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In The News - 2010

  News from 2011
December 30, 2010 California Build Americas Outperform on 7% Yields: Muni Credit - Bloomberg
December 23, 2010 Yields Fall During Three Skimpy Sessions Ahead of Holiday - The Bond Buyer
December 6, 2010 N.J. Turnpike Selling as Build America Yields Rise: Muni Credit - Bloomberg
December 3, 2010 Treasuries Cancel Out Yield Gains - The Bond Buyer
November 19, 2010 Weekly Yields Spike Amid Flood of New Issues - The Bond Buyer
November 18, 2010 Tax-Exempt Market Begins To Stabilize - Dow Jones Newswires
November 17, 2010 Tax-Exempt Muni Bonds Tumble - The Wall Street Journal
November 16, 2010 Miller Tabak's Pietronico Says Muni Supply Surge Means Bargains - Bloomberg
November 12, 2010 Yields Rise as Supply Pressure Hits Long-Terms - The Bond Buyer
November 8, 2010 L.A. County May Pay 'Punitive Yield' on Debt Sale: Muni Credit - Bloomberg
November 5, 2010 Harvard Taps Bond Markets for $1.04 Billion While Hoarding Cash - Bloomberg
November 4, 2010 The Windy City Looks For A Better Borrowing Climate Down The Road - Dow Jones Newswires
November 3, 2010 University of California Selling $760M for Medical Centers - The Bond Buyer
November 2, 2010 Ambac Facing Chapter 11; Holding Company Has Until Dec. 31 - The Bond Buyer
October 26, 2010 Chicago, San Antonio Tap Build Americas Amid Audit: Muni Credit - Bloomberg
October 22, 2010 Mississippi Sells $650 Million In Muni Bonds - Dow Jones Newswires
October 18, 2010 Scheduled Deals Total Almost $8 Billion, Up From Last Week - The Bond Buyer
October 18, 2010 Elvis Museum Draws on $372 Million Mississippi Build Americas: Muni Credit - Bloomberg
October 15, 2010 Almost All Yields Decline in Short Week - The Bond Buyer
October 13, 2010 Fed Considers Raising Inflation Expectations to Boost Economy - Bloomberg
October 1, 2010 Yields Rise as New Supply Weighs on Munis - The Bond Buyer
September 24, 2010 Muni Mkt Already Penalized IL, NJ Bonds - Dow Jones Market Talk
September 24, 2010 Yields Fall as Munis Rally Behind Fed Warning - The Bond Buyer
September 23, 2010 New York City Selling $1.3 Billion in General Obligation Debt - Bloomberg
September 17, 2010 New York City Receives Record-Low Yield on $750 Million Water-System Bonds - Bloomberg
September 16, 2010 Build America 1-Year Extension Offered in Senate Bill - Bloomberg
September 10, 2010 Yields Rise as Munis Weaken in Short Week - The Bond Buyer
September 1, 2010 New York State Mortgage Cuts Borrowing Costs 31% on $127 Million - Bloomberg
August 30, 2010 Muni market unphased by California's overdue budget - FOX Business
August 27, 2010 Nearly All Yield Indexes Down; Two Hit 43-Year Lows - The Bond Buyer
August 24, 2010 Puerto Rico Sells $1.1 Billion in Bonds as Borrowing Costs Rise - Bloomberg
August 17, 2010 Chicago Could Have To Pay Up In Order To Sell $160M Muni Deal - Dow Jones Newswires
August 13, 2010 Weekly Yields Drop as Rally Brings Historic Lows - The Bond Buyer
August 10, 2010 Ohio Agency Taps Muni 'Seller's Market' With 6-Week-Low Issuance - Bloomberg
August 6, 2010 Government Job Losses Seen Good For Muni Investors - Dow Jones Market Talk
August 6, 2010 Yields Mostly Decline as Prices Grind Higher - The Bond Buyer
July 21, 2010 Tax-Exempt Shortage Aids NY-NJ Port Agency Selling $400 Million - Bloomberg
July 19, 2010 Washington Voters to Decide on State Income Tax in November - The Bond Buyer
