2 last month.

Tuesday's announcement of the Institute of Supply Management's manufacturing index likely won't offer much reassurance.

After crossing the 50 mark in August, it probably will show a decline to 54.7 in November from 55.7 in October, according to economists surveyed by Dow Jones.

The only bright spot: ISM's nonmanufacturing index, due Thursday, is projected to hit 51.7, up from 50.6 in October.

The services index crossed the magic line of 50 in September.

Given where they were a year ago, it is hard to deny that this November's numbers are signs of substantial economic progress.

The problem: Even with last week's jitters, the stock market's torrid nine-month rally continues to price in a V-shaped recovery.

That eventually will require stronger growth in gross domestic product, many economists and market strategists say.

"A V-shaped recovery, in a broad economic sense, this is not," says Dan Greenhaus, Miller Tabak's chief economic strategist. The current pace of expansion "seriously trails" what one would expect given the depth of the decline, said Mr. Greenhaus.

Of course, that doesn't matter for stocks until investors decide it does.

Earlier this month, the market generally shrugged off the Commerce Department's report that manufacturing production slipped 0.1% in October.

"The market responded more to the ISM than it did to the actual production data two weeks later," Gluskin Sheff's chief economist David Rosenberg says. "That's how bizarre this whole rally is."

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Treasury Urge: Investors Still Hungry for Notes, as Sale Goes Well - The Wall Street Journal
Government Sells $44 Billion of Two-Year Paper

Monday, November 24, 2009
By Min Zeng

Despite Monday's rally in risky assets, the Treasury sold $44 billion in two-year notes with a yield of 0.802%, the lowest yield on record achieved in a two-year auction.

The solid auction helped lift the Treasury market off its session lows, although prices still ended mostly lower.

Demand was solid, if not as strong as the market had expected, for the $44 billion note sale, the first of this week's $118 billion total. Bids totaled more than three times the amount on offer and foreign demand, including purchases by foreign central banks, was also healthy, at 44.5%.

The market had expected stronger demand: Just before the note sale, the new two-year note yield was at 0.798%, indicating traders were expecting a higher prices to be bid in the auction. Bond yields fall when prices rise.

"The Treasury is having almost no trouble selling its debt regardless of its duration and [Monday's] auction is just the latest in a long line of evidence," said Dan Greenhaus, chief economic and bond strategist at Miller, Tabak & Co. in New York.

The sale took place against a backdrop of strong demand for short-term Treasury securities in recent sessions, which pushed the two-year yield as low as 0.663% last week, the lowest point this year, and not far away from the record low of 0.601% set in mid-December 2008.

Monday, the two-year note ended down 1/32 point, or $0.3125 for every $1,000 invested, to yield 0.793%. The 30-year bond eked out a small gain of 1/32 point for a yield of 4.294%, down from 4.295% Friday.

Hedge funds, commercial banks and mutual funds are opting to hold liquid and low-risk Treasurys as a way to preserve the profits made in riskier assets this year and to strengthen their balance sheets before year-end accounting.

Reassurance from the Federal Reserve that interest rates would be kept near zero for a while given the rise in the unemployment rate has also encouraged buying. Yields on short-dated Treasurys, including the two-year note, are the most sensitive to changes in the official rate outlook.

"The Fed is giving coverage to anyone who wants to buy the short end of the Treasury market," said Michael Franzese, executive vice president of bond trading at Wunderlich Securities.

Investors are bracing for the $42 billion five-year Treasury note sale Tuesday and $32 billion auction of seven-year notes Wednesday before the Thanksgiving holiday on Thursday.

James Newman, head of U.S. government and agency trading in New York at Keefe, Bruyette & Woods Inc., said the seven-year sale is most at risk of seeing weak demand given the proximity to the holiday.

The timing of the seven-year note sale caused some eyebrow-raising among traders. Scheduling the note sale at 1 p.m. EST Wednesday before Thanksgiving "probably is not an ideal time slot," Mr. Newman said.

Tuesday, the government is scheduled to release the second estimate of the gross domestic product for the third quarter at 8:30 a.m. EST, followed by consumer-confidence data at 10 a.m. EST.

One hour after the five-year Treasury note auction at 1 p.m. EST, the minutes for the Federal Reserve's Nov. 3-4 monetary-policy meeting will be released.

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Yields in a Falling Mood As Market Grows Firmer - The Bond Buyer

Friday, November 20, 2009
By Michael Scarchilli
The Bond Buyer

Most of The Bond Buyer's yield indexes declined this week, as the municipal market grew firmer over the past several sessions in the last full week of activity prior to the Thanksgiving holiday.

"It seems a combination of January reinvestment flows and the whole roll-down of the yield curve has been on many peoples' minds, and also the steepening of the yield curve that comes along with that," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "Shorter maturities have done extraordinarily well this week, in terms of seeing good investor demand.

"With the exception of California paper, [the new issues] seem to be meeting reasonably good demand," Pietronico continued. "However, the caveat is it's priced cheaper than the secondary to clear the market. So it keeps the secondary in check, but most high-quality issuers do trade up after they're free to trade, so it's just hitting the level that clears the market. But it's our expectation that supply will diminish for the next two weeks or so, with the holidays coming, so there's probably a decent opportunity to pick up some paper."

Leading the new-issue market this week, the Empire State Development Corp. priced $1.5 billion of state personal income tax bonds, including $576.1 million of taxable Build America Bonds.

The Bond Buyer 20-bond index of 20-year general obligation bond yields declined five basis point this week to 4.35%. That is the lowest level for the index since Oct. 22, when it was 4.31%.

The 11-bond index of higher-grade 20-year GO yields dropped four basis points this week to 4.08%, which is the lowest it has been since Oct. 22, when it was 4.04%.

The revenue bond index, which measures 30-year revenue bond yields, rose two basis point this week to 5.04%, which is the highest the index has been since Sept. 10, when it was 5.33%.

The 10-year Treasury note declined 11 basis points this week to 3.35%, which is the lowest it has been since Oct. 8, when it was 3.24%.

The 30-year Treasury bond also dropped 11 basis points this week, to 4.29%. This the lowest the 30-year yield has been since Oct. 22, when it was 4.24%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, declined one basis point this week to 0.55%, which is the lowest it has been since Oct. 28, when it was also 0.55%.

The weekly average yield to maturity on The Bond Buyer's 40-bond municipal bond index, which is based on 40 long-term municipal bond prices, finished at 5.46%, up three basis points from last week's 5.43%.

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Muni Bond Yields Slide to Four-Week Low as Sales Outlook Falls

Friday, November 20, 2009
By Jeremy R. Cooke
of Bloomberg

Nov. 20 (Bloomberg) -- Benchmark municipal bond yields fell to a four-week low as sellers demanded higher prices in anticipation of a drought in new issues around the holidays beginning with Thanksgiving next week.

The weekly Bond Buyer 20 index of 20-year general obligation debt yields fell 5 basis points, or hundredths of a percentage point, to 4.35 percent, the lowest since Oct. 22.

Borrowers led by the New York State Urban Development Corp. this week sold about $7.8 billion of tax-exempt securities and $3.7 billion of Build America Bonds and non-subsidized taxable debt, preliminary data compiled by Bloomberg show. States and local governments scheduled $1.9 billion of fixed-rate bond sales in the next 30 days, the lowest reading on the Bloomberg Municipal Visible Supply Index since mid-February.

"The supply picture seems to have gotten more favorable," said Michael Pietronico, chief executive officer of New Yorkbased Miller Tabak Asset Management, said in an interview. "Combine that with the upcoming roll of the calendar into January, where there's going to be plenty of money around, and you can see where the market would take a little leap toward higher prices."

December and January typically represent two of the four biggest months, after June and July, for municipal bondholders to receive potential reinvestment cash in the form of principal and semiannual interest payments.

The BofA Merrill Municipal Master Index, which accounts for price changes and interest income in tax-exempt bonds, rose 0.3 percent since the end of October, after falling 2.5 percent last month, its worst performance in a year.

Following are descriptions of pending sales of municipal bonds; the timing and amounts may change.

MASSACHUSETTS, the U.S. state with the second-highest debt per capita after Connecticut, plans to borrow $500 million for capital projects by selling taxable, federally subsidized Build America Bonds due in 2039 as soon as next week. Banks led by Goldman Sachs Group Inc. were selected to handle the offering. S&P and Fitch rate the state's general obligation pledge AA and Moody's Investors Service gives Massachusetts an equivalent Aa2. (Added Nov. 20)

NEW YORK, the third-most-populous U.S. state after California and Texas, will take bids on Nov. 23 from banks seeking to underwrite $351.3 million of tax-exempt general obligation bonds. The transaction will replace variable-rate debt with fixedrate securities due from 2010 through 2030. The state, home to about 19.5 million people, carries ratings of AA- by Fitch, AA by S&P and Aa3 by Moody's. Only about 7 percent of New York's debt carries its general obligation pledge, Fitch said. The rest is secured by state appropriations or dedicated revenue streams. (Added Nov. 17)

PENNSYLVANIA TURNPIKE COMMISSION, operator of the state's toll-road system, plans to sell $524.8 million of fixed-rate, tax-exempt bonds as soon as the week beginning Nov. 30 through Morgan Stanley to replace variable-rate debt and make termination payments on associated interest-rate swaps. The bonds, backed by a senior lien on revenue from the Pennsylvania Turnpike, are rated A+ by Fitch Ratings and Standard & Poor's. (Updated Nov. 20)

To contact the reporter on this story:
Jeremy R. Cooke in New York at

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Investors Hope It's a 1983 Flashback but... - The Wall Street Journal

Monday, November 9, 2009
By Mark Gongloff

It's beginning to look a bit like 1983: Stocks are soaring, unemployment is above 10% and the sci-fi TV miniseries "V" is back.

Stock investors can only hope for a repeat of that year, which continued the first leg of an 18-year bull market.

So far, stocks have behaved much as in the early 1980s. The Standard & Poor's 500-stock index soared 69% between August 1982 and October 1983. Since March 9, it has jumped 58%. Both eras had deep recessions, and fast snapbacks usually follow such recessions.

[Manufacturing PMI]

Unfortunately, other similarities are scarce. The market is not nearly as cheap now as it was then. When the 1980s bull market began, the S&P 500 was priced at less than 7 times trailing earnings. Even after a 69% rally, that multiple was just 10 times earnings. The latest rally began with the market at a P/E of 13. The ratio has bloated to nearly 19, compared with its long-term average of 16. In April 1983, when unemployment was last at 10.2%, it was on its way down. Now it looks like unemployment could rise for months.

And when the 1980s rally began, the Federal Reserve's key policy interest rate was 11%, meaning it could simply slash rates to get things moving again. Today, the fed-funds target rate is nearly zero.

Baby boomers then in their prime earning and spending years have since lost trillions of dollars in net worth, with uncertain retirement and health benefits.

U.S. consumers in 1983 hadn't yet embarked on a 20-year debt binge. Household debt was 62% of disposable income, a level that had endured since the 1960s.

That percentage now stands at 122%, even with debt growth stalled for the past two years.

The outlook for regulation and taxes is likely different now than in 1983. The market has proven it can endure higher taxes and more regulation, but they make Wall Street squirm.

"Inflation is going higher, unemployment is going higher, taxes are going higher, regulation is going higher and debt is going lower," Dan Greenhaus, chief economic strategist at Miller Tabak, told clients on Friday. "1983 this is not."

Write to Mark Gongloff at

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Treasurys Split on Jobs, Sales - The Wall Street Journal

Saturday, November 7, 2009
By Emily Barrett

Treasury prices rose on unexpectedly heavy job losses in the latest payrolls survey, but retreated from session high as investors turned their attention to more record supply in the coming week.

The benchmark 10-year note was up 8/32 point, or $2.50 per $1,000 face value, at 100 31/32. Its yield fell to 3.507% from 3.537% Thursday, as yields move inversely to prices. The 30-year bond was up 11/32 point to yield 4.392%.

Treasurys tend to thrive on bad economic news, which propels investors toward the safest assets. These latest data revived a little of the recent flagging momentum in the government bond market, casting further doubt on the prospects for a smooth recovery from two years of recession.

The Labor Department reported a 190,000 drop in nonfarm payrolls in October, with job losses concentrated in construction, manufacturing and retail trade. Economists had expected a 175,000 decrease. The data support the Federal Reserve's intention -- reiterated in its latest policy statement this week -- to hold the short-term funding rate near zero for an extended period.

"Now we're into the second quarter of a jobless recovery, and all this is pointing to a lengthy process," said Dan Greenhaus, senior economic strategist at Miller Tabak in New York.

But a shorter-term concern motivated the Treasury market in the afternoon: the upcoming $81 billion in Treasurys auctions.

The Treasury is starting Monday with $40 billion of three-year paper, followed by $25 billion of 10-year debt on Tuesday, and $16 billion of 30-year bonds on Thursday. The auctions should attract decent demand, as they are the last in these maturities for 2009. Demand for Treasurys typically rises toward the end of the financial year as they are the safest investments for those unwilling to jeopardize their year-to-date performance.

The consistently healthy demand seen at Treasury auctions hasn't dispelled concerns that the government's record fundraising requirements might overwhelm investor appetite, though. For that reason, the strength of bidding at each auction is under closer scrutiny than ever before, and a weak turnout at any of the week's sales could weigh heavily on prices.

Write to Emily Barrett at

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FSA Gets New Name as Part of Assured Family - The Bond Buyer

Tuesday, November 3, 2009
By Patrick McGee
The Bond Buyer

Financial Securities Assurance Inc. is getting a makeover. The company was acquired by and became a subsidiary of Assured Guaranty Ltd. in July, and it was announced Monday its name would be changed to Assured Guaranty Municipal Corp.

Assured will continue to operate its two subsidiaries, Assured Guarantee Corp. and Assured Guarantee Municipal Corp., as distinct bond insurers. A press release said that would allow investors the choice between "two proven, financially strong guarantors."

"Some issuers and investors may prefer a muni-only bond insurer and some may prefer a diversified provider," said Assured president and chief executive officer Dominic Frederico. "Additionally, having two strong names in the market provides investors with greater diversification."

As of June 30, 2009, FSA had total claims-paying resources of $7.3 billion and Assured Guaranty Corp. had $2.7 billion.

During the credit crunch, the seven viable bond insurers were trimmed to just two, leaving the Bermuda-based company with a quasi-monopoly in the market. That status has helped Assured's stock skyrocket 358% since early March, closing at $16.73 yesterday.

However, while Assured's share of the insured bond market pie was nearly 100% in the third quarter, the pie itself is dramatically smaller than it was before the crisis.

Less than 10% of new issuance was insured in the third quarter, compared to more than 50% before the crisis. According to Mike Pietronico, chief executive officer of New York-based Miller Tabak Asset Management, that ratio is unlikely to improve any time soon.

"Our view is that the market will remain skeptical towards the municipal bond insurance industry altogether, and we're not so certain that a name change is going to have any meaningful impact - positive or negative - on the outstanding bonds," he said.

Even over the long term, Pietronico said it would be unlikely that private insurance would regain the status it once held in the market.

Frederico was more optimistic, however. "Our market activity for the first 10 months fully supports the demand for bond insurance," he said. "Through October 2009, [the two subsidiaries] have insured approximately $32 billion of new municipal issues, representing about 9.5% of all new issuance."

He added: "When you look at the breakdown of market issuance by rating category, you can readily see the pressure that credits below double-A are under, and this is the segment where bond insurance provides significant value based on the insurer's higher ratings and investor confidence in our analysis and structuring. All of this leads to reduced cost of funding."

Frederico did acknowledge there is a lack of appetite for insured executions of bonds rated double-A or higher.

Looking forward, Frederico said outstanding bonds guaranteed by FSA "remain guaranteed in the name of FSA on the indenture." Once the name change has been approved in all of the licensed jurisdictions, listing services will be updated under the new name but with the same Cusip numbers.