July 16, 2010 Yields Mostly Down as Munis Keep Firming - The Bond Buyer
July 1, 2010 Jobless Claims Show American Job Machine Sputtering in Recovery - Bloomberg
June 28, 2010 Illinois Borrowing $900 Million as Credit-Default Cost Doubles - Bloomberg
June 25, 2010 Yields Narrowly Mixed Amid Shifts in Tone - The Bond Buyer
June 14, 2010 Bond Insurer Stocks Get Pummeled - The Bond Buyer
June 11, 2010 Households Bust $1 Trillion Muni Mark - The Bond Buyer
June 4, 2010 Tax-Free Munis Firm After Disappointing Jobs Data - Dow Jones Market Talk
May 28, 2010 Yields Trend Down, Lagging Treasury Losses - The Bond Buyer
May 25, 2010 Arizona Sells $449 Million in Lottery Bonds to Close Deficit - Bloomberg
May 17, 2010 Northeast Leads a Big Week - The Bond Buyer
May 12, 2010 Louisiana warns of over-reaction to Gulf spill - Reuters
May 6, 2010 Gulf States Ready and Worrying - The Bond Buyer
May 4, 2010 Market Drinks Up Water Bond - Dow Jones Newswires
April 30, 2010 Wake County Sells $383 Million as Treasuries Lose Greek Gains - Bloomberg
April 30, 2010 California DWR Pumping in $2B of Tax-Exempts - The Bond Buyer
April 30, 2010 Yields Dip Amid Light Slate, Lazy Secondary - The Bond Buyer
April 23, 2010 Jobless Claims Decline; Inflation Remains Low - The Wall Street Journal
April 15, 2010 Build America Yields Lure Washington Utility to Taxable Market - Bloomberg
April 14, 2010 The Municipal Market today: Prices firm, secondary market steals the show - Reuters
April 9, 2010 Yields Increase Amid Softness Inside 20 Years - The Bond Buyer
March 30, 2010 California Inquiring About CDS Trading in GO Bonds - Reuters
March 24, 2010 California Taxable Bond Sale Increased To $3.4B - Dow Jones Newswires
March 12, 2010 Munis Flat as California Boosts Offering - The Bond Buyer
March 11, 2010 The ABC's or 1-2-3 of Munis - CNBC
March 10, 2010 Retail demand hot for California GO debt deal - Reuters
March 5, 2010 California Ready for Its Return to GOs - The Bond Buyer
March 5, 2010 Yields on Tax-Exempt Bond Sales Reach Lowest in Three Months - Bloomberg
March 3, 2010 Nuclear Bonds Test Muni Market's Appetite For Risk - Dow Jones Newswires
February 26, 2010 Yields Down as 'Problematic' March Nears - The Bond Buyer
February 22, 2010 N.J. Environmental Trust Sets $130M of Triple-A Debt for Clean-Water Work - The Bond Buyer
February 19, 2010 U.S. Inflation Report Gives Fed Breathing Room on Rates - The New York Times
February 16, 2010 NJ Budget Plan Shakes The State, But Not The Muni Market - Dow Jones Newswires
February 12, 2010 Quiet Tone in Munis Fri; Prep For $1.4B Deals On Tap - Dow Jones Market Talk
February 8, 2010 Leave Out the Stimulus And Volume Still Rocked - The Bond Buyer
February 3, 2010 Muni Bonds Outperform Treasuries as N.Y. MTA Postpones Sale - Bloomberg
January 29, 2010 A New Year for Retail - The Bond Buyer
January 26, 2010 Muni Watch: Puerto Rico's $1.4B Bond Sale Stokes The Market - Dow Jones Newswires
January 25, 2010 Puerto Rico to Sell Largest Tax-Exempt Bond Offering in a Month - Bloomberg
January 15, 2010 Yields Show Little Change in an Active Week - The Bond Buyer
January 14, 2010 Muni Watch: Market Easily Absorbs More Than $4B - Dow Jones Newswires
January 12, 2010 Good Variety Of Tax-Exempts Being Priced - Dow Jones Market Talk
January 8, 2010 Employers Cut 85,000 Jobs in December - The Wall Street Journal
  News from 2009
  News from 2008

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California Build Americas Outperform on 7% Yields: Muni Credit

Thursday, December 30, 2010
By Brendan A. McGrail and Ashley Lutz
of Bloomberg

Dec. 30 (Bloomberg) -- Build America Bonds from California, the biggest issuer of the taxable debt in 2010, outperformed the market in the last six weeks as the state's 7.25 percent yield lured investors unfazed by the lowest state credit rating.

The extra yield above U.S. Treasuries demanded by buyers of 30-year California Build Americas sold Nov. 19 fell to 2.8 percentage points on Dec. 28 from 3.3 points when issued, according to data compiled by Bloomberg. The average spread on Build Americas jumped to 1.95 percentage points from 1.9 points in the same period, according to a Wells Fargo index.

After the program expires tomorrow, Build America investors may be less concerned with creditworthiness than liquidity, or how easily they can be sold, making secondary-market debt from the largest issuers more attractive. California will likely provide the most value to investors heading into 2011, said Bud Byrnes, chief executive officer at Encino, California-based RH Investment Corp., which specializes in the state's securities.

"People were paying up for a good name and are now coming back toward the rest of the field," Byrnes said. "People are backing away from higher-rated states. There isn't a problem selling those states, there's a problem finding those bonds."

The Build America program, part of President Barack Obama's stimulus package, is set to end tomorrow after Congress failed to extend it. Issuers across the U.S. moved up planned sales to this month to take advantage of the expiring subsidy, making the last three months of 2010 the biggest quarter for the securities since their April 2009 inception, according to data compiled by Bloomberg. The average yield of Build Americas was 6.48 percent Dec. 28, according to the Wells Fargo index.

California, Illinois

California has sold about $5.5 billion in Build Americas, the most of any issuer, Bloomberg data show. Illinois is second, with $3.2 billion, followed by New York City's $3.1 billion.

Illinois and California both have Moody's Investors Service's fifth-highest A1 rating, though Moody's has Illinois with a negative outlook. Standard & Poor's ranks Illinois at A+, two levels higher than California at A-, S&P's fourth-lowest investment grade.

"Larger issuers are the best investment because they are easily followed by ratings agencies and remain more liquid," Mike Pietronico, chief executive officer of New York-based Miller Tabak Asset Management, who manages $360 million in munis, said in a telephone interview.

Utah's Spread

Even though Utah, which sold $653 million of Build Americas, carries top rankings from all three major credit rating companies, the spread on 15-year securities climbed to 1.07 percentage points yesterday from 1.01 points Nov. 19.

Bondholders of issuers such as Utah may suffer from a lack of liquidity with the end of the program, Byrnes said.

New York City, which carries third-highest ratings, in June sold 30-year Build Americas yielding 1.7 percentage points above Treasuries. The spread reached 1.88 points on Nov. 19 before falling to a low of 1.41 points Dec. 28, Bloomberg data show.

Like California, New York City's Build Americas will continue to outperform because of the greater liquidity the issuers will maintain even after the program expires, said Matt Fabian, managing director of Municipal Market Advisors, an independent research firm based in Concord, Massachusetts.

'Fair Amount of Trading'

"Because California and New York are some of the biggest BAB issuers, there is a fair amount of trading and therefore better liquidity," Fabian said in a telephone interview. "Even with the potential for headline risk and lower ratings, you have more liquidity and a better price."

California's budget for the year that ends in June, which passed a record 100 days late because lawmakers disagreed on how to close a $19 billion gap, is out of balance by $6 billion, according to the state's Legislative Analyst's Office.

"Ultimately, we are the eighth-largest economy in the world and wherever BABs come they are going to trade up," Byrnes said. Investors are "moving toward California because the yields were just too good."

Following is a description of a pending sale of U.S. municipal debt:

METROPOLITAN WATER RECLAMATION DISTRICT OF GREATER CHICAGO, a wastewater utility that serves more than 5 million people, plans to sell as much as $500 million in taxable and tax-exempt debt next year. The offering will need to be re-authorized in January, so a new pricing date hasn't been set, according to acting Treasurer Mary Ann Boyle. The bulk of the issue will be tax-free bonds, she said. The securities are top-ranked by all three major credit-rating companies. (Updated Dec. 28)

--Editors: Walid el-Gabry, Mark Schoifet

To contact the reporters on this story:
Brendan A. McGrail in New York at +1-212-617-6818 or bmcgrail@bloomberg.net; Ashley Lutz in New York at +1-212-617-4495 or alutz@bloomberg.net.