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Treasury Prices Up As Weak Data, Stocks Lift 5-Yr Note Auction - The Wall Street Journal

Wednesday, October 28, 2009
By Min Zeng

NEW YORK (Dow Jones)--Treasury prices rose for a second day Wednesday as soft economic data in housing and consumers raised doubt about the strength of an economic recovery, spurring robust bidding on this week's record-sized government note auctions.

Investors returned to low-risk government debt for comfort after a report showed new home sales unexpectedly fell while risky assets from U.S. stocks to crude oil declined. The data came after a report Tuesday showing weakness in consumer confidence, raising concern again about the economic outlook and tempering bets on any imminent shift in the Federal Reserve's easy monetary policies.

So far, three out of the four government's scheduled note sales totaling $123 billion have fared very well. Treasury's sale Monday of $7 billion in five-year Treasury inflation protected securities drew the strongest demand since 1997. Both Tuesday's sale of a record $44 billion in two-year notes and Wednesday afternoon's $41 billion five-year note auction lured the biggest demand since 2007. The government will sell a record $31 billion in seven-year notes Thursday afternoon.

Resilient demand from investors, ranging from U.S. households, foreign central banks to domestic commercial banks, have allowed the U.S. government to borrow at relatively low costs to fund a widening budget shortfall and stimulus to revitalize the economy. So far this year, net Treasury sales have hit more than $1 trillion, but the 10-year note's yield has been kept on a range of 3% to 4% over the past few months, after briefing rising above the 4% level in early June.

"As we have noted time and time and time again, the Treasury is having almost no trouble selling its debt and for all the concerns of supply, little yield concession is ever realized," said Dan Greenhaus, chief economic and bond strategist at Miller, Tabak & Co in New York. "Continued participation in Treasury auctions at these levels reflects overall nervousness regarding the economic landscape," he added.

As of 2 p.m. EDT, the two-year note's price was up 4/32 at 100 4/32 to yield 0.94%, the 10-year note was up 13/32 at 101 25/32 to yield 3.41% and the 30-year bond was up 19/32 at 104 5/32 to yield 4.25%. Bond yields move inversely to their prices.

The 10-year note's yield has dipped from Monday's intraday high of 3.583%, the strongest level since late August, and Wednesday, it touched as low as 3.394%. The two-year note's yield fell below 1% again, after hitting 1.042% Monday, the highest level since the end of September.

The result on the five-year note, though, was less impressive compared to the two-year note. The auctioned five-year note came in at a yield of 2.388%, slightly higher than the 2.373% on the when-issued paper just before the auction. Higher yield, known as tails, means lower bidding price. In contrast, the auctioned two-year note's yield was below what it traded before the auction.

But other measures showed demand on the five-year notes were healthy. The bid-to-cover ratio, a main gauge of demand, was 2.63, the highest since October 2007, compared with 2.4 for the previous auction in September and 2.51 in August. The average is 2.35 from the past four auctions. The indirect bid - demand from domestic and foreign institutions, including foreign central banks - for the five-year note auction was 54.8%, compared with 44.8% from the previous auction in September and 56.4% in August. The average is 50.2% for the last four auctions.

"The market has been very rich. The fact that we can hold at these yield levels is pretty significant given the continued rise in supply," said Thomas Roth, head of U.S. government bond trading in New York at Dresdner Kleinwort Securities LLC, part of Commerzbank AG. "There is still tremendous amount of cash flowing into Treasurys."

Thursday, investors will also zero in on the morning release of the U.S. gross domestic products for the third quarter to gauge the health of the economy, along with the weekly jobless claims.

The Federal Reserve is also scheduled to conduct the last round of Treasury buying, targeting maturities between December 2013 and April 2016, on pace to complete its $300 billion buying program.

-By Min Zeng, Dow Jones Newswires; 212-416-2229;

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Yields Mixed; Refundings Pulled From Primary - The Bond Buyer

Friday, October 23, 2009
By Michael Scarchilli and Patrick McGee
The Bond Buyer

The Bond Buyer's weekly yield indexes were mixed this week, as municipals were little changed following last week's sell-off, which prompted a number of issuers to pull scheduled refunding deals from this week's primary.

"The market has backed up to levels that will help clear some supply, although there is a substantial shadow calendar building right now of refunding deals that have been put off due to market conditions," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

"To me, it seems the market is churning in place," he said. "Demand is better than what it was three weeks ago due to the move-up in rates; however, the overhang of supply is the variable that's keeping the market from appreciating much from here."

Issuers such as Minnesota and Maryland pulled some refunding components of their scheduled deals this week, citing market conditions. Pietronico said that in order for the market to improve, those deals have to "come to the market and clear the market."

"Essentially what you need from here is a bit of a snap-back rally before those deals can clear the market," he said.

The Bond Buyer 20-bond index of 20-year general obligation bond yields declined one basis point this week to 4.31%, but remained well above the 4.06% level from two weeks ago.

The 11-bond index of higher-grade 20-year GO yields also fell one basis point this week to 4.04%, but remained considerably higher than its 3.80% level from two weeks ago.

The revenue bond index, which measures 30-year revenue bond yields, rose one basis point this week to 4.87%, marking the highest level since Sept. 17, when it was 4.98%.

The 10-year Treasury note fell five basis points this week to 3.42%, well above its 3.24% yield from two weeks ago.

The 30-year Treasury bond declined seven basis points this week to 4.24%, considerably higher than its 4.08% level from two weeks ago.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, declined three basis points this week to an all-time low of 0.54%. The previous record low was 0.56%, which was first achieved on Sept. 23.

The weekly average yield to maturity on The Bond Buyer's 40-bond municipal bond index, which is based on 40 long-term municipal bond prices, finished at 5.15%, up seven basis points from last week's 5.08%.

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California Sale Pushes Munis Down, Lifts Yields Most Since June

Friday, October 9, 2009
By Jeremy R. Cooke
of Bloomberg

Oct. 9 (Bloomberg) -- California, which raised yields and scaled back its bond sale to $4.1 billion this week, led a surge in fixed-rate municipal issuance that drove benchmark rates higher by the most in almost four months.

The Bond Buyer 20 index, which tracks 20-year general obligation bonds, jumped 12 basis points, or 0.12 percentage point, to 4.06 percent yesterday, after reaching a 42-year low last week.

State and local governments sold at least $6.3 billion of tax-exempt debt and $4.5 billion of taxable Build America Bonds and other securities, according to data compiled by Bloomberg. The total is the largest since Aug. 14, when $11.1 billion came to market.

"A combination of surging supply, generational lows in yield, and a weaker dollar fueling inflation fears put the market in a tailspin that shows no signs of reversing anytime soon," Michael Pietronico, chief executive officer of New York-based Miller Tabak Asset Management, said in an e-mail.

The dollar reached an almost 14-month low against the currencies of six major U.S. trading partners, according to IntercontinentalExchange Inc.'s Dollar Index.

California, the most populous and lowest-rated U.S. state, sold its first long-term general obligation bonds since April. Individual investors took 33 percent of this week's offering. Last month, they bought 75 percent of the $8.8 billion in notes due in less than a year.

Tax-exempt California bonds that had an estimated yield of 4.63 percent Oct. 6 sold at a final rate of 5 percent.

'Inhospitable Market'

"We were able to get a $4 billion-plus deal in a cold and inhospitable market," Tom Dresslar, spokesman for State Treasurer Bill Lockyer, said in an e-mail late yesterday.

California's sale came after a two-month rally in municipal bond prices. The gain was fueled by a record flow of money into mutual funds that overcame lingering fiscal strains on localities, said Craig Elder at Milwaukee-based Robert W. Baird & Co.

"It tells you there's too many dollars chasing too few bonds," said Elder, the fixed-income analyst in Baird's private wealth division. "It comes back to the question, 'Are we in another bond bubble?'"

Investors added $1.7 billion to muni funds during the period ended Oct. 7, the 40th straight week of inflows, according to Thomson Reuters' Lipper FMI.

'Sign of a Retreat'

"All eyes will be focused on what fund investors do as any sign of a retreat in municipal mutual fund demand will hit the market even harder next week," Pietronico said.

Ten-year borrowing costs for the highest-rated states rose as the week progressed. North Carolina auctioned 10-year bonds at 2.55 percent on Oct. 6; Virginia's sale of similar maturity debt cost 2.65 percent the next day. Delaware paid 2.81 percent through negotiation with Morgan Stanley yesterday.

Following are descriptions of some pending sales of municipal bonds; the timing and amounts may change.

WASHINGTON STATE plans to sell $1.38 billion of general obligation securities next week. Investment banks will place interest-cost bids Oct. 14 seeking to underwrite $875.2 million of tax-exempt debt, and Goldman Sachs will market $500 million in taxable Build America Bonds Oct. 15, according to data compiled by Bloomberg. The deal will fund capital improvements and refinance debt. Washington is rated AA+ by S&P, Aa1 by Moody's and AA by Fitch. (Updated Oct. 9)

ALABAMA PUBLIC SCHOOL AND COLLEGE AUTHORITY may offer $775.8 million of tax-exempt revenue bonds as soon as next week through Morgan Stanley. All except $38.1 million will be used to refinance previous capital-improvement issues. The rest will finance new construction loans to local school boards. The bonds are to be repaid from utility and sales taxes. (Added Oct. 9)

MISSISSIPPI plans to sell $622.9 million of general obligation bonds as soon as next week to fund capital projects and refinance debt. Regions Financial Corp.'s Morgan Keegan & Co. and Morgan Stanley will handle the offerings. All except $64 million will be taxable; $98.3 million will be federally subsidized Build America Bonds. The financing will go to facilities for Toyota Motor Corp. and the B.B. King Museum in Indianola, Mississippi. The state's full faith and credit pledge is rated AA by Standard & Poor's and Aa3 by Moody's. (Added Oct. 9)

ATLANTA plans to offer $433.4 million of fixed-rate bonds backed by revenue from the city's water and sewer system to replace variable-rate debt whose credit support is expiring Nov. 1, according to Fitch. A group of investment banks led by Goldman Sachs will handle the refinancing, with maturities from 2010 through 2039. The bonds will be insured by Assured Guaranty Ltd.'s Financial Security Assurance Inc., rated AAA by S&P, AA+ by Fitch and Aa3 by Moody's. Fitch rates the underlying revenue backing BBB+. (Updated Oct. 8)

TEXAS A&M UNIVERSITY SYSTEM intends to offer about $315 million of federally subsidized, taxable Build America Bonds and $58 million of tax-exempt securities this month through investment banks led by Barclays Plc and Piper Jaffray Cos. The bonds, backed by pledged revenue from the 110,000- student university system based in College Station, will finance campus projects and are rated AA+ by Fitch. (Updated Oct. 9)

FAIRFAX COUNTY, VIRGINIA, will take interest-cost bids on Oct. 14 from investment banks seeking to underwrite $144 million of tax-exempt debt and $124.5 million of taxable Build America Bonds. The most populous jurisdiction in the Washington, D.C., metropolitan area, with more than 1 million people, will use the money to finance public improvements. Fairfax County is rated AAA by Fitch and S&P, and Aaa by Moody's. (Updated Oct. 9)

MASSACHUSETTS BAY TRANSPORTATION AUTHORITY, which runs the Boston area's bus, subway and train system, plans to raise $253.2 million by selling debt including $213.8 million of taxable Build America Bonds. Goldman Sachs was chosen to handle the deal. The securities, backed by sales taxes and rated AAA by S&P and Aa2 by Moody's, will have a final maturity in 2039. The sale, which will pay for locomotives, subway cars and other capital investments, is scheduled for the week of Oct. 19, said Jonathan Davis, the authority's chief financial officer. (Added Oct. 9)

--With assistance from William Selway in San Francisco, Michael McDonald in Boston, Darrell Preston in Dallas and Jerry Hart in Miami. Editors: Pete Young, 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:
Michael Weiss at +1-212-617-3762 or

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UPDATE: Munis Pull Back; First Slip Since Aug For 10-Yr -MMD

Tuesday, October 6, 2009
By Rob Copeland
Dow Jones Newswires

NEW YORK (Dow Jones)--Municipal bonds ran into a rare headwind Tuesday, with prices falling and yields rising across most maturities as long-awaited new supply hit the market.

On average, 10-year triple-A yields rose to 2.60%, the first increase since Aug. 25, according to Municipal Market Data. Yields had fallen without exception since that date, thanks to a scarcity of new issues.

Starved for new tax-exempt debt, investors had been bidding up existing bonds, but a slew of new issues Tuesday led by California finally satiated demand.

"There was a frenzy in the market that looks to be notably gone," said Michael Pietronico, chief executive of Miller Tabak Asset Management, a New York City investment firm specializing in high-quality, tax-exempt bonds.

The tax-exempt market has also been affected by the new, federally subsidized Build America bonds program for taxable debt, which has consumed issuance that might otherwise have been sold in the tax-free arena.

A 35% federal subsidy to issuers on Build America bond interest makes them a popular choice for state and local borrowers.

The Golden State marketed nearly $900 million of tax-exempt bonds to retail investors, part of an overall $4.5 billion offering set to sell Thursday.

Cedars-Sinai Hospital in Los Angeles sold $535 million of tax-free revenue bonds. North Carolina, one of the country's strongest credits, sold $372 million of general obligation bonds.

Triple-A bonds due in 2039 now yield 3.85%, up 4 basis points from Monday, according to MMD.

-By Rob Copeland, Dow Jones Newswires; 212-416-2622;

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Tax-Free Bond Yields Reach a 40-Year Low - The Wall Street Journal

Friday, October 2, 2009
By Stan Rosenberg

Don't look to the tax-exempt bond market for yield anymore.

Prices in this $2.8 trillion sector of the capital markets have been skyrocketing for the past two months, driving yields to their lowest levels in more than 40 years.

This trend, attributable mainly to a diminishing supply of tax-exempt bonds and to strong demand, isn't expected to abate anytime soon.

"Let the train leave the station without you," said Michael Pietronico, chief executive of Miller Tabak Asset Management, a New York investment firm. "The downside is much greater than the upside," Mr. Pietronico said, noting that yields have fallen in the year since the collapse of Lehman Brothers Holdings Inc. "At this time last year, you had 6% and 7% yields available for the same credits you're getting 4% now."

Bond analysts have described the market's rally as "bulletproof" and as "devouring everything in its path," based on three factors: Tax-exempt bond yields have exceeded those on taxable investments, the stellar credit of municipal bonds, and the record pace at which investors have been pouring money into municipal-bond mutual funds this year.

This year, inflows have totaled more than $60 billion compared with the previous high of $30.6 billion in 1993.

Since April, tax-exempt issuance has been restrained by state and local governments selling about $35.6 billion of taxable Build America Bonds, in which the federal government offers a 35% rebate on interest costs as part of its stimulus program.

That makes them cheaper to sell than tax-exempt bonds. For the nine months ended Sept. 30, $286.6 billion of tax-exempt bonds were sold compared with $319.1 billion in the same period last year, according to Thomson Reuters.

As a result, tax-exempt bonds have commanded hefty prices. And yields have continued to plunge, some by 0.40 percentage point or more. At the start of September, triple-A five-year munis returned 1.81%; 10 years, 2.96%; and 20 years, 4.04%, already low levels. But those continued to spiral downward this week to levels of 1.57%, 2.57% and 3.47%, respectively, according to a market benchmark.

Treasury Shifts Focus to Longer-Term Debt

The Treasury Department plans to extend the average duration of its debt in order to meet longer-term borrowing needs, a senior Treasury official said.

Karthik Ramanathan, Treasury's acting assistant secretary for financial markets, said the Treasury plans to move away from its emphasis on short-term Treasury bills. The Treasury is trying to lock in low rates on long-term debt to cover its financing needs for a longer period.

Historically, the average maturity of Treasury's marketable debt portfolio has hovered around five years. The Treasury is working to lengthen that number, he said.

Meanwhile, a rally in bond prices sent the 10-year Treasury note's yield to the lowest level since May. The 30-year bond's yield dipped below 4% to the weakest level since April. The two-year note's yield dropped below 0.9%.