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net.

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Yields Fall During Three Skimpy Sessions Ahead of Holiday

Thursday, December 23, 2010
By Michael Scarchilli
The Bond Buyer

All The Bond Buyer's long-term weekly yield indexes declined this week in the wake of Friday's rally, during three lightly traded sessions in advance of the upcoming Christmas closure.

"The market seems to be moving sideways with a bit of a grind higher in price in the belly of the curve," said Michael Pietronico, the chief executive officer at Miller Tabak Asset Management. "That's probably a reflex reaction to the supply moving into next year."

Pietronico also noted that the market this week is much quieter than in recent weeks and has a holiday feel, though "there's some cash out there."

"High-net-worth individuals seem more active on the buy side, which we see as a prudent strategy and expect to see more of heading into 2011," he said. "Mutual funds though are clearly on the sidelines and raising cash to meet what might be redemptions moving forward."

Tax-exempt yields fell anywhere from four to eight basis points Friday before the holiday slowdown that has characterized the current week. Munis have been flat to slightly firmer since Monday amid fairly light activity in both the primary and secondary markets.

In the new-issue market, New York's Metropolitan Transportation Authority sold a $750 million Build America Bond deal Tuesday, which was upsized from $350 million.

The Bond Buyer 20-bond index of 20-year general obligation bond yields declined 15 basis points this week to 5.00%, but remained above its 4.86% level from two weeks ago.

The 11-bond GO index of higher-grade 20-year GO yields dropped 13 basis points this week to 4.74%, but remained above its 4.60% level from two weeks ago.

The revenue bond index, which measures 30-year revenue bond yields, decreased six basis points this week to 5.42%. However, it remained above its 5.32% level from two weeks ago.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, was unchanged this week at 0.56%.

The yield on the 10-year Treasury note declined five basis points this week to 3.35%. It remained above its 3.22% level from two weeks ago.

The yield on the 30-year Treasury bond fell 11 basis points this week to 4.45%, but remained above its 4.41% level from two weeks ago.

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 5.50%, down 13 basis points from last week's 5.63%.

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N.J. Turnpike Selling as Build America Yields Rise: Muni Credit

Monday, December 6, 2010
By Brendan A. McGrail
of Bloomberg

Dec. 6 (Bloomberg) -- The New Jersey Turnpike Authority, which gives about $26 million a year to the state's transport budget, is selling $1.5 billion in Build America Bonds, the week's largest offering, as increased sales of the taxable debt pushed yields to the highest in almost eight months.

States and local governments are set to sell about $13.5 billion in debt this week, including $4.5 billion in Build Americas, both the highest in three-weeks, according to data compiled by Bloomberg. The program, scheduled to expire Dec. 31, provides a 35 percent federal interest-rate subsidy to issuers.

With supply surging, average yields on the bonds climbed to 6.21 percent on Dec. 2, 0.01 percentage point below an eight-month high on Nov. 24, according to the Wells Fargo Build America Bond index. Even amid the glut, the size of the deal and the reliability of the revenue stream may entice investors, said Mike Pietronico, chief executive officer of Miller Tabak Asset Management in New York.

"To get north to south in New Jersey you almost have to take the Turnpike by car," said Pietronico, who oversees $345 million in municipal assets. "It's a solid credit and will see some decent demand."

The authority, which runs the 122-mile (196-kilometer) New Jersey Turnpike and 173-mile Garden State Parkway, is rated A3 by Moody's Investors Service, fourth-lowest investment grade, A by Fitch Ratings, fifth-lowest, and A+ by Standard & Poor's, fifth-highest.

Moody's assigned a negative outlook in its rating report, its first by a ratings company since Fitch lowered its outlook from stable in 2004.

Program Extension

A one-year extension to the U.S. Build America Bond program was included in a Senate bill to continue the tax cuts for middle-income Americans, enacted during President George W. Bush's first term.

U.S. Senate Finance Committee Chairman Max Baucus, a Montana Democrat, included the provision along with dozens of other tax breaks set to end. A continuation of the bond program hadn't been contained in previous bills to prolong the income-tax cuts, the dominant issue facing Congress before the current session concludes.