Late in New York, the 10-year note rose one point, or $10 per $1,000 face value, at 103 20/32. Its yield fell to 3.194% from 3.309% late Wednesday, as yields move inversely to prices. The 30-year bond gained 1 19/32 points to yield 3.960%.

-Robert Copeland and Min Zeng contributed to this article. Write to Stan Rosenberg at

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Indexes: 40-Year Lows

Friday, October 2, 2009
By Michael Scarchilli
The Bond Buyer

Two of The Bond Buyer's weekly yield indexes declined to 40-year lows this week as yields dropped slightly in all the week's sessions.

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said this week was "more of the same" of what the municipal market has been experiencing of late.

"Yields are being pressured lower by the lack of supply, and the obvious unattractiveness of basically a 0% cash-equivalent yield," he said. "There's no let-up in the contraction of yields; however, there seems to be a reasonable amount of hesitation moving into the market. People are forced to put money to work."

The Bond Buyer 20-bond index of 20-year general obligation bond yields dropped 10 basis points this week to 3.94%. This is the lowest level for the index since Aug. 10, 1967, when it was also 3.94%. The index now has declined or remained unchanged for 10 consecutive weeks, declining a total of 75 basis points from its most recent high of 4.69% on July 23.

The 11-bond index of higher-grade 20-year GO yields also dropped 10 basis points, to 3.69%. This is the lowest the index has been since April 27, 1967, when it was 3.61%. The index has dropped or been unchanged every week for the past nine weeks, falling a cumulative 72 basis points from its most recent high of 4.41% on July 30.

The revenue bond index, which measures 30-year revenue bond yields, declined 17 basis points this week to 4.69%. This is the lowest level for the index since Jan. 17, 2008, when it was 4.63%. The index has now declined eight weeks in a row, for a total loss of 99 basis points from its most recent high of 5.68% on Aug. 6.

The 10-year Treasury note yield declined 18 basis points this week to 3.20%, which is the lowest it has been since May 14, when it was 3.11%. The 30-year Treasury bond fell 20 basis points this week to 3.97%, which is the lowest it has been since April 23, when it was 3.80%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, was unchanged at its all-time low of 0.56%. The index began on July 12, 1989.

The weekly average yield to maturity on The Bond Buyer's 40-bond municipal bond index, which is based on 40 long-term municipal bond prices finished at 4.98%, down six basis points from last week's 5.04%.

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(Mis)leading Indicator: Factory Data, Maybe - The Wall Street Journal

Thursday, October 1, 2009
By Mark Gongloff

The factory sector might be misleading investors about the strength of the broader economy.

The Institute for Supply Management on Thursday releases its purchasing managers' index of manufacturing activity in September. Economists think the index rose to 54 from a two-year high of 52.9 in August.

Any reading above 50 indicates expansion in the factory sector. In August, the index leapt across that magic line for the first time since January 2008, convincing many observers that the recession was over.

[Manufacturing PMI]

Though manufacturing accounts for just 19% of the U.S. economy, it is usually a good predictor of the direction of growth in gross domestic product -- which makes sense given manufacturing's cyclical nature.

Another ISM gain would reinforce notions of a durable recovery and offset some recent downside surprises in economic data. Those include a purchasing managers' index for the Chicago region, which fell unexpectedly in September and roiled markets when it was reported on Wednesday.

ISM, though, is likely heading higher. The gap between the ISM new orders and inventories indexes is the highest since 1975, suggesting there aren't enough manufactured goods available to meet demand.

Current levels of new orders and inventories, along with other evidence, suggest ISM could soon approach 60, consistent with annualized GDP growth of 5%, says Capital Economics economist Paul Dales.

But ISM prognostications aren't perfect, he warns. It gets the direction of broader growth right but can overstate the magnitude. ISM rose much faster than GDP in early 2004, for example. It is probably doing so again.

The ISM surveys midsize and large manufacturers, which are benefiting more from demand overseas and have easier access to credit than smaller factories.

And the economy is still largely anemic outside of temporarily stimulated sectors such as autos and housing. Mr. Dales expects a few quarters of healthy economic growth, but warns the recovery could fade, taking the ISM with it.

It wouldn't be the first time, notes Miller Tabak economic strategist Dan Greenhaus: The ISM topped 50 for five months after the 1990-91 recession and for eight months after the 2001 recession. In both instances, it quickly retreated below 50 again.

Write to Mark Gongloff at

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Tit for Tat on Inflation-Deflation Front - The Wall Street Journal

Tuesday, September 15, 2009
By Paul Vigna

Powerful forces in favor of inflation and deflation seem to be canceling each other out.

[Consumer Price Index]

The Federal Reserve has flooded the marketplace with cash and credits, lowered interest rates and generally tried anything it can to prevent the onset of deflation, even if that means stoking a more-tolerable phenomenon: inflation.

"Inflation illustrates a growing economy," Miller Tabak strategist Dan Greenhaus notes.

Meanwhile, the brutal assault on the economy this past year has unleashed deflationary trends. Last month, prices for food items like eggs and fish, as well as housing and lodging, eased. Federal Reserve Bank of Dallas President Richard Fisher said the Fed has seen an increase in the number of items that are falling in price compared with rising.

Retail and food-services sales are down 9.5% this year from last, according to the Census Bureau; a report on August retail sales comes out Tuesday.

Amid this dynamic, the Fed's push and recession's pull, inflation data remain in a welcome range.

Producer prices for August, reported Tuesday, are expected to show a 1.0% gain from July, a Dow Jones survey of economists predicts, almost all on rising oil prices, while the core index, which excludes food and energy, rose 0.1%. That almost would be a mirror image of July, which saw broad-based, albeit slim, price declines.

Consumer prices in August, which will be reported Wednesday, are expected to be up 0.4%, compared with July's flat reading, with the core index up 0.1%.

The data suggest the Fed's goal is working. Its hope is that its actions reflate the economy subject to some mild inflation well before rising unemployment and underemployment force consumers to spend even less.

The Fed has stretched itself to get to this point, pulling several levers, such as buying bonds. Were inflation to take off, the Fed certainly has the tools to stamp it out, however painful that might be.

The darker scenario would be deflation taking hold, as the already-tapped Fed would have less ability to maneuver.

But if the economy strengthens as signs suggest, the Fed might skirt the deflation specter altogether. Then it can fret about less-daunting fears.

Write to Paul Vigna at

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As BAB Deluge Eases, Projected Volume Slips to $2.49 Billion

Monday, August 31, 2009
By Christine Albano
The Bond Buyer

Call it the calm after the storm of taxable Build America Bond issuance.

The bulge of billion-dollar deals in the market in recent months due to the flood of BAB issuance since April will come to a sudden halt this week as volume slows to an estimated $2.49 billion leading into the Labor Day holiday, according to Ipreo LLC and The Bond Buyer.

"The municipal market will continue to easily absorb next week's supply as the absence of participants due to possible vacations does little to defer the strong inflows of cash that continue to look for bonds," said Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York City. "If the market opened for business on Saturday and Sunday, there would be buyers looking for tax-free bonds."

The largest deal headed to market this week is expected to be a $375 million offering of water revenue bonds from the San Francisco Public Utilities Commission. It will be California's second largest competitive sale of the year, but represents a stark difference from the $901.6 million sale of prepaid gas revenue bonds from the state's M-S-R Energy Authority that dominated the new-issue slate of $4.13 billion last week, according to Thomson Reuters.

The energy deal's 2039 final maturity, rated A by Standard & Poor's and A-plus by Fitch Ratings, was priced with a 6.70 % yield. That was 247 basis points higher than where the benchmark 30-year Treasury bond ended Thursday when the deal was priced by Citi, and 223 basis points higher than the generic triple-A general obligation scale in 2039, according to Municipal Market Data.

This week's San Francisco deal, which is planned for bidding tomorrow, will carry ratings of A1 from Moody's Investors Service and AA-minus from Standard & Poor's and will be structured to mature from 2011 to 2039. The PUC previously sold $375 million of water revenue bonds on Aug. 11 as part of its ongoing $4.6 billion water system improvement plan.

"The California market has rebounded smartly over the last month or so and the San Francisco deal will benefit from [demand] by the many investors previously skeptical of credit quality within the state," Pietronico explained. "Higher tax-free municipal market prices have forced many to assume more risk than they were perhaps willing to a couple of months ago."

Elsewhere in California, a $125 million sale of general obligation bonds is expected from the Pasadena Unified School District. Comprised of $30.8 million of tax-exempt serial bonds, as well as $94.1 million of taxable, direct-pay BABs structured as serials and term bonds, the deal is expected to be priced tomorrow by RBC Capital Markets LLC and is rated Aa3 by Moody's and AA-minus by Standard & Poor's.

Meanwhile, activity in the negotiated market will center around a $313.1 million sale of taxable GO pension bonds from Waterbury, Conn. William Blair & Co. is expected to price the deal on Wednesday with a tentative structure that includes serials maturing from 2010 to 2019, a final term bond in 2038, and A-minus ratings from Standard & Poor's and Fitch.

Some of the week's other offerings hail from Ohio, Oklahoma, Florida, and New York.

A $209 million sale from the Oklahoma Capital Improvement Authority of state highway capital improvement revenue bonds is planned for pricing tomorrow by lead manager RBC after a retail order period today. Rated AA by Standard & Poor's and AA-minus by Fitch, the deal will consist of $152 million of tax-exempt highway bonds in Series 2009A that mature from 2010 to 2024, and $57 million of taxable, direct-pay BABs in Series 2009B that mature from 2020 to 2024.

In addition, a $170.3 million sale of state facility refunding bonds from the Ohio Building Authority is slated for pricing by RBC on Wednesday, following a retail order period tomorrow.

The issue will be comprised of $82 million of Series 2009B bonds for administrative building fund projects, $72.2 million of Series 2009B bonds for adult correctional building fund projects, and $16 million of Series 2009B bonds for juvenile correctional building fund projects, and is structured to mature from 2010 to 2024. Bonds are expected to be rated Aa3 by Moody's, AA by Standard & Poor's, and AA-minus by Fitch.

In the Southeast, a $139 million offering of water and sewer revenue bonds is on tap from Pasco County, Fla., with the pricing expected on Wednesday by senior manager Morgan Keegan & Co. The larger portion of the deal is comprised of $115.5 million of taxable, direct-pay BABs that are structured to mature in 2024, 2029, 2034, and 2039, while the tax-exempt portion consists of $23.5 million of serial bonds maturing from 2013 to 2021. The Pasco bonds are rated Aa3 by Moody's, AA by Standard & Poor's, and AA-minus by Fitch.

Meanwhile, Nassau County, N.Y., is gearing up for a three-pronged sale of general improvement bonds totaling $130.4 million in the competitive market on Wednesday. Rated A2 by Moody's and A-plus by Standard & Poor's and Fitch, it consists of $89.6 million of Series F tax-exempt bonds maturing from 2011 to 2023, and $40.8 million of Series G bonds that mature from 2023 to 2025 and for which bidders may submit bids for either tax-exempt bonds or federally taxable BABs, according to the sale notice.

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Budget-Less Pennsylvania Seeks Savings in Refunding

Monday, August 24, 2009
By Michelle Kaske
The Bond Buyer

Pennsylvania still doesn't have a final budget for fiscal 2010 but the Keystone State hopes to get nearly $30 million in interest savings with a $689.6 million advance refunding deal set for tomorrow.

The transaction will price competitively and proceeds will refinance outstanding general obligation bonds to reduce interest costs while maintaining the same maturities.

Though Democratic Gov. Edward Rendell signed an $11 billion "bridge budget" on Aug. 5 to cover payroll costs, keep essential services running, and pay debt service, his proposed $26 billion fiscal 2010 budget has yet to pass the legislature. It now sits in conference committee.

The heart of the impasse deals with additional revenue. Rendell and other Democratic lawmakers believe the fiscal 2010 budget needs new or additional revenue to balance the budget along with spending cuts while Republicans contend the state must live within its means and reduce expenditures further to match sluggish revenues. Democrats control the House and GOP members control the Senate.

Fiscal 2010 began July 1. Pennsylvania officials anticipate the market will still be receptive to a GO refunding and participants said that while the timing may not be ideal, investor interest will still be there for the commonwealth based on its conservative borrowing history.

"I don't think that Pennsylvania will be punished nearly as much as, say, Illinois and California have, because the supply level in Pennsylvania has been very moderate overall and the reputation of that state from a fiscal perspective is on a much more solid ground than say, for instance, California," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "It may amount to five or six basis points at most, but nothing that's going to be a significant long-term [issue] for the state - there just isn't enough supply."

Rick Dreher, director of the bureau of revenue, cash flow, and debt in the Budget and Administration Office, said the state is confident that investors will participate in the refunding deal despite the budget stalemate.

"I hope the refunding would be received in the same manner as prior commonwealth issues," Dreher said. "We've had very attractive rates in the last several issues."

JPMorgan was the winning bidder on Pennsylvania's last refunding, a deal for $155.7 million. That sale priced on May 19, with bonds maturing in 2009 yielding 0.30% with a 2% coupon and debt maturing in 2014 yielding 1.92% with a 4% coupon.

Public Financial Management Inc. is the financial adviser for this week's offering. Cozen O'Conner is bond counsel.

Fitch Ratings and Standard & Poor's give the refunding sale their AA rating, with a stable outlook. Moody's Investors Service said it will release its rating on the transaction today.

Pennsylvania has $8.6 billion of total net outstanding debt. The state will pay $1.04 billion of debt service costs in fiscal 2010.

While Fitch and Standard & Poor's mention the state's lack of a fiscal 2010 budget in their recent analysis of the credit, both rating agencies said they will continue to monitor the budget stalemate and cite the $11 billion approved spending as support for the state's most immediate needs.

The sale will advance refund all or a portion of 14 prior bond series sold from 2000 to 2008. The transaction is set to generate net present-value savings of nearly $30 million, according to Dreher.

Issuers are facing negative arbitrage on advance refinancings as escrow accounts are offering lower interest rates. Dreher said Pennsylvania plans to invest the bond proceeds in Treasury bonds instead of Treasury state and local government series securities, or SLGS, to achieve interest rates closer to what the state will pay in interest on tomorrow's refunding deal.

"The concern isn't so much keeping it under that, it's how much underwater the escrow's going to be and trying to mitigate that negative arbitrage," Dreher said.

The fiscal 2010 budget standoff also delays approval of the state's capital debt act for this year. Pennsylvania anticipates issuing $2.32 billion of new-money debt in fiscal 2010, for major projects such as the expansion of the Pennsylvania Convention Center in Philadelphia and construction of four new state prisons, among other infrastructure developments. That $2.32 billion amount is slightly higher than the $1.91 billion that the commonwealth sold in fiscal 2009. Pennsylvania cannot issue any new-money GO bonds until lawmakers approve the fiscal 2010 borrowing plan.

Dreher said the state can wait to issue those bonds, but if the budget impasse continues into November or December some projects could be put on hold.

"Clearly if we get into a very protracted budget impasse then yes, we will have projects that are going to have to be shut down because of a lack of ability to pay the contracts," he said. "But I don't anticipate that until much later into the fall."

While the state plans to boost its GO debt levels in the coming years, Standard and Poor's believes it can absorb the additional borrowing.

"Pennsylvania's debt profile is favorable in our opinion. In the next five years, however, commonwealth management intends to issue substantially more GO debt than it retires, boosting the commonwealth's tax-supported debt by about 40% from fiscal year-end 2008 levels," according to a Standard and Poor's report. "In our view, debt per capita and debt to personal income are very low at $748 and 1.9%, respectively. We also saw debt services, as a percent of general fund revenues, as low at 3.3% in fiscal 2008."

To bring additional liquidity, the state plans to sell tax and revenue anticipation notes this year, the first time Pennsylvania will offer short-term debt since 1998. The recession has eroded the state's cash reserves, prompting the commonwealth to look towards Trans for additional liquidity.

Dreher said the amount of Trans and the timing of the deal depend upon what the final fiscal 2010 budget looks like. A budget that includes new or additional revenue would necessitate a short-term sale of roughly $300 million to $400 million in February, while a spending plan that does not include a tax hike would require a Tran deal of $1 billion or more around November.

The state is also keeping an eye on pension costs that are expected to increase in fiscal 2013. In May, Dreher projected the state's pension contribution to increase by $1 billion to $1.2 billion in fiscal 2013. Now, due to poor investment performance, that estimate could rise by roughly $300 million.

"I would be ball-parking it, but I would say $200 to $300 million higher, at a minimum," Dreher said.

Officials have not discussed pension bonds in detail, he said. Such borrowing would require legislative approval, as the state's current borrowing capabilities do not include pension debt.

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Record Treasury Debt Seen to Have Minimal Short-Term Effect on Munis

Monday, August 3, 2009
By Patrick Temple-West
The Bond Buyer

The record amount of Treasury debt issued last week will have a minimal short-term effect on municipal bond yields, as inflation and interest rates are expected to remain low at least through the end of the year, market participants said last week.

Muni yields would likely rise with Treasury yields if the government is forced to increase interest rates to attract buyers, they said. However, last week demand for the $235 billion of bills and notes auctioned remained adequate, especially from foreign buyers, according to sources. Meanwhile, demand for munis remains strong as individual investors buy high-grade credits and pour cash into tax-exempt mutual funds.

Treasury market gyrations "have not really affected the municipal market," said Dominick Mondi, senior managing director of municipal trading at Mesirow Financial Inc. in Chicago. Though munis have detached from trading in lockstep with Treasuries, the tax-exempt market is "keeping an eye on [Treasuries] for any dramatic move," he said.

The market will have to absorb more government during the next three months. The Treasury is expected to issue $446.0 billion of bills, notes and bonds in the third quarter compared with $343.0 billion in the second quarter, according to a survey of securities firms that was conducted by Securities and Financial Markets Association and released Thursday. The survey respondents estimated the 10-year Treasury yield will be 3.70% in September and 3.90% by the end of the year.

A 10-year Treasury yielded 3.53% Friday afternoon and a triple-A, 10-year muni bond yielded 3.01%, according to Municipal Market Data.

"Our concern is, what yield will [Treasury] have to offer to attract foreign investors?" said Peter Hayes, who leads BlackRock Inc.'s municipal team. If Treasury demand weakens and rates continue to rise this year, "muni rates will be affected to some degree albeit not to the degree that we think Treasuries will be affected," he said.

Sources said the debt issuance is not likely to spur inflation concerns in 2009 and that the Fed will not have to raise interest rates this year.

"The Fed has been very vocal about keeping the funds rate anchored close to zero," said Michael Pietronico, CEO of Miller Tabak Asset Management.

Economic factors may benefit munis as the recession shows signs of easing. Retail investors would like to see interest rates moving higher because "that would be a signal that municipalities are going to see higher tax receipts," Pietronico said.

Munis "will perform quite well in the initial stages of an economic rebound," particularly the first three to four months, as concerns about defaults and downgrades ease, he said, adding that the economy "is scraping at the edges" of that recovery now.

If Congress has to raise taxes to help pay off the government debt, munis will benefit, sources said. Already, many legislatures have raised local taxes to fill their budget gaps.

"The federal government is greatly increasing its costs, so in theory it should be good for tax exempt bonds," said Matt Fabian, managing director of Municipal Market Advisors in Concord, Mass.

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Munis Buoyed by Below-Average Week of $5.6 Billion in Offerings

Friday, July 24, 2009
By Jeremy R. Cooke
of Bloomberg

July 24 (Bloomberg) -- U.S. state and local governments led by issuers in Pennsylvania and New York sold $5.6 billion of fixed-rate bonds this week, a below-average total that helped municipal securities hold their value better than Treasuries.

The Pennsylvania Turnpike Commission sold $956.7 million of debt and New York City's Transitional Finance Authority borrowed $900 million, each after offering a portion to individual investors during so-called retail order periods. The turnpike operator sold $145 million and the city financing arm raised a net $215 million from such buyers, officials said.

"Tax-exempts are still well-bid by retail," said Michael Pietronico, chief executive of Miller Tabak Asset Management in New York. Shorter-maturity municipal bonds have performed so well compared with U.S. notes that their relative value has become "a little more questionable," raising the possibility of declines next week, he said.

Yields on benchmark five-year municipal bonds eased two basis points this week through yesterday to 2.06 percent, based on a daily survey by Municipal Market Advisors of Concord, Massachusetts. That's the lowest point relative to comparable- maturity Treasury notes in five weeks.

State and local bonds due in the next few years have advanced on demand for yields higher than those offered by tax- free money-market funds. Investors pulled cash out of municipal money funds for the fifth time in the past six weeks, shrinking their assets to the lowest in 20 months on July 21, according to iMoneyNet of Westborough, Massachusetts.

The simple seven-day yield for tax-free money funds held at a record low of 0.11 percent for a second week, said iMoneyNet, which has tracked such investments since 1981.

Obviously Risky

"These are basically zero returns, and stocks and real estate are obviously risky," said Phil Condon, head of municipal bond portfolio management for DWS Investments in Boston. Longer-term muni bonds and the funds that invest in them are "the place that's adding value for people who don't want to stay in cash and don't want too much risk."

Municipal bond mutual funds have reported that investors added new cash every week in 2009, according to AMG Data Services of Arcata, California. Total net inflows in July are more than $2.2 billion higher than the average during the same period since 2002, JPMorgan Chase & Co. said in a note to clients yesterday, citing AMG.

Tax-exempts have gained 8.7 percent so far this year, while Treasuries lost almost 5 percent, according to total-return indexes from Bank of America Corp.'s Merrill Lynch & Co. For July, municipals are up 1.4 percent, while federal securities are down 0.5 percent.

Matching the Average

This week's preliminary fixed-rate issuance total compares with a weekly average of $6.9 billion this year, according to data compiled by Bloomberg.

States, local governments and other municipal borrowers plan to issue at least $13.1 billion of bonds during the next 30 days, matching the 12-month average according to a Bloomberg index of visible supply.

Issuers have sold $192.7 billion of fixed-rate municipal bonds this year through last week, up 7.5 percent from the $179.2 billion sold during the comparable period in 2008, Bloomberg data show.

Following are descriptions of some pending sales of municipal bonds and notes; timing is subject to change.

NORTH TEXAS TOLLWAY AUTHORITY, which operates toll roads around Dallas, plans to sell $1.17 billion of fixed-rate bonds. Banks led by Morgan Stanley will market $360.9 million of tax- exempt securities and Goldman Sachs Group Inc. will lead underwriters on the sale of $810.4 million in taxable, 40-year Build America Bonds, according to preliminary deal documents. The money raised will refinance debt issued in 1997, 1998 and 2005; pay off commercial paper; fund payments to terminate interest-rate swap agreements, and help cover construction costs on the Sam Rayburn Tollway and eastern extension of the President George Bush Turnpike. The toll-road authority expects ratings of A- from Standard & Poor's and A2 from Moody's Investors Service for its first-tier system revenue bonds. (Added July 24)

METROPOLITAN WASHINGTON AIRPORTS AUTHORITY, which runs Dulles International and Reagan National airports, plans to sell $827 million of bonds backed by revenue from the Dulles Toll Road in northern Virginia. Citigroup Inc. and Morgan Stanley will lead a group of investment banks underwriting the sale, to finance the extension of Washington's Metrorail system to Dulles airport. The deal will include $173 million of fixed-rate debt; $111.5 million of capital appreciation bonds, which pay out returns only at maturity instead of semiannually; $182.9 million of securities that begin as capital appreciation bonds and convert to current interest debt in 2016; and $359.5 million of Build America Bonds, which are taxable and eligible for a 35 percent interest-cost rebate from the U.S. Treasury. The $173 million portion has a senior lien on toll revenue and Moody's Investors Service's A2 credit rating; the rest has a secondary lien and a Baa1 grade, two grades lower. (Added July 24)

INDIANAPOLIS LOCAL PUBLIC IMPROVEMENT BOND BANK intends to offer $568.7 million of fixed-rate bonds to refinance auction- rate securities and variable-rate debt and to borrow additional funds to end interest-rate swap agreements. Morgan Stanley leads underwriters on the transaction. Revenue from Indianapolis's waterworks secures the bonds, rated AA- by Standard & Poor's, A3 by Moody's Investors Service and A- by Fitch Ratings. The debt was downgraded by Moody's and Fitch this month, while S&P reduced its outlook to negative. The three actions resulted from concerns that state-approved rate increases may not keep up with debt service policies. (Added July 24)

HOUSTON, the largest city in Texas by population, will offer $524.4 million of general obligation bonds next week. About $100 million of the deal will be taxable; the rest will be tax-exempt. The proceeds will refinance commercial paper that provided interim financing for public improvements as well as long-term debt issued in 1999 and 2000. After the sale, Houston will have $3.15 billion of general obligation debt, rated Aa3 by Moody's Investors Service. (Added July 22)

HOUSTON AIRPORT SYSTEM, the airport enterprise of the fourth-most populous U.S. city, plans to sell $420 million of tax-exempt bonds secured by a senior lien on revenue next week. JPMorgan Chase & Co. leads underwriters on the deal. The system that operates George Bush Intercontinental Airport and William P. Hobby Airport will use the money borrowed to fund capital improvements, pay off commercial paper and reimburse Houston for project funds already spent. The bonds are rated Aa3 by Moody's Investors Service and an equivalent AA- by Standard & Poor's. (Added July 22)

LOS ANGELES COUNTY METROPOLITAN TRANSPORTATION AUTHORITY plans to sell as much as $335.4 million of tax-exempt bonds next week through Bank of America Corp.'s Merrill Lynch & Co. to pay off commercial paper and refinance long-term debt. Individual investors can place orders for the bonds July 28 and final pricing for institutions will be the next day, said Mike Smith, assistant treasurer for the agency. The debt, rated Aa3 by Moody's Investors Service and AAA by Standard & Poor's, is payable from revenue collected by Los Angeles County's Proposition A half-cent sales tax. Maturities will range from 2010 through 2025. The authority runs the second largest bus network by passengers after New York's MTA and the third-busiest light-rail system after Boston and San Francisco, according to the American Public Transportation Association. (Added July 24)

PHILADELPHIA, the sixth-largest U.S. city by population, intends to offer $240.8 million of fixed-rate general obligation bonds insured by Assured Guaranty Corp. next week. Underwriting of the deal, to refinance variable-rate debt issued in 2007, will be led by Bank of America Corp.'s Merrill Lynch & Co. Philadelphia is rated Baa1 by Moody's Investors Service, BBB by Standard & Poor's and BBB+ by Fitch Ratings. Moody's has a negative outlook on the city's credit and Fitch has it under review for possible downgrade. (Added July 23)

MASSACHUSETTS WATER POLLUTION ABATEMENT TRUST, the state agency that finances low-cost loans for local water projects, plans to sell $223.5 million of tax-exempt bonds through JPMorgan Chase & Co. next week. Maturities will range from 2010 through 2029. The deal is to refinance debt and pay for terminating an interest-rate swap agreement. Fitch Ratings grades the debt AAA. (Added July 22)

MARYLAND plans to sell $485 million of top-rated general obligation bonds beginning next week. A group of investment banks led by Citigroup Inc. will sell as much as $235 million of the deal to individual investors July 31 through Aug. 4. The rest of the debt will be sold via interest-cost auction among underwriters on Aug. 5. About $50 million may be issued as taxable, 15-year Build America Bonds, which would give the state a 35 percent federal rebate on the interest. The remaining $435 million would be tax-exempt and come due from 2012 through 2023. (Added July 22)

FYI PROPERTIES, a nonprofit corporation created to finance a new headquarters for the Washington State Department of Information Services, plans to sell almost $300 million of tax- exempt lease revenue bonds the week of Aug. 3. Banks led by Barclays Plc will underwrite the deal to fund construction of a six-story office building, data center and underground garage on the campus in Olympia, Washington. The debt will be secured by rent payments from the state's technology agency after the project is completed in late 2011. FYI is staffed by the National Development Council, a New York-based group that helps local governments with housing and economic development projects. (Updated July 23)

To contact the reporter on this story:
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California Debt Tempts Bargain Hunters - The Wall Street Journal

Wednesday, July 8, 2009
By Stan Rosenberg

While individual investors are nervous, professional portfolio managers are almost united in the view that California unquestionably will pay its debts, and the Golden State's bonds not only are a buy, but also may be an even better bargain if the headlines get worse.

Those headlines center on the state's inability to close a $26 billion-plus budget deficit in a $92 billion general-fund budget, a slumping economy with an 11.5% unemployment rate, ratings downgrades and warnings of more to come, and the latest ignominy of having to issue scrip, or promise of later payment, to vendors to avoid running out of cash.

On Monday, Fitch Ratings cut the state's long-term general-obligation bond ranking two notches to triple-B. Fitch kept the ratings on watch for further downgrades. Moody's Investors Service and Standard & Poor's Ratings Services also have issued ratings warnings.

California bonds already were trading at levels in line with triple-B-rated municipal debt. The fear in the market now is, if the bonds are reduced to junk, many institutions no longer would be able to hold them under their investment guidelines, producing what Miller Tabak Asset Management Chief Executive Michael Pietronico last week described as a "cataclysmic event."

Individual investors have been scared by the flow of bad news. "Customers are extremely edgy," said Gary Pollack, head of fixed-income trading and research at Deutsche Bank Private Wealth Management.

Mr. Pollack hasn't bought California general-obligation bonds -- those payable from a pledge of the state's taxing power -- in a while, "but I'm thinking of it [now] because I still think the state will make principal and interest payments."

And there is a chance to pick up yield on bonds in which professionals have almost unwavering faith. On Tuesday, a California 4.5% tax-exempt bond maturing in 2036 traded at a 6.31% tax-free yield to maturity. That equals a 9.48% taxable equivalent yield for an investor in the 35% tax bracket, more than double the yield of the 30-year taxable Treasury bond, Mr. Pietronico said.

"I'm hearing a lot of people who are very concerned," said Peter Coffin, president of Breckinridge Capital Advisors.

The state has the obligation and ability to meet principal payments on its bonds. And Mr. Coffin maintains the state's willingness isn't in doubt "because California, like most municipalities, recognizes that failure to meet its obligations in a timely manner would for a generation prove extremely costly." The state would be unable to borrow, even though it already has plenty of borrowing authorized.

"The headlines are scary, but we just put them in perspective," Mr. Coffin said, pointing out the state has a "very manageable" level of debt service around $5.2 billion, just 5.6% of the proposed budget.

A large level of expenditures would be cut before California would miss a debt payment, and the state's resources make this "unlikely from a fundamental perspective," according to a Samson Capital Advisors report.

The state constitution gives general-obligation debt service the second-highest priority, behind public-school funding. Based on the most recent estimates for fiscal 2010, which started July 1, public-school payments equal $38.8 billion, which leaves $53.5 billion to cover $4.5 billion of debt service, according to Samson analysts Judy Wesalo Temel and Stephen A. Stowe.

Still, Samson is taking defensive measures, including limiting client accounts to a moderate proportion of California exposure, but the analysts stressed they aren't advocating wholesale elimination.

"We believe budget resolution is inevitable and that the strong bondholder protection inherent in the priority of cash payments ... will ensure payment of debt service," they wrote.

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California To Issue IOUs If No Budget, Cash Resolution

Friday, June 24, 2009
By Stan Rosenberg
Dow Jones Newswires

NEW YORK (Dow Jones)--With a new fiscal year about to begin next Wednesday, and hamstrung by a still-unbalanced budget and a continuing cash shortage, California State Controller John Chiang said he will have to issue IOUs starting July 2 if immediate solutions aren't quickly adopted.

At the same time, California's Department of Finance said it will take the unusual step of drawing on a debt reserve fund July 1 in order to make a payment coming due on the state's Economic Recovery Bonds.

"Next Wednesday, we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression," Chiang said.