The Build America program was created under President Barack Obama's economic-stimulus program. More than $173 billion of the taxable securities have been sold, Bloomberg data show. The subsidy would be scaled back to 32 percent under the Senate bill.

"The BAB's program is set to expire on Dec. 31, and the authority wants to avail itself of the 35 percent BAB's subsidy," Tom Feeney, a spokesman, said in an e-mail.

Previous Sales

The agency's sale equals the second-biggest offering of Build Americas this year. The Bay Area Toll Authority and the Texas Transportation Commission each sold $1.5 billion in June and July, respectively. California sold $3.3 billion last month.

The turnpike authority's previous Build America sale was an almost $1.4 billion offering in April 2009. Bonds due in January 2040 were priced to yield 7.41 percent, or 370 basis points above U.S. Treasuries maturing in May 2038. The securities traded Dec. 2 at an average yield of 6.22 percent, a so-called spread of about 185 basis points above the federal debt. A basis point is 0.01 percentage point.

"They come down on the side of being able to benefit due to their size," Miller Tabak's Pietronico said. Even if Congress doesn't extend the Build America program, the turnpike issue "might have some scarcity factor and retain its value," he said.

Following are descriptions of pending sales of U.S. municipal debt:

NEW YORK LIBERTY DEVELOPMENT CORP., a state arm created to finance loans for lower Manhattan construction, will sell about $1.3 billion in tax-exempts as early as this week to refinance existing debt from the World Trade Center project, according to S&P, which assigned a rating of AA-, fourth-highest. The bonds are backed by support payments from the Port Authority of New York & New Jersey, which owns the site, and rent from New York City, S&P said in a Dec. 1 report. Goldman Sachs Group Inc. will lead banks marketing the bonds. (Updated Dec. 6)

DISTRICT OF COLUMBIA, home of the U.S. capital, plans to sell about $342.6 million in taxable Build Americas as soon as this week. The securities will be backed by a first lien on personal-income and business-franchise tax revenue, according to a Nov. 23 report by Fitch, which rates the debt AA+, its second-highest investment grade. Underwriters led by Citigroup Inc. will market the bonds. (Updated Dec. 6)

--With assistance from Dunstan McNichol in Trenton, New Jersey, and William Selway in Washington.

--Editors: Walid el-Gabry, Ted Bunker

To contact the reporter on this story:
Brendan A. McGrail in New York at +1-212-617-6818 or bmcgrail@bloomberg.net.

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net.

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Treasuries Cancel Out Yield Gains

Friday, December 3, 2010
By Michael Scarchilli
The Bond Buyer

The Bond Buyer's weekly yield indexes were mixed this week as tax-exempts erased early-week gains with Treasury-driven losses Wednesday and Thursday.

Despite the sideways week, the municipal market withstood some $11 billion of new-issue supply this week without the dramatic rise in yields that plagued it much of last month.

"The market did a superb job this week, compared to November, which was just short of an overall collapse," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

"It seems like the market is trying to stabilize, but it still has a little bit of wood to chop with more supply coming," he said.

Leading the new-issue market this week, Illinois' Railsplitter Tobacco Settlement Authority priced $1.5 billion of well-received 17-year tobacco debt. The pricing of the bonds was accelerated one day to Tuesday due to higher than expected retail demand.

The Bond Buyer 20-bond index of 20-year general obligation bond yields rose five basis points this week to 4.65%, but remained below its 4.72% level from two weeks ago.

The 11-bond GO index of higher-grade 20-year GO yields also increased five basis points this week, to 4.39%. However, it also remained below its 4.47% level from two weeks ago.

The revenue bond index, which measures 30-year revenue bond yields, gained two basis points this week to 5.18%, but held short of the 5.25% level it posted two weeks ago.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, declined two basis points this week to 0.54% — unchanged from two weeks ago.

The yield on the 10-year Treasury note rose 23 basis points this week to 3.00%. It is at its highest level since July 29, when it was also 3.00%.

The yield on the 30-year Treasury bond increased nine basis points this week to 4.27%, but remained below its 4.29% level from two weeks ago.