About $15 billion of the ERBs were sold in 2004, backed both by the state's full faith and credit and by sales tax revenues, which now are plunging in the Golden State. Curently, there are $8.6 billion of the ERBs outstanding.

Another draw is expected next January, but sources familiar with the matter said the state is looking to restructure the remaining ERBs before next December to save on debt-servicing costs.

California also drew down debt reserves last December in a move that went largely unnoticed by market participants.

"Just the fact that they need to do this tells you the weakened state that California's cash flow is in," said Richard Larkin, Director of Credit Analysis at Herbert J. Sims & Co., Inc.

The IOUs, which would carry an unspecified interest rate, would be issued for all general fund payments other than those categories protected by the state constitution, federal law and court decisions.

Affected by issuance of what are technically called "registered warrants" would be payments to local governments for social services, private contractors, state vendors, income and corporate tax refunds and payments for state operations including legislative per diems, Chiang said in a press release.

The action would mark the second time in modern history that California issues registered warrants. It had done so in 1992 for about 100,000 state workers during another budget stalemate under the administration of Gov. Pete Wilson. The state's Department of Finance doesn't count a one-day issuance in 1982, when the warrants were called back the same day.

The action would spread the state's fiscal pain, which many say is a purely political problem, to its constituents.

"All eyes are on Sacramento. It's clearly a political issue," said Michael Pietronico, chief executive of Miller Tabak Asset Management.

"The state's $2.8 billion cash shortage in July grows to $6.5 billion in September, and after that we see a double-digit free fall. Unfortunately, the state's inability to balance its checkbook will now mean short-changing taxpayers, local governments and small businesses," Chiang said.

The state also is staring at a $24 billion budget deficit that has Democrats and Republicans in the legislature butting heads over whether to raise taxes or cut spending. On Wednesday, Democrats proposed levying a 9.9% tax on oil production, a $1.50-a-pack boost in the cigarette tax and a $15-per-vehicle registration fee.

Chiang met with Gov. Arnold Schwarzenegger and legislative leaders this week to warn about the ramifications of continued budget delays. "In addition to the burden on those who receive the notes, resorting to IOUs sends a signal that California has exhausted all other options to manage its cash flow," Chiang said.

The controller was forced to delay payments for 30 days in February to manage a smaller cash crisis. But the magnitude of this shortfall, which is nearly five times larger, cannot be temporarily covered by payment delays, he said.

The option to pursue short-term, high-cost loans from Wall Street to cover the cash shortfall was taken off the table by Schwarzenegger earlier this month when he revoked the state's authority to issue revenue anticipation warrants. These RAWs are short-term obligations that are issued in one fiscal year and mature in the next, allowing the state to stretch out its debts.

An interest rate for the IOUs will be set by California's Pooled Money Investment Board, which will meet in emergency session July 2. The board comprises the state treasurer as chairperson, the state controller and the director of finance.

California's full faith and credit bonds have been on a steady decline recently. They were trading Wednesday at yields about two percentage points above those for triple-A Maryland bonds. "That's a substantial difference," Pietronico said.

-By Stan Rosenberg, Dow Jones Newswires; 212-416-2226;

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Muni Market Quiet; California Bonds May Offer Opportunity

Wednesday, June 24, 2009
Dow Jones Market Talk

1407 GMT (Dow Jones) -- Municipal market quiet and unchanged from Tuesday with a summer-like feel. A few new issues of moderate size being priced, but investors apparently see no reason to jump out ahead of FOMC decision. Normally large July reinvestment flows have been muted, too. California GO bonds, meanwhile, continue to underperform, quoted 200 BPS cheaper than benchmark triple-A Maryland GOs. "That's substantial," says Miller Tabak's Mike Pietronico, who feels weakness in state and some local California credits "could be one of the great buying opportunities" to pick up incremental yield. (SDR)

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Yields Climb Amid New Deals and Weaker Treasuries

Friday, June 12, 2009
By Michael Scarchilli
The Bond Buyer

The Bond Buyer's yield indexes climbed this week as tax-exempt yields edged higher against a large new-issue calendar and a weakening Treasury market.

"I would characterize the last week as the municipal market recognizing that the Treasury market still matters," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "For a matter of months, the muni market, positively so, was trading in its own vacuum, so to speak, and I think the higher Treasury rates in particular this week with declining ratios and a surging amount of municipal supply took its toll."

Leading the market this week, the Puerto Rico Sales Tax Financing Corp. Wednesday priced $4.1 billion of bonds, while Los Angeles County yesterday priced $1.3 billion of notes.

Pietronico said the market now "is trying to grapple with the concept of how much more refunding deals might we see on the tax-exempt side because of the lower Treasury ratios."

"So there's a bit of an offset to the Build America Bonds story of taking bonds out of the market, and that is increased amounts of refundings, because we're at lower ratios," he said.

The Bond Buyer 20-bond index of 20-year general obligation bond yields rose 15 basis points to 4.86% - the highest it has been since April 8, when it was 4.92%.

The 11-bond index of higher-grade 20-year GO yields also rose 15 basis points this week, to 4.60%. That's the highest level since April 8, when it was 4.68%.

The revenue bond index, which measures 30-year revenue bond yields, increased 13 basis points this week to 5.76%, which is the highest it has been March 26, when it was 5.78%.

The 10-year U.S. Treasury note yield rose 16 basis points this week to 3.87%, and is at its highest level since Oct. 30, 2008, when it was 3.94%. The 10-year note's yield has risen in nine of the past 12 weeks. It is up 127 basis points from its most recent low of 2.60% on March 19.

The 30-year Treasury bond yield rose 12 basis points this week to 4.70%, which is the highest it has been since June 19, 2008, when it was 4.77%. The bond's yield has risen in nine of the past 10 weeks, up a total of 113 basis points from its most recent low of 3.57% on April 2.

The Bond Buyer one-year note index, which is based on tax-exempt note yields, rose seven basis points to 0.65% after reaching an all-time low of 0.57% the past two weeks.

The weekly average yield to maturity on The Bond Buyer 40-bond municipal bond index finished at 5.51%, an increase of nine basis points from last week's 5.42%.

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Puerto Rico to Sell Largest Tax-Exempt Bond Deal in 10 Weeks

Wednesday, June 10, 2009
By Jeremy R. Cooke
of Bloomberg

June 10 (Bloomberg) -- Puerto Rico plans to sell about $4.5 billion of bonds secured by sales tax revenue to U.S. investors today in the largest tax-exempt offering in 10 weeks.

Puerto Rico's Sales Tax Financing Corp. boosted the planned deal size by $1 billion yesterday, after taking orders from individual investors beginning June 8. The bonds will be offered to institutions such as mutual funds today through a group of underwriters led by New York-based Citigroup Inc.

The commonwealth is tapping demand for bonds that pay interest exempt from taxes nationwide and whose ratings are higher than its general obligation debt. Yields on benchmark, 30-year municipal bonds have risen to an eight-week high of 5.18 percent as the market handles more than $12 billion in planned deals this week, according to data compiled by Municipal Market Advisors of Concord, Massachusetts, and Bloomberg.

"The market is clearly on its back foot and the supply issue has taken center stage," said Michael Pietronico, chief executive of Miller Tabak Asset Management in New York. "I don't think there is any deal that can come in the next few days that won't be priced to sell."

The proceeds from the Puerto Rico bond sale will help finance its budget deficit, pay off other debt and fund an economic stimulus plan. The bonds being offered carry a subordinate lien on sales tax revenue and are rated A2 by Moody's Investors Service and A+ by Standard & Poor's, four and five grades above their general obligation ratings.

Stable Sales Tax

Puerto Rico's 7 percent sales tax has been "relatively stable" since it was implemented in November 2006 to replace a similar levy, Moody's said in a release last month, even as the commonwealth's unemployment rate rose to a 15-year high of 15.6 percent in April, higher than any U.S. state.

Today's deal will be the biggest since California sold $6.54 billion of tax-exempt bonds March 25 to jump-start capital spending after tight credit and a record budget impasse kept the state out of the municipal market since June 2008.

The Sales Tax Financing Corp., advised by the island's Government Development Bank, will offer debt paying semiannual interest; capital appreciation bonds, whose compound interest won't be paid out until maturity, and securities that will start in the latter form and convert to the former around 2016.

--Editors: Margot Slade, 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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Muni Yields Rise to Eight-Week High as Texas, Washington Borrow

Tuesday, June 9, 2009
By Jeremy R. Cooke
of Bloomberg

June 9 (Bloomberg) -- Municipal bonds declined, sending an index of benchmark 10-year yields to the highest in eight weeks, as Texas raised payouts on its new issue to entice buyers and Washington state offered higher-than-expected yields at auction.

Texas reduced prices and increased yields from initial levels on a $331 million sale of state bonds to fund loans for local water projects and refinance debt. Washington sold $387 million of general obligation, or GO, debt through competitive bidding, obtaining a 3.52 percent yield on 10-year bonds, seven basis points higher than a Bloomberg index of the state's bonds. A basis point is 0.01 percentage point.

"There was a concession built into new issues," said Michael Pietronico, chief executive of Miller Tabak Asset Management in New York. "Washington GOs came wider than normal. There seems to be a lot of supply out there relative to demand for duration. Investors are very cautious." Duration is a measure of a bond's yield sensitivity over time given changes in price.

The municipal market is working through its busiest week for bond sales since the end of April, with more than $12 billion in deals planned, based on data compiled by Bloomberg. Yields on top-rated general obligation debt due in 10 years rose four basis points to 3.37 percent, the highest since April 13, according to a daily survey by Municipal Market Advisors of Concord, Massachusetts.

Puerto Rico increased its planned offering of bonds backed by a subordinate lien on the U.S. commonwealth's sales tax by $1 billion to $4.5 billion, after gathering orders from individual investors the past two days, Bloomberg data show.

Retail Demand

"Supposedly, the short end is taken care of by retail," Pietronico said. "There's still a fair amount of institutional demand that's going to be needed to get this deal done."

Among other transactions today, New York's State Thruway Authority and New York City's Water Finance Authority offered almost $1 billion of bonds. Final pricing details weren't available.

The Pennsylvania Intergovernmental Cooperation Authority sold $351 million of securities backed by Philadelphia's city wage tax through Goldman Sachs Group Inc. Yields ranged from 1.6 percent on two-year notes to 4.36 percent on bonds due in 2023.

Texas's deal, underwritten by a group of investment banks led by JPMorgan Chase & Co., included 10-year bonds priced to yield 3.61 percent, nine basis points more than a Bloomberg index for the state.

Washington sold bonds to refinance debt issued in 1999. Even with the higher-than-expected yields, the state obtained $34 million in savings, according to a news release from State Treasurer James McIntire. Goldman submitted the winning interest-cost bid of 3.679 percent, beating out five other securities firms within a range of about 12 basis points.

--Editor: 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:
Michael Weiss at +1-212-617-3762 or

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Miller Tabak's Crescenzi Moving to Pimco as a Senior Vice President

Thursday, June 4, 2009
By Jack Herman
The Bond Buyer

Pacific Investment Management Co. has hired Anthony J. Crescenzi from Miller Tabak as a senior vice president, market strategist, and portfolio manager, the firm announced earlier this week.

Crescenzi will join Pimco's Newport Beach office. Crescenzi, who starts June 22, will report to Steve Rodosky, executive vice president, portfolio manager, and head of Pimco's Treasury desk.

Crescenzi had been chief bond market strategist at Miller Tabak + Co. He also was the co-founder and chairman of Miller Tabak Asset Management.

Crescenzi, who joined Miller Tabak in 1986, has also worked at Lehman Brothers and Prudential Securities. Crescenzi has written three books, including the "The Strategic Bond Investor" and "Investing from the Top Down: A Macro Approach to Capital Markets."

He earned a bachelor's degree in finance from the City University of New York and an MBA from St. John's University.

"Tony is widely recognized in our industry as a leading and thoughtful market strategist," Pimco chief executive officer and co-chief investment manager Mohamed A. El-Erain said in a statement. "His knowledge, experience, analytical skills, and insights will further enhance the resources devoted to delivering to our clients around the world superior investment performance."

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Munis Flat as Treasuries Tumble

Friday, May 22, 2009
By Michael Scarchilli
The Bond Buyer

The week's largest scheduled transaction was priced in the new-issue market yesterday, as tax-exempt yields held mostly unchanged amid light trading in the secondary.

Citi tentatively priced $750 million of revenue bonds for the California Statewide Communities Development Authority on behalf of Oaklandbased health care group Kaiser Permanente. Final pricing information was not available by press time.

The bonds contain a three-part 2013 maturity worth $10 million, $10 million, and $280 million; a $100 million maturity in 2014; a 2016 split maturity worth $10 million and $190 million; and a 2019 split maturity worth $10 million and $140 million. The 2013 bonds all yield 3.35%, with 3.25%, 4%, and 5% coupons, respectively. Bonds maturing in 2014 yield 3.70% with a 5% coupon. The 2016 bonds both yield 4.10%, with 4% and 5% coupons, respectively. The 2019 bonds both yield 4.68%, with 4.625% and 5% coupons, respectively. The bonds are not callable and are rated A-plus by Standard & Poor's and Fitch Ratings.

JPMorgan also priced $50 million of revenue bonds for Kaiser Permanente through the CDA. These bonds mature in 2044, yielding 2.50% with a 4% coupon.

The bonds are not callable, but feature a mandatory put in 2011. The short-term credit is rated F1 by Fitch.

Muni traders said yields on tax-exempt bonds were mostly unchanged in the secondary market yesterday.

"There's not a whole lot going on right now," a trader in New York said. "We're pretty quiet, and pretty flat. I think it's just unchanged right now."

However, some traders saw more activity than others.

"The market had a pretty good feel to me," a trader in Los Angeles said. "It felt like people were intent on buying bonds."

The government market, however, showed losses yesterday as stocks rose and the New York Federal Reserve purchased $7.4 billion of Treasuries, less than had been anticipated.

The yield on the benchmark 10-year note, which opened at 3.20%, finished at 3.36%. The yield on the two-year note was quoted near the end of the session at 0.87% after opening at 0.84%. The yield on the 30-year bond, which opened at 4.14%, was quoted near the end of the session at 4.31%.

Tony Crescenzi, chairman of Miller Tabak Asset Management, wrote yesterday in an e-mail that Treasuries "took a hit late this morning after the New York Fed said that it had purchased $7.4 billion of the $45.7 billion of Treasuries dealers had offered today as part of a series of planned auctions that are part of the Fed's program to purchase $300 billion of Treasuries in the six months ending in September."

"There are two messages here," he continued. "Number one, dealers, by showing a larger-than-normal amount of supply, are indicating that they are 'better sellers' at current prices," he wrote. And secondly, "the Fed, in purchasing a smaller proportion than normal of what was offered by dealers, may have wanted to push back the dealer community after many concluded [Wednesday] from the FOMC minutes that the Fed might either increase its Treasury purchases or be more aggressive with its purchases."

As of Wednesday's close, the triple-A muni scale in 10 years was at 87.1% of comparable Treasuries, according to Municipal Market Data. Additionally, 30-year munis were 104.8% of comparable Treasuries.

As of the close Wednesday, 30-year tax-exempt triple-A rated general obligation bonds were at 115.7% of the comparable London Interbank Offered Rate.

Elsewhere in the new-issue market yesterday, RBC Capital Markets priced $35 million of certificates of participation for Pima County, Ariz.

The bonds mature from 2010 through 2012, yielding 1.35%, 2.20%, and 2.55%, with 3%, 4%, and 4% coupons, respectively. The bonds, which are not callable, are rated A1 by Moody's Investors Service and A-plus by Standard & Poor's.

Burlington County, N.J., competitively sold $27.9 million of bond anticipation notes to Wachovia Bank NA, with a net interest cost of 0.48%. The Bans mature in 2010, with a 1.5% coupon. The notes were not formally re-offered.

Berkeley County, S.C., competitively sold $27.4 million of GO Bans to JPMorgan with a NIC of 0.48%. The Bans mature in 2010, with a 1.25% coupon. The notes were not formally re-offered. The credit is rated MIG-1 by Moody's and SP-1-plus by Standard & Poor's.

Trades reported by the Municipal Securities Rulemaking Board yesterday showed little movement. A dealer sold to a customer insured Puerto Rico Public Finance Corp. 5.125s of 2024 at 4.00%, even with where they traded Wednesday.

A dealer sold to a customer insured California 5s of 2037 at 5.54%, one basis point lower than where they traded Wednesday. A dealer bought from a customer Massachusetts Health and Education Facilities Authority 5.25s of 2038 at 6.43%, even with where they were sold Wednesday.

In economic data released yesterday, initial jobless claims came in at 631,000 the week ended May 16, after a revised 643,000 the previous week. Economists polled by Thomson Reuters had predicted 630,000 initial jobless claims.

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Yields Mostly Decline as Munis Firm in 'One-Way Train'

Friday, May 22, 2009
By Michael Scarchilli
The Bond Buyer

Most of The Bond Buyer's yield indexes declined this week, as municipals showed firmness in nearly all the week's sessions.

"It's been a one-way train," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

"The technicals are strong, we're still talking about a reinvestment period that's substantial, there's plenty of cash on the sidelines, and cash equivalent yields are too small to be even considered for many. So those who need income need to buy bonds, and obviously they are spending their money on munis.

"It seems that the perception is that the new-issue market will be met with more demand, and if anything, the more supply is proving that the appetite for bonds is higher than many thought at these yield levels," Pietronico continued.

"So it's probably going to remain quite firm until either a negative credit event occurs, or the economy lifts off and stocks become more of an alternative to bonds."

Activity in the secondary market remained quiet for much of the week, as attention shifted to the primary market, which saw good demand for new issues in a week free of Build America Bond transactions.

The Bond Buyer 20-bond index of 20-year general obligation bond yields declined 10 basis points this week to 4.44%. This is the lowest the index has been since Feb. 7, 2008, when it was 4.33%.

The 11-bond index of higher-grade 20-year GO yields declined 11 basis points this week to 4.18%, which is the lowest level for the index since Jan. 17, 2008, when it was 4.08%.

The revenue bond index, which measures 30-year revenue bond yields, dropped four basis points this week to 5.42%, which is the lowest the index has been since Sept. 11, 2008, when it was 5.09%.

The 10-year U.S. Treasury note yield rose 25 basis points this week to 3.36%, which is the highest the yield has been since Nov. 13, 2008, when it was 3.86%.

The 30-year U.S. Treasury bond yield jumped 24 basis points higher this week to 4.31%. This is the highest the bond's yield has been since Nov. 13, 2008, when it was 4.34%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, rose 15 basis points this week to 0.74%, which is the highest level since March 25, when it was 0.79%.

The weekly average yield to maturity on The Bond Buyer 40-bond municipal bond index finished at 5.25%, down five basis points from last week's level of 5.30%.

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Yields May Signal Recovery - The Wall Street Journal

Wednesday, May 20, 2009
By Min Zeng

The gap between short- and long-term Treasury rates is approaching a record as the U.S. economy shows signs of recovery and the government floods the market with new debt.

The gap between two- and 10-year Treasury yields was as wide as 2.360 percentage points at one point Tuesday, the most since the 2.619 points hit in November and nearing the August 2003 peak of 2.747 points. The gap ended Tuesday at 2.352 points, as the 10-year note fell 9/32 point, or $2.8125 for every $1,000 invested, to 99 to yield 3.243%, while the two-year note rose 1/32 point to 99 31/32, lowering its yield to 0.891%. Prices and yields move inversely.

Strategists said the gap could exceed three points. Two-year yield is expected to remain anchored by the Federal Reserve's interest-rate target of 0% to 0.25%. But the yield on the 10-year note is expected to rise amid a surge of new government debt and as investors sell existing government debt as they look to move out of these safe investments.

James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, said there is a chance that this gap, also known as the yield curve, may rise to 3.50 percentage points by the end of the third quarter.

Tony Crescenzi, chief bond-market strategist in New York at Miller Tabak & Co., said the yield-curve trend "tends to be long-lasting."

Until the Fed starts to reverse its stimulative monetary policies and starts raising interest rates, the curve is likely to remain steep, he said.

Investors profit from a steepening yield curve by buying two-year notes and selling 10-year notes. The steeper the curve, the bigger the profit potential. Banks benefit as they can borrow funds at cheap short-term rates and invest in higher-yielding long-term assets.

The yield curve is widely seen as a harbinger of an economy's outlook, with a steepening yield curve portending the end of a recession and an economic rebound in the making.

There is a dark side to the curve, though: worries about a reduced demand from foreign investors, who own more than half of Treasurys outstanding.

The concern is that the massive monetary and fiscal stimulus may fan inflation in the long run, hurting the dollar and reducing the value of foreigners' Treasury holdings. To entice them to buy, the U.S. government would then have to offer higher returns, which in turn would mean higher funding costs for the U.S.

Banks Come to Market

The high-grade primary market accounted for the bulk of bond offerings Tuesday, with nearly $10 billion in new issues on the docket, boosted by efforts by banks to repay money received from the Treasury Department's Troubled Asset Relief Program.

State Street Corp. sold $500 million of five-year, senior holding company notes at a risk premium of 2.20 percentage points more than comparable Treasurys via joint bookrunners Goldman Sachs Group and Morgan Stanley. The issue was priced at a level 0.05 percentage point narrower than was expected. The bank expects to use proceeds to repurchase TARP securities.

Barclays PLC's Barclays Bank sold $2 billion of 10-year bonds launched at a risk premium of 3.55 percentage points more than Treasurys.

And Capital One Financial Corp. was selling $1 billion of five-year notes, launched at a risk premium of 5.40 percentage points more than Treasurys via bookrunners Credit Suisse Group and J.P. Morgan Chase.

Away from the financial sector, Verizon Communications was in the market with a $4 billion offering.

-- Kellie Geressy

Write to Min Zeng at

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San Diego Leads Rise in Muni Sales as Yields Reach 8-Month Low

Friday, May 15, 2009
By Jeremy R. Cooke
of Bloomberg

May 15 (Bloomberg) -- Municipal bond sales rose to a three-week high of about $6.8 billion as San Diego took advantage of falling yields and a lull in California issuance to bring to market a refinancing deal a week sooner than planned.

San Diego's Public Facilities Financing Authority led long-term municipal offerings this week with a $635 million deal to save more than 5 percent on sewer-system debt service, said Lakshmi Kommi, the city's director of debt management. The Bond Buyer 20, a weekly index of 20-year general obligation bond yields, slid to 4.54 percent, matching the level reached Sept. 11, 2008, before Lehman Brothers Holdings Inc. went bankrupt.

State and local government bonds headed for their sixth weekly gain in the past seven weeks as low money-market rates stoke demand for longer-term investments and the Build America Bonds program saps supply from the traditional tax-exempt market, said Mike Pietronico, chief executive officer of New York-based Miller Tabak Asset Management.

"There's a powerful backdrop," Pietronico said. "May through July is generally an extraordinarily strong time for munis because of the coupon interest and maturity payments that hit the market. When you couple that with reduced supply, it's certainly going to point to higher prices."

Holders of municipal bonds will have about $88.8 billion from interest and principal payments to reinvest in the next two months, according to a May 11 estimate from Bank of America Corp.'s Merrill Lynch & Co.

The average seven-day simple yield on tax-free money-market mutual funds fell five basis points, or 0.05 percentage point, to 0.29 percent May 12, according to iMoneyNet of Westborough, Massachusetts.

Subsidized Issues

Issuers led by the Illinois State Toll Highway Authority and the Utah Transit Authority sold almost $1 billion of federally subsidized taxable securities this week, pushing the total from the Build America Bonds program to $9.25 billion, data compiled by Bloomberg show.

The Illinois and Utah agencies each ended up selling more taxable and less tax-exempt debt than previously planned to tap the 35 percent interest-cost rebates from the U.S. government.

San Diego moved up its deal, the second refinancing of city sewer debt in as many weeks, to take advantage of a lull in the California new-issue market before Oakland-based Kaiser Permanente begins selling $1.6 billion in bonds next week. The next largest fixed-rate deal out of the nation's most populous state this week was a $350 million auction by Santa Clara County, California.

'Busy Week'

"Next week is going to be a busy week for the market," Kommi said.

The public facilities authority obtained an all-in interest cost of 4.08 percent, she said. Underwriters led by Citigroup Inc. hadn't released final pricing details on the bonds, maturing from 2010 through 2025, by late yesterday.

This week's long-term municipal issuance was the most since the week ended April 24 when California's first Build America deal pushed the total to $15.35 billion, based on Bloomberg figures that don't include variable-rate securities.

--Editors: Bob Brennan, 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:
Michael Weiss at +1-212-617-3762 or

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Government Holds Strings to Markets - The Wall Street Journal

Monday, May 11, 2009
By Mark Gongloff

For all of the excitement about improving financial markets, most are still on some form of government life support and the evidence so far is they can't yet function normally on their own.

Last fall, markets froze and interest rates soared as investors dumped stocks and corporate bonds and banks cut back on lending to their customers and to each other. In response, the Federal Reserve sharply cut interest rates and established a Scrabble game's worth of acronymic lending and insurance programs to reassure investors and jump-start markets.

Those programs have helped return markets to near normal. Lending has resumed, and many key rates are back to where they were before the peak of the crisis. But in cases where the government has pulled back its support, markets have trembled. Given that history, officials will likely err on the side of intervening too much and for too long.

"When the recovery is self-reinforcing and cash flow is picking up for companies and banks, then financial assets will grow on their own without any need for government involvement," says Tony Crescenzi, chief bond strategist at Miller Tabak. "We are nowhere near that self-reinforcing state."

In one sign of lingering credit-market anxiety, interest rates not under direct Fed control -- corporate bonds, for example -- haven't fallen as sharply as overnight lending rates, over which the Fed has the greatest power.

"Where there's been the most intervention, there has been the largest decline relative to previous trends" in interest rates, notes Citigroup economist Steven Wieting. "It makes the case that policy is heavily influencing markets, directly and indirectly."

One of the key markets to seize up last fall was for asset-backed commercial paper, which is generally held by money-market funds and is backed by assets such as auto loans or mortgages. Money-market funds, fearful they couldn't sell these securities to meet redemptions, stopped buying them. So the Fed launched its Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF for short), saying it would buy up all of the asset-backed commercial paper that any fund wanted to sell.

The AMLF had seen very little action, a sign that the market could function on its own. But when the Fed announced two weeks ago that it wouldn't accept commercial paper that had been placed on "negative watch" by credit-rating agencies, funds borrowed heavily against the AMLF, to the tune of at least $30 billion, notes Barclays Capital money-market strategist Joseph Abate. This suggested money funds were worried about getting stuck with paper they couldn't sell, a sign that the market still needed the government backstop to function normally.

"If there was a full, broad and deep recovery in financial markets, we wouldn't have seen this," says Mr. Abate. "Funds would have said, 'So what if they're tightening standards, there's enough liquidity that I don't have to worry.' "

Another situation involves debt issued by banks. The U.S. government's Federal Deposit Insurance Corp. has been guaranteeing bank debt since the crisis peaked, allowing banks to borrow just above low government rates. Morgan Stanley paid one percentage point above Treasurys when it sold FDIC-backed debt in January, similar to what it paid before the crisis, in 2006. But last week when it announced plans to sell $4 billion in senior notes not backed by the government, it had to pay four percentage points over Treasurys.

Even healthier banks are paying interest rates far higher than in the past. Bank of New York Mellon, which wasn't ordered to raise capital under the government stress tests, recently issued non-FDIC-backed debt yielding 2.25 percentage points above Treasurys. A similar note issued in 2006 yielded 0.55 percentage points over Treasurys.

In some cases, one government program, such as a Fed program to buy commercial paper directly from companies, hasn't had much action because banks have found it cheaper to sell debt backed by the FDIC, says Mr. Crescenzi of Miller Tabak.

And while a plan by the Fed and other central banks to provide dollars to non-U.S. banks worked well, helping to drive down the London interbank offered rate, banks in need of dollars are pulling them out of their U.S. branches rather than go to central banks. The problem that led to this program -- that banks wouldn't lend to each other -- hasn't been completely solved.

Markets not directly affected by government help, such as stocks and corporate bonds, have soared recently, though only to levels seen at the end of last year. Stocks remain 40% off their all-time highs and BBB-rated corporate bonds trade at a spread of about six percentage points above comparable Treasurys, compared with one percentage point before the crisis. With the government guaranteeing vast portions of the financial markets, it is difficult to determine how these markets would have performed otherwise.

"Insurance changes behavior," says Howard Simons, a bond strategist at Bianco Research in Chicago. "If you take the insurance away, you change the behavior."

Write to Mark Gongloff at

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Treasuries Entering Bear Market as Bonds Trail Stocks (Update1)

Thursday, April 9, 2009
By Dakin Campbell and Susanne Walker
of Bloomberg

(Updates yields in ninth paragraph.)

May 8 (Bloomberg) -- Treasuries are suffering their biggest losses since 1994 so far this year as investors turn to higher-yielding assets on signs the worst of the recession is over.

After posting a gain of 14 percent in 2008 as investors sought a refuge from mounting losses on securities tied to subprime mortgages, Treasuries have lost 3.95 percent since December, according to Merrill Lynch & Co.'s U.S. Treasury Master index.

A 34 percent gain in the Standard & Poor's 500 Index since its low this year on March 9, $506 billion of bond sales by U.S. companies and declining money-market rates all suggest the global economy is on the mend, alleviating the need for the haven of Treasuries.

"We've seen the evidence of the beginning of a bear market in Treasuries," said Steve Rodosky, the head of Treasury and derivatives trading at Newport Beach, California-based Pacific Investment Management Co., manager of the word's biggest bond fund. "They are certainly losing some of their haven status."

Bonds are tumbling as the Treasury steps up increased debt sales to a record $3.25 trillion this fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., to finance bank bailouts, economic stimulus plans and fund a budget deficit.

Borrowing Benchmark

Declines in bond prices are pushing up yields just as the Federal Reserve is trying to drive down borrowing costs and spur the economy out of the deepest recession in half a century. Treasuries are a benchmark for everything from mortgages rates to corporate bond yields.

Treasury 30-year bonds fell the most in four months after yesterday's auction of $14 billion of the securities underscored waning demand. The bonds were sold at a yield of 4.288 percent, almost 10 basis points, or 0.01 percentage point, higher than the average estimated by seven primary dealers in a survey by Bloomberg.

"This is a problem," said Chris Ahrens, head interest-rate strategist at primary dealer UBS AG in Stamford, Connecticut. "The market required a fairly significant discount to buy the bonds."

Yields on 30-year bonds rose to an almost six-month high of 4.34 percent today from 3.55 percent two months ago. Ten-year yields surged to 3.36 percent from 2.46 percent on March 19.

Seeking Safety

Last year, the collapse of Lehman Brothers Holdings Inc. in September shocked investors, who fled all but the safety of government debt, driving rates on one- and three-month Treasury bills below zero, freezing credit markets and sending the S$P 500 to its biggest annual decline since 1938. Government bonds outperformed the S&P 500 by 53 percentage points, the widest margin since Merrill Lynch started calculating fixed-income returns in 1978.

Now, investors are dumping Treasuries and moving into stocks and other fixed-income assets amid signs the banking system may be stabilizing. The KBW Bank Index of 24 financial companies has risen 110 percent since it bottomed March 6. Debt issued by U.S. companies has returned 5.7 percent this year after posting the biggest losses in 2008 since at least 1997, Merrill Lynch indexes show.

"Investors have been willing to take on a little more risk," said Richard Schlanger, who helps invest $13 billion in fixed-income securities as vice president at Pioneer Investment Management in Boston. "Investors are feeling confident the worst is over."

'Signs of Stabilization'

Finance ministers from the Group of Seven industrialized nations issued a statement on April 24 that said they see "signs of stabilization" in the world economy and that a recovery should begin later this year.