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 5.27%, down three basis points from last week's 5.30%. This is the lowest weekly average for the yield to maturity since the week ended Oct. 10, when it was 5.03%.

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Weekly Yields Spike Amid Flood of New Issues

Friday, November 19, 2010
By Michael Scarchilli
The Bond Buyer

The Bond Buyer's weekly yield indexes increased dramatically this week amid a supply-driven rout that persisted through Wednesday and prompted a number of issuers to postpone pricing.

However, Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said that with Thursday's long-end rally, there's a sense that the weakness in the market has hit bottom — at least in the near term.

"Given the violent move, our expectation is that it will take time to stabilize," Pietronico said.

"Our sense is that the intermediate sector will take a little longer to participate, as there is a little bit more of a supply hang-up there," he said. "But we're setting ourselves up for a pretty nice end of the year. Enough deals got done and enough got postponed that we should be able to handle what's to come."

The Bond Buyer 20-bond index of 20-year general obligation bond yields increased 48 basis points this week to 4.72%, the highest since July 1, 2009, when it was 4.81%.

The 11-bond GO index of higher-grade 20-year GO yields rose 49 basis points this week to 4.47%, which is the highest level for the index since July 1, 2009, when it was 4.53%.

The revenue bond index, which measures 30-year revenue bond yields, gained 38 basis points this week to 5.25%. That is its highest level since Sept. 10, 2009, when it was 5.33%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, rose eight basis points this week to 0.54%, which is its highest level since Aug. 4, when it was 0.55%.

The yield on the 10-year Treasury note rose 25 basis points this week to 2.91%. This is the highest the yield has been since Aug. 5, when it was also 2.91%.

The yield on the 30-year Treasury bond rose four basis points this week to 4.29%, which is the highest level for the yield since June 3, when it was also 4.29%.

The weekly average yield to maturity on The Bond Buyer's 40-bond municipal bond index, which is based on 40 long-term muni bond prices, rose 26 basis points this week to 5.29%, the highest since the week ended March 4.

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Tax-Exempt Market Begins To Stabilize

Thursday, November 18, 2010
By Stan Rosenberg
Dow Jones Newswires

NEW YORK (Dow Jones)--Tax-exempt municipal bonds eased one or two basis points Thursday morning as bids started to emerge in what until now has been a rapidly plunging market.

After losing about 50 basis points for long maturities since Nov. 5 from a combination of factors--mainly extraordinarily heavy supply--that sector gave up another 20 Wednesday, according to a widely watched index compiled by Thomson-Reuters unit Municipal Market Data. That index Thursday was off just one or two basis points from 2013 to 2022, while longer bonds were unchanged.

Aside from long-term high-grade bonds, portfolio managers said bids were "all over the place" for lesser-rated issues but were slightly encouraged by the fact they existed. It may represent a turning point, said Michael Pietronico, chief executive of Miller Tabak Asset Management.

California Thursday is taking institutional orders on the $3.9 billion balance of a $10 billion revenue anticipation note sale. Traders note the institutions are capable of purchasing large blocks and could clean up the sale. An $8 billion June maturity carries a 3% coupon and yields 1.75%. A $2 billion May maturity also carries a 3% coupon and yields 1.5%.

-By Stan Rosenberg, Dow Jones Newswires, 212.416.2226; stan.rosenberg@dowjones.com.

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Tax-Exempt Muni Bonds Tumble - The Wall Street Journal

Wednesday, November 17, 2010
By Stan Rosenberg

NEW YORK—Tax-exempt municipal bonds declined Tuesday, extending a losing streak for the $2.8 trillion market that has driven up interest rates on long-term debt by almost one-half of a percentage point since Nov. 5.

A rush to sell federally subsidized Build America Bonds before the program expires at the end of the year has flooded the market with supply and overwhelmed demand, which has been damped by growing concern about the ability of state and local governments to pay as tax revenues fall and costs rise.

Compounding those problems has been a decline in 30-year Treasurys, which were largely excluded from the Federal Reserve's latest effort to keep interest rates low by buying government debt. Without the Fed as a buyer, 30-year Treasury prices have fallen and their yields, which move in the opposite direction, have risen.

Since muni bonds often track Treasurys, new municipal securities are being priced at much lower than comparable issues a few weeks ago. At least one issue has been pulled because of the high-yield investors demanded.

"The market is going through a meltdown," said Randy Smolik, an analyst with Thomson Reuters. That hasn't been helped by news headlines about some cities applying for receivership or even heading into bankruptcy.

The market swoon is affecting even the most-creditworthy issuers. Gwinnett County, Ga., for example, offered to sell $180 million of triple-A-rated water and sewer bonds, but investors demanded a yield 0.3 percentage point above a generic scale compiled by Thomson's Municipal Market Data unit. Gwinnett is accustomed to paying no premium, and its underwrites pulled the deal from the market, Mr. Smolik said.

At the same time, a $146 million New Mexico severance-tax bond, rated Aa1 by Moody's Investors Service and AA by Standard & Poor's, was priced at yield levels roughly one-half percentage point higher than the scale and was completely sold. Similar New Mexico bonds normally sell for a 0.2 percentage point premium to the scale.

The new-issue market is "very illiquid," Miller Tabak Asset Management CEO Michael Pietronico said, and that is putting pressure on the secondary, or resale, market.

According to Municipal Market Data indexes, secondary prices for 10-year munis had plummeted from Nov. 5 through Monday, driving the index yield to 2.64% from 2.46%. The yield on the 30-year index rose even more, to 4.20% from 3.90%.

"And there are going to be significant adjustments today," Mr. Smolik said Tuesday morning. Sure enough, by midday, the 10-year had climbed another 0.15 percentage point and the 30-year tacked on another 0.09 percentage point.

Declines have been so swift that the prices of some exchange-traded municipal funds had fallen substantially below the value of the indexes they are supposed to follow. These ETFs are funds that trade throughout the day on stock exchanges, usually around the net asset value of their underlying portfolios.

The question is whether such a decline—an S&P ETF was trading 3% beneath its NAV—portends a coming cataclysm for the municipal market or if they are simply good buys at cheap prices. The short answer: No one knows. But it is also true that almost every portfolio manager and bond trader has taken notice.

The main issue with the funds is liquidity, said Dan Solender, director of municipal-bond management at Lord Abbett & Co., an investment firm in Jersey City, N.J. A good portion of flows into industry funds has been on the decline as the muni market has come under pressure, he said. That leaves the funds to trade beneath net asset value.

"Clearly, people want to sell wherever they can," Mr. Solender said. The muni ETFs now are performing more like closed-end funds because of a liquidity problem, he added. "It's possible it's suggesting something," he said, "but I wouldn't read that into it."

Mr. Pietronico of Miller Tabak said flatly that the ETF declines weren't foreshadowing a bigger problem. "They are shadowing it," he said. "It's happening in real time."

The problem with ETFs is that they are not held by long-term investors, Mr. Pietronico said. The ETFs are falling faster than their underlying assets because "there's a fast-money aspect to them."

The market's supply issue, meanwhile, appears to be out of control, said Matt Fabian, senior municipal analyst at Municipal Market Advisors in Concord, Mass.

"Normally, dealers would be able to better manage the calendar, shifting some new issues either later in the year or into 2011, but Build America Bond expiration at year-end limits scheduling flexibility," Mr. Fabian said. "In a sense, this converts issuers into forced sellers and limits dealers' ability to warehouse unsold proceeds ahead of ever more sales."

Write to Stan Rosenberg at stan.rosenberg@dowjones.com

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Miller Tabak's Pietronico Says Muni Supply Surge Means

Tuesday, November 16, 2010
By Ashley Lutz
of Bloomberg

Nov. 16 (Bloomberg) -- A surge in the municipal-bond supply creates the best buying opportunity in two years, said Michael Pietronico, chief executive officer at New York-based Miller Tabak Asset Management.

Oversupply has meant a slow market and higher yields as issuers rush to sell federally subsidized Build America Bonds before the program's expiration at year's end, Pietronico, who manages $330 million in municipal holdings, said in a telephone interview today.

"Rates will drop noticeably once the pressure to issue Build America Bonds has passed," Pietronico said.

The U.S. pays 35 percent of the interest on taxable Build America Bonds. The program, created as part of President Barack Obama's economic stimulus, hasn't been extended.