Government efforts to spur bank lending are working. The London interbank offered rate for three-month dollar loans fell to 0.94 percent, the lowest since June 2003. The Libor-OIS premium that indicates banks' reluctance to lend to each other fell to 0.73 percentage point, the lowest level since before Lehman's collapse, from 3.64 percent on Oct. 10.

At the same time, the economy still shows signs of shrinking. The Labor Department may say today that the unemployment rate rose to 8.9 percent last month from 8.5 percent in March, according to the median estimate of 69 economists surveyed by Bloomberg. Federal Reserve Chairman Ben S. Bernanke warned this week that another shock to the banking system could stall a recovery.

Yesterday's auction shows that the extra debt the government is selling may be weighing on demand. China, the biggest creditor to the U.S., is "worried" about its holdings of Treasuries an wants assurances that the investment is safe, Premier Wen Jiabao said at a briefing in Beijing on March 13.

Hurting Treasuries

"What's hurt Treasuries is that the flight to safety element, the story of value, has waned," said Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co. in New York. "People signed on to the idea of a trough in the economy."

Details of President Barack Obama's record $3.55 trillion budget plan, released this week, show he is seeking $81 billion more in spending on domestic initiatives while calling on Congress to trim $17 billion.

Rising yields suggest that the Fed may need to step up its purchases of Treasuries if it wants to contain borrowing costs. Central bank officials said in March that they would buy $300 billion of Treasuries to drive down consumer rates.

"A combination of the tremendous amount of supply, tid-bits of bright economic news and the challenge to the luke-warm policy for the Fed's direct purchases of Treasuries have pushed Treasuries lower," said Brian Edmonds, head of interest rates in New York at primary dealer Cantor Fitzgerald LP. "It's a challenge to a policy seen as not strong enough."

--Editors: Dave Liedtka, Garfield Reynolds

To contact the reporters on this story:
Dakin Campbell in New York at +1-212-617-6311 or
Susanne Walker in New York at +1-212-617-1719 or

To contact the editor responsible for this story:
Dave Liedtka at +1-212-617-8988 or

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Sales Have Treasury Chasing Its Tail - The Wall Street Journal
Yields Rise as Dealers Adjust to Auctions

Monday, May 4, 2009
By Deborah Lynn Blumberg

With more Treasurys to sell, the government has found itself paying up at its debt auctions, and this week could see more of the same.

That means not just higher interest costs for the public purse. It also works against the government's goal of keeping longer-term Treasury yields low, as these are the benchmarks for corporate and consumer lending rates, including home loans.

In the past months, Treasury auctions have, on average, resulted in higher yields than had been expected by the market. This outcome is known as a tail.

Tails are good news for buyers, because they get a higher return and pay a lower price for the securities. But the overall Treasurys market tends to weaken after tailed auctions, leading to higher yields. Bond prices fall when yields rise.

Auctions have tailed as the government has sold massive amounts of securities to fund its many rescue plans; in the first quarter alone, it sold nearly half a trillion dollars of debt. In the current three-month period, it expects to raise $361 billion, and an additional $515 billion in the three months to September. The largest refunding round on record, $71 billion, will occur this week.

Tails, while frequent, have been relatively small this year -- between 0.01 and 0.02 percentage point on average. Still, said David Ader, head of government bond strategy at RBS Securities, the possibility of tails could keep investors sidelined leading up to an auction, as they expect to be able to buy the securities for a cheaper price later.

Dealers are starting to adjust to the larger and more frequent debt auctions, driving prices lower and yields higher heading into the sale. On Friday, the 10-year yield pushed as high as 3.21%, with 3.25% eyed as the next key level.

Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co., said a yield of 3.25% or more could affect private credit markets, and raise eyebrows at the Federal Reserve, which is buying up Treasurys to keep yields low.

Still, only if tails are large and persistent even after the market has cheapened ahead of an auction would there be cause for concern.

"It would show the Street is having to mark down prices continually to attract buyers at a time when a lot of buyers are needed," Mr. Crescenzi said.

That's when auctions couldn't just come with tails, they could also fail, which happens when fewer bids come in than the amount on offer.

Write to Deborah Lynn Blumberg at

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Calif., N.J. BAB Deals Lead Week; Total Volume Over $10 Billion

Monday, April 20, 2009
By Christine Albano
The Bond Buyer

Call it a bond bonanza.

Led by up to $4 billion of taxable general obligation debt from California that could include billions of Build America Bonds, as well as a $1.75 billion sale from the New Jersey Turnpike Authority with $1.25 billion of BABs, the primary market will make room for a glut of both taxable and tax-exempt supply.

The estimated volume calls for more than $10 billion in competitive and negotiated offerings, according to Ipreo and market sources.

The supply bulge will perk up last week's relatively lackluster, holiday-abbreviated market, when taxexempt issuers sold a revised $3.66 billion in competitive and negotiated offerings.

"Municipal bond investors will welcome additional supply as tentative signs of an economic bottom in the United States seemed to have alleviated some of the anxiety over municipal bond credit quality in the near term," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

"This easing of anxiety combined with the almost universal expectation of higher future tax rates at the federal and state levels has created a solid base of demand from individuals for tax-free municipal bonds that we expect to see remain constant well into 2010," Pietronico said.

The California sale - which is expected to be the largest Build America Bond offering to date that will serve as a benchmark for future transactions - will be priced by a syndicate led by co-senior managers Goldman, Sachs & Co., JPMorgan, Barclays Capital, and Morgan Stanley with bullet maturities in 2034 and 2039.

The state will not single out retail investors for the transaction, but instead conduct an Internet road show and one-on-one calls with the taxable bond buyers who don't usually buy California bonds, such as pension funds and foreign banks. The state is rated A2 by Moody's Investors Service and A by Standard & Poor's and Fitch Ratings.

Proceeds from the unspecified amount of BABs will finance traditional tax-exempt projects, like children's hospital construction, water infrastructure, and schools, and the state will use the remaining taxable proceeds to finance affordable housing and stem cell research. The BAB program was authorized in the America Recovery and Reinvestment Act in February and allows municipalities to sell taxable bonds to receive a 35% interest subsidy from the federal government.

The new sale follows two maiden voyages of BABs last week. The University of Virginia priced $250 million of bonds rated triple-A by all three major rating agencies at a taxable rate of 6.22% - 32% above Municipal Market Data's tax-exempt triple-A GO curve. The University of Minnesota also sold $35 million of BABs Wednesday, with 20-year, double-A rated bonds yielding 3.81%, which was lower than the MMD double-A tax-exempt curve at 4.63%.

Back to this week's market, the New Jersey Turnpike deal will be priced by Morgan Stanley today with ratings of A3 by Moody's and A by Standard & Poor's and Fitch, however, the exact structure of the deal was not available at press time. The deal will be the authority's first new-money sale since 2005.

The market will also see a $650 million deal from New York's Metropolitan Transportion Authority, and a $600 million offering of airport revenue bonds from Miami-Dade County.

The pricing of the MTA deal will take place on Thursday, following a retail order period on Wednesday by JPMorgan in a deal that consists of $450 million of dedicated tax fund bonds maturing from 2009 to 2038, as well as $200 million of federally taxable dedicated tax fund BABs. The offering will be rated AA by Standard & Poor's and A-plus by Fitch.

Miami-Dade is slated to sell $600 million of international airport aviation revenue bonds that are not subject to the alternative minimum tax on Thursday via a negotiated priced by Barclays following a retail order period on Wednesday.

The deal, which is rated A2 by Moody's, A-minus by Standard & Poor's, A by Fitch, will consist of serial and term bonds, but the exact structure was not available at press time.

Other sizable deals on tap this week include a $357 million Tennessee GO bond sale expected to be priced by Morgan Stanley on Wednesday following a two-day retail order period today and tomorrow. The two-pronged new-money and refunding deal, whose structure was not available at press time, is rated Aa1 by Moody's and AA-plus by Standard & Poor's and Fitch.

In addition, a $350 million sale of GO bond anticipation notes is being planned from Connecticut in a negotiated deal slated for priced on Thursday by JPMorgan and maturing in June, 2011.

In the competitive market, meanwhile, a $222.8 million New Mexico GO sale for capital projects is planned for tomorrow with a structure that includes serial bonds maturing from 2010 to 2019.

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Muni Watch: Get Ready For Flood Of Build America Bonds

Friday, April 17, 2009
By Stan Rosenberg
Dow Jones Newswires

NEW YORK (Dow Jones)-- Move over, Mom and Pop.

While you're now the largest investors in the $2.7 trillion tax-exempt bond market, next week will bring a dramatic change as state and local issuers begin to target large investors who typically buy taxable securities.

California, a perennial favorite with individual investors, will lead the way. The nation's largest issuer of tax-exempt debt could sell billions of dollars of Build America Bonds, a new form of federally approved funding for projects that traditionally would qualify for tax-exempt financing.

Just six weeks after selling $6.5 billion of tax-exempt bonds, the Golden State plans to sell a $3 billion to $4 billion taxable issue via Goldman Sachs. The state hasn't determined how much of the sale will be BABs, but the deal is eagerly anticipated. Among other maturities, the offering will carry 25-and 30-year bonds, which are bound to be the BABs.

Other major sellers of these BABs next week include the New Jersey Turnpike Authority and the New York Metropolitan Transit Authority. They'll be seeking to pocket large interest-cost savings by selling bonds more akin to corporate debt than to garden-variety municipals.

The Turnpike Authority already has orders for four times the $1.25 billion BABs it plans to price Monday, according to a source familiar with the matter. Those bonds are expected to mature in 2040 and to be priced at 3.75 to 4.0 percentage points over the 30-year Treasury bond, placing their yield in the 7.30% to 7.80% range.

With issuers now turning to BABs to raise funds, the municipal market has begun to anticipate a scarcity of tax-exempt bonds. The market rallied this week as the first publicly offered smaller issues reached the market and were well received.

The University of Virginia sold $250 million of triple-A BABs on Wednesday at a price that was 2.5 percentage points above the 30-year Treasury bond. The offering, via JPMorgan, was five times oversubscribed and Friday traded at 2.2 percentage points above Treasurys. The lower the yield, the higher the price in bond markets. JPMorgan estimated the university saved over 0.8 percentage point relative to a traditional tax-exempt financing.

The University of Minnesota also sold a $35 million BABE issue that performed well.

BABs offer issuers a choice of receiving a 35% rebate from the government on their bond interest costs or of passing that benefit along to investors in the form of a tax credit. It isn't hard to fathom which they'll choose.

"The reception to BABs overall has been strong, and that is noteworthy as it implies economic growth will return as issuers are able to begin infrastructure work," said Miller Tabak Chief Executive Michael Pietronico. "Perhaps more important for the casual tax-free municipal investor is the marginal decrease in tax-free supply that will be seen as issuers now have access to taxable money. This is a classic win-win situation for both issuers and investors."

(Stan Rosenberg, a veteran observer of the municipal bond industry, writes about issues and trends in the muni market for Dow Jones Newswires. He can be reached at 212.416.2226 or

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Munis Advance for Second Week Amid $5.4 Billion in Bond Sales

Thursday, April 9, 2009
By Jeremy R. Cooke
of Bloomberg

April 9 (Bloomberg) -- U.S. state and local government bonds posted a second consecutive weekly gain as borrowers led by New York City sold about $5.4 billion in new issues.

New York boosted by 45 percent its sale of general obligation bonds to $883 million to feed demand from individual and institutional buyers, who ordered more securities than were available. Washington state, Illinois and California's State Public Works Board brought to market deals totaling more than $1 billion during the holiday-abbreviated week.

Tax-exempt bonds gained at least 0.28 percent since the end of last week, based on the latest data from the Municipal Master Index by Bank of America Corp.'s Merrill Lynch & Co. The total-return gauge advanced 0.67 percent since California raised $6.54 billion in a single offering March 24.

"You would think the market would pause to digest that type of supply, but it's saying, 'No, we can use more,'" said Steven Krupa, a managing director and municipal portfolio manager at Nuveen Asset Management in Chicago.

Yields on the highest-rated tax-exempt bonds due in 30 years this week eased two basis points, or 0.02 percentage point, to 5.23 percent, according to a daily survey by Municipal Market Advisors of Concord, Massachusetts. State and local bonds were little changed today, outperforming declines in taxable Treasuries, today's survey showed.

U.S. bond markets were to close at 2 p.m. New York time today and stay shut until April 13 in observance of Good Friday, according to a recommendation from the Securities Industry and Financial Markets Association.

Municipal bonds advanced even as Moody's Investors Service this week assigned a negative outlook to U.S. local governments, its first such assessment of the overall sector that includes cities, counties and school districts.

Berkshire Hathaway Cut

Moody's late yesterday also cut the financial strength rating on Warren Buffett's Berkshire Hathaway Assurance Corp., the third-largest insurer of municipal bonds last year, to Aa1 from Aaa. Standard & Poor's put a negative outlook on the Berkshire Hathaway Inc.'s unit AAA grade last month.

With the move, no bond insurers carry Moody's top rating, down from seven two years ago, before the industry was overcome by guarantees of subprime mortgage debt and the recession.

Berkshire losing Moody's Aaa puts "another nail in the coffin for this industry," said Michael Pietronico, chief executive of Miller Tabak Asset Management in New York, in an e-mail today. In July 2008, he said investors would begin valuing "all bond insurance at zero."

Lower-rated borrowers that used to rely on insurance are coming to market without the private guarantees against default.

The California Treasurer's office today released data from yesterday's $435 million public-works agency bond deal, which carried credit ratings one grade below the state's general obligation pledge. Yields ranged from 1.82 percent on one-year securities to 6.43 percent on bonds due in 2034.

Ten-year bonds rated A3 by Moody's and A- by Standard & Poor's and Fitch Ratings were priced to yield 5.25 percent, 35 basis points more than the state debt sold last month, according to data compiled by Bloomberg.

--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:
Michael Weiss at +1-212-617-3762 or

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Yield Indexes Narrowly Mixed Amid String of Slightly Firmer Sessions

Thursday, April 9, 2009
By Michael Scarchilli
The Bond Buyer

The Bond Buyer's weekly yield indexes were narrowly mixed this week, as the municipal market strung together several slightly firmer sessions amid the primary market pricing of a number of sizeable new issues.

At the forefront was Tuesday's pricing of $883 million of general obligation bonds for New York City by senior manager Morgan Stanley. The deal was originally slated at $483 million, but was upsized last Friday by $100 million and Tuesday by another $300 million due to investor demand, mostly from the retail sector. The city received $546 million of retail orders and filled $454 million of those.

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said that the city benefitted from the momentum from the California GO deal that came to market two weeks ago. The state increased their planned $4 billion GO sale to $6.5 billion due to higher-than-anticipated demand.

"I think the psychology of the market changed with the large California general obligation deal that came," Pietronico said. "The fact that it was a weakening credit that was able to have such great reception that they were able to upsize the deal. It really spoke volumes about the retail sponsorship of the municipal market, and how it's been quite consistent.

"Quite frankly," he continued, "an issuer would have to be crazy to come competitively these days, because the negotiated way of coming to the market allows the retail investor multiple days to work with their advisor to put orders in. And as you can see, by the Cal GO deal and certainly the New York City deal, that over time, the reception is greater because the biggest buyer in the market right now needs time to do due diligence on a credit and decided whether they want to buy. So the whole competitive model is coming into question."

Against that backdrop, The Bond Buyer 20-bond index of 20-year general obligation bond yields was unchanged this week at 4.92%.

The 11-bond GO index of higher-grade 20-year GO yields also was unchanged this week at 4.68%.

The revenue bond index, which measures 30-year revenue bond yields, declined one basis point this week to 5.74%, which is the lowest that the index has been since Feb. 19, when it was 5.70%.

At the same time, the 10-year Treasury note yield rose 10 basis points this week to 2.85%, which is the highest it has been since March 12, when it was 2.88%.

The 30-year. Treasury bond yield also rose 10 basis points this week, to 3.67%, which is the highest yield for the bond since Feb. 19, when it was 3.68%.

The Bond Buyer's one-year note index, which measures one-year tax-exempt yields, rose five basis points this week to 0.70%, after reaching an all-time low of 0.65% last week. This week's yield is the second-lowest for the index since it began on July 12, 1989.

The weekly average yield to maturity on The Bond Buyer 40-bond municipal bond index finished at 5.55%, down 0.02 basis points from last week's 5.57%.

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Munis Quiet As $583M NYC Deal Draws Retail

Monday, April 6, 2009
Dow Jones Market Talk

1518 GMT (Dow Jones) -- Municipal market quiet and mostly unchanged in price. A relatively light new issue week, estimated around $4.8 Bln, should be helped by strong demand for NYC's $583 Mln tax-exempt and taxable issue. Over $400 Mln were sold to individual investors first day out Friday, representing "excellent demand for a credit widely owned in many portfolios," said Miller Tabak's Michael Pietronico. Deal is in second day or retail orders Monday before being priced for institutions Tuesday. (SDR)

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Muni Borrowers Sell Most Since 2006 as Demand Caps Yield Rise

Monday, March 27, 2009
By Jeremy R. Cooke
of Bloomberg

March 27 (Bloomberg) -- U.S. state and local borrowers sold about $12 billion of bonds in the biggest week for new issues since December 2006, as strong reception for California's record deal helped to cap yield increases in the broader market.

California on March 24 boosted its $4 billion offering to a "historic" $6.54 billion to feed demand from mutual funds and other institutions, the state treasurer's office said.

The Bond Buyer 20, an index of yields on 20-year general obligation debt, rose two basis points, or 0.02 percentage point, to 5 percent this week, compared with the 12-month average of 4.96 percent. California, the lowest rated U.S. state, issued 20-year bonds at 5.85 percent.

With the nation's most populous state considering another sale next month, investors' expectations for a "reasonably high" volume of deals will probably damp any price increases, said Michael Pietronico, chief executive of New York-based municipal investment adviser Miller Tabak Asset Management.

"While there's good demand for munis, the price appreciation potential in the near term is rather muted,"Pietronico said.

The last time municipal borrowers raised more than $12 billion in one week was in early December 2006, when they sold $14.1 billion, data compiled by Bloomberg show.

Tax-exempt bonds slid 0.2 percent this week, according to Merrill Lynch & Co.'s total-return Municipal Master Index, which is down 0.6 percent for the month. The index has still returned almost 4 percent in 2009.

California brought to market the largest long-term tax-exempt issue to carry a full-faith-and-credit pledge. It was also the fourth-largest municipal bond deal on record.

"The fact that it was a state general obligation made it possible for the deal to be that big," Pietronico said. "I don't think the market would be that receptive to lesser-rated sectors of the muni market, such as hospitals and tobacco."

--Editors: Margot Slade, 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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California to Launch $4 Billion Bond Deal - The Wall Street Journal

Friday, March 20, 2009
By Stan Rosenberg

NEW YORK -- Battered and bruised by fiscal, economic and ratings problems, California still plans to bring $4 billion of its general obligation bonds to market next week, luring investors with hefty yields.

The state is the nation's heaviest issuer of tax-exempt municipal bonds, but it now also holds the unenviable distinction of being the lowest rated state in the wake of downgrades by the three major ratings firms.

Its difficulties have shut it out of the $2.7 trillion municipal bond market since last June. But while market professionals expect to extract a pound of flesh from the nation's most populous state, return-conscious investors may see an opportunity in the yield bonus.

"The price chatter on the street is attractive for investors," said Michael Pietronico, chief executive at Miller Tabak Asset Management. A five-year bond would yield 4% tax-free, and an investor would have to earn 5.92% to match that from a taxable security, assuming he was in the 35% bracket. A 10-year bond would yield 5%, or a 7.69% taxable equivalent, and a 30-year 6% or 9.12%.

"Given our view on the future rate of inflation ultimately picking up, as the Federal Reserve wants it to, we see the best value in the five-year area on this loan as it would be priced at approximately 250% of the current [fiscal] year U.S. Treasury issue," Mr. Pietronico said.

While the ratings news has been negative, the downgrades were small and the bonds remain in the middle of the single-A range, said Dan Solender, director of municipal bond management at Lord Abbett.

The state's bonds trade between one to almost 1.5 percentage points above comparable triple-A-rated munis, depending on maturity, "but they're very liquid, and there's a lot of demand for them in the secondary market," Mr. Solender said.

The larger yields differentials are in the five-year and 10-year areas, those most favored recently by individual investors.

The state's bonds are popular among California buyers because of their interest exemption from the state's high personal income tax, as well as from those of the federal government. The Golden State has developed a sophisticated marketing mechanism that includes a Web site and newspaper and radio advertising to drum up demand among individuals.

"We're going to sell $4 billion of general obligation bonds next week, regardless of what (the rating agencies) think of our creditworthiness, which we don't think has any value, and we're going to get the best deal possible for taxpayers," said Tom Dresslar, spokesman for State Treasurer Bill Lockyer.

The issue is expected to be formally priced Wednesday after being offered to individual investors Monday and Tuesday via underwriters headed by Citigroup and Merrill Lynch.

Ratings for the state's $47 billion of general obligation bonds were knocked down a peg to single-A by McGraw-Hill Cos. unit Standard & Poor's and by Fimalac S.A.'s Fitch Ratings, while Moody's Corp.'s Moody's Investors Service also brought them down a notch to an equivalent A2.

The firms cited a combination of factors that included a deteriorating state economy, a precarious financial situation that could leave it facing months of deteriorating revenues and uncertainty about some of its budget solutions.

The state's economy, the world's eighth largest, accounts for about 13% of the nation's total output. It has been badly battered by the real-estate crisis and the recession, with unemployment in February at 10.5% -- far above the national average of 8.1%. The state has lost 605,000 jobs since last February, according to its Employment Development Department.

Write to Stan Rosenberg at

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Prices little changed as deals flow

Thursday, March 12, 2009
By Michael Connor

MIAMI - U.S. municipal bond prices moved little on Thursday as a big California deal and a steadily growing primary calendar overshadowed secondary trading.

Top-quality munis were unchanged along most of the curve, except for maturities between 2033 and 2039, which were off enough to lift yields by 1 basis point, according to Municipal Market Data.

A 10-year top-rated muni finished with a yield of 3.33 percent, the same as Wednesday, while the yield on a 30-year bond rose 1 basis point to 4.88 percent.

"The market has been moving sideways with a weak bias," said Michael Pietronico, chief executive of Miller Tabak Asset Management in New York. "Our expectation is that supply is accelerating and that perception causes the bid to be less aggressive."

Deals this week were forecast by Reuters to total $6.2 billion, up about $1 billion from last week, while 30-day supply now stands at about $13.5 billion, or $2 billion more than a week ago.

"Generally, new issues are coming cheaper and the credit spreads appear to be widening," Pietronico said.

Among Thursday's primary deals, underwriters led by Barclays Capital priced a $795.5 million offering of revenue bonds from the University of California with a top yield of 5.57 percent on a 2039 maturity carrying a 5.25 percent coupon, according to a pricing schedule.

Merrill Lynch and other underwriters priced a $121 million deal composed mostly of tax-exempt public improvement bonds from Frederick, Maryland, with a top yield of 5.01 percent on a 2034 maturity carrying a 5 percent coupon. The yields were steady in a repricing, according to pricing schedules.

Separately, the Rockefeller Institute of Government in Albany, New York, issued a report saying that tax revenues for state governments tumbled 3.6 percent in last year's fourth quarter, compared to the same time period in 2007.

(Reporting by Michael Connor; additional reporting by Karen Pierog in Chicago; Editing by James Dalgleish); +1 305 810 2688;
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Maryland Leads $5 Billion in Muni Sales Amid Record Yield Gap

Monday, March 2, 2009
By Jeremy R. Cooke
of Bloomberg

March 2 (Bloomberg) -- Maryland leads U.S. state and local government borrowers planning to sell more than $5 billion of bonds this week.

Maryland wants to raise as much as $515 million in its first general obligation bond sale to target individual buyers, and negotiate with banks to market the debt. Six other municipal issuers, including New York state and Utah, each plan to sell $400 million or more.

The gap between yields on top-rated two- and 30-year municipal bonds tracked by Municipal Market Advisors last week matched the widest on record, 3.69 percentage points. Long-term interest rates may rise further as the U.S. government increases spending to stem the economic decline, Michael Pietronico, chief executive of Miller Tabak Asset Management in New York, said in an e-mail.

Tax-exempt bonds due in less than 10 years have returned 6.1 percent in the past 12 months, while state and local debt due in 22 years or more lost 4.7 percent, according to index data from Bank of America Corp.'s Merrill Lynch & Co. that account for price swings and interest income.

Maryland, one of seven U.S. states with top grades from the three major credit-rating companies, is taking orders from so-called retail investors today and tomorrow through a group of underwriters managed by Merrill. Whatever isn't sold will be added to the minimum $100 million in bonds to be offered at a competitive sale among banks March 4.

The split structure, similar to one used by Delaware, will allow Maryland to offer bonds to individual as well as institutional investors such as mutual funds and insurers, said Patti Konrad, state director of debt management.

Other borrowers scheduled to sell at least $400 million of bonds this week include the University of Pittsburgh in western Pennsylvania, the California State University system, the Massachusetts Water Pollution Abatement Trust and New York City's Transitional Finance Authority.

Fixed-rate, long-term municipal bond sales have averaged $5.4 billion a week in 2009, comparable to last year and down from $6.5 billion in 2007, data compiled by Bloomberg show.

--Editors: Michael Nol, 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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Passage of California Budget Could Unleash Supply

Thursday, February 19, 2009
Dow Jones Market Talk

1545 GMT (Dow Jones) -- Passage of a California budget could unleash a flood of pent up supply, says Miller Tabak CEO Michael Pietronico. State is largest issuer of munis year after year, but hasn't issued new bonds in about six months because of its fiscal situation. "So one would anticipate a reasonable amount of supply coming just from the state itself, and then localities will follow suit," he said. Still too early to see much price reaction since passage had been anticipated, but one portfolio manager had $100,000 4s of 2018 out for bids and saw a 4.12% bid come in against a triple-A yield of 2.76%. That's a narrowing of the differential to 136 BP above vs 140-145 last week. (SDR)

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Yankees Face Higher Muni Borrowing Costs to Complete Stadium

Monday, January 27, 2009
By Jeremy R. Cooke
of Bloomberg

Jan. 27 (Bloomberg) -- The New York Yankees baseball team will test demand today for lower-rated tax-exempt bonds with a $259 million municipal offering arranged through a city agency.

Yankee Stadium LLC is raising funds to finish the team's $1.4 billion ballpark in the Bronx, after construction costs rose 43 percent, according to Standard & Poor's. New York's Triborough Bridge and Tunnel Authority also plans to sell $250 million in tax-exempt bonds to fund capital projects today.

Even with insurance, the Yankees may have to offer yields of 7 percent or more to sell 40-year bonds, based on trades this month for similar securities from the team's first round of tax-exempt financing in August 2006. Bonds issued at 4.51 percent and due in 2046 fell in price to yield 7.05 percent Jan. 15, data from the Municipal Securities Rulemaking Board show.

"It's a difficult environment for any credit that might not be deemed Aaa," said Mike Pietronico, chief executive officer of Miller Tabak Asset Management in New York. "It's going to require a concession. Most people see the weakening economy and the political wrangling that has gone on about this particular deal."

Bond insurance on the Yankees' deal will be provided by Assured Guaranty Corp., rated AAA by S&P and Aa2 by Moody's Investors Service. The bonds carry underlying ratings of Baa3 from Moody's and BBB- from S&P, the lowest investment grades. Goldman Sachs Group Inc. is managing the sale.

Top-rated state and local government bonds due in 30 years rose in yield yesterday to 5.32 percent, the highest in more than two weeks, according to a daily survey by Concord, Massachusetts-based Municipal Market Advisors.

Stadium Critic

The Yankees franchise fielded months of criticism from Democratic New York State Assemblyman Richard Brodsky about public subsidies and the bond approval process, before the city's Industrial Development Agency gave the final go-ahead to the deal Jan. 16.

The bonds are secured by payments in lieu of property taxes, or Pilots, made by Yankee Stadium LLC, run by Yankees Global Enterprises LLC, a 99 percent limited partner in the team.

About $184 million of the latest Yankee Stadium bonds will mature in 2049 and pay interest semiannually. The rest, known as capital appreciation bonds, will pay out their full return only upon maturities ranging from 2012 through 2047.

The Yankees are borrowing to fund added security measures, modifications for scoreboards and video screens, and structural upgrades at the stadium.

Mets Stadium

Also this month, the New York Mets won an $82 million authorization for a second round of Pilot bonds to complete that team's ballpark construction in Queens. The bond sale for Citi Field, managed by Citigroup Inc., will come tomorrow, according to data compiled by Bloomberg.

Both New York stadiums will open in time for the beginning of Major League Baseball's regular season in April.

Since the two teams started building new homes, the value of municipal bond insurance has declined as most firms in the industry were stripped of their AAA financial strength ratings.

Philadelphia, rated BBB by S&P and Baa1 by Moody's, last month agreed to pay a yield of 7.25 percent on 30-year bonds insured by Assured Guaranty.

The yield was 140 basis points more than AAA general obligation bonds tracked by Municipal Market Advisors that day, compared with a premium of just three basis points at a similar insured sale by Philadelphia in April 2008, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

Insured bonds have accounted for 10 percent of municipal offerings in 2009 through last week, down from 36 percent during the comparable period last year, according to data compiled by Thomson Reuters.

--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:
Michael Weiss at +1-212-617-3762 or

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State, Local Borrowers Plan Most Bond Offerings in Four Weeks

Monday, January 5, 2009
By Jeremy R. Cooke
of Bloomberg

Jan. 5 (Bloomberg) -- State and local governments led by New York plan to offer at least $3 billion of bonds this week, the most in four weeks, after borrowing costs eased during the holiday lull in offerings.

New York's Empire State Development Corp. will offer as much as $1.1 billion in debt backed by income taxes to fund projects for economic development, housing, state facilities and equipment. California's Department of Water Resources also plans to refinance $350 million of power-supply bonds held by banks, and Washington will borrow $400 million for state public works.

The U.S. municipal market opens the first full week of 2009 with average yields on top-rated 10-year bonds at 3.91 percent, the lowest since mid-September, according to Municipal Market Advisors. Higher-rated tax-exempt bonds gained the past three weeks, paring 2008's losses, as state and local borrowing slowed around the Christmas and New Year holidays.

"The yield levels that you see in the first few days of the year are not nearly as attractive as they were," said Mike Pietronico, chief executive officer of Miller Tabak Asset Management in New York. "Even though cash is not yielding much these days, the typical retail investor is going to be patient and wait for absolute yields."

Yields may rise as bond issuance increases at a time when institutions such as banks, funds and insurers remain on the sidelines, Pietronico said.

"Once the deals start pricing, they'll again put some pressure on a market that continues at this point to lack the institutional presence to handle many large deals," he said. "It's going to be a see-saw market this year with periods of strength followed by periods of illiquidity, and I think that's the new norm."

Interest Range

The 10-year index compiled by Concord, Massachusetts-based research firm Municipal Market Advisors fell as low as 3.28 percent and rose as high as 4.71 percent last year, almost triple the range of yields during 2007.

Yields on 30-year AAA bonds averaged 5.47 percent at the end of last week, the lowest since November, after swinging in a range of 1.8 percentage points last year.

"High grades are cycling through boom/bust dynamics," Municipal Market Advisors said in a Dec. 29 report.

State and local bonds in 2008 posted their first decline in nine years, falling 3.95 percent, according to the total-return Municipal Master Index compiled by Bank of America Corp.'s Merrill Lynch & Co.

Municipal bond mutual funds on average posted a negative 11 percent return last year, based on data compiled by Bloomberg.

--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:
Michael Weiss at +1-212-617-3762 or

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