The secondary market, in which previously issued bonds are bought and sold, showed top-rated debt yields at 4 percent in the 10-year range, Pietronico said. Yields could begin to fall in mid-December, Pietronico said.

"Rates will stop going up when money starts coming out of the stock market and into the muni market, which we're seeing the beginning of now," Pietronico said.

--Editors: Stephen Merelman, Ted Bunker

To contact the reporter on this story:
Ashley Lutz in New York at +1-212-617-7822 or alutz8@bloomberg.net.

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net.

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Yields Rise as Supply Pressure Hits Long-Terms

Friday, November 12, 2010
By Michael Scarchilli
The Bond Buyer

Nearly all The Bond Buyer's weekly yield indexes increased considerably throughout this holiday-shortened week as supply pressure weighed heavily on long-term munis.

"Yields have been backing up, particularly on the long end," said Evan Rourke, portfolio manager at Eaton Vance. "There's still a fairly hefty calendar. You've got long munis with a 4-handle; that's making the market a little interesting. People are seeing opportunities heading into the large December-January reinvestment flows. There's still uncertainty around, though."

Tax-exempt yields were unchanged to slightly weaker both Friday and Monday before Tuesday's onslaught of new-issue activity.

The municipal market was weaker by six to eight basis points overall Tuesday with the pricing of close to $4 billion of debt, with yields widening to 10 to 12 basis points on the long end.

The weakness led the Massachusetts Development Finance Agency to downsize its expected $740 million offering for Harvard University to $601.1 million and concede 20 basis points in yield, according to market sources, helping accelerate the market's downward spiral.

Traders Tuesday indicated the issuer wanted to price the triple-A rated 30-year tax-exempt debt at 4.00%, but were forced to move yields up 20 basis points to complete the deal.

"The Harvard deal was about price discovery, and Build America Bonds masking demand on tax-exempts," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "The clearing level was dramatically higher in yield than was thought."

Tuesday's market also saw the pricing of $789.4 million of taxable BABs and tax-exempts for the Los Angeles County Public Works Financing Authority, $750 million of taxable BABs for the New York City Municipal Water Finance Authority, and $709.2 million of taxables, mostly BABs, for the University of California Regents.

"There's been supply pressure over the last week that has been building to a crescendo," Pietronico said. "The market seemed to have been broken Tuesday, and carried that theme Wednesday."

The weakness persisted Wednesday, the last trading day before Thursday's Veterans Day holiday, with yields increasing another five to seven basis points in 10-year debt and longer. Leading the new issues, California's Santa Clara Valley Transportation Authority came to market with $647.6 million of tax-exempts and taxable BABs.

According to Municipal Market Data, one-year triple-A debt remained flat at 0.30% from last Thursday through Wednesday's close. However, MMD's triple-A scale yielded 2.62% in 10 years Wednesday, 16 basis points higher than last Thursday's 2.46%, while the 20-year scale yielded 3.73%, 21 basis points more than a week ago. The scale for 30-year debt climbed 27 basis points to 4.17% Wednesday from 3.90% last Thursday.

Pietronico noted that the weakness could persist for a time, though he expects a "snap-back rally in December that will carry us through into the new year."

The Bond Buyer 20-bond index of 20-year general obligation bond yields increased 22 basis points this week to 4.24%. That is the highest level for the index since July 22, when it was 4.26%.

The 11-bond GO index of higher-grade 20-year GO yields rose 21 basis points this week to 3.98%, which is the highest level for the index since July 15, when it was 4.09%.

The revenue bond index, which measures 30-year revenue bond yields, gained 17 basis points this week to 4.87%. That is its highest level since May 13, when it was 4.90%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, declined two basis points this week to 0.46%, which is its lowest level since Sept. 29, when it was 0.44%.

The yield on the 10-year Treasury note increased 17 basis points this week to 2.66%, but remained below its 2.67% level from two weeks ago.

The yield on the 30-year Treasury bond jumped 21 basis points higher this week to 4.25%, which is the highest level for the yield since June 3, when it was 4.29%.

The weekly average yield to maturity on The Bond Buyer's 40-bond municipal bond index, which is based on 40 long-term muni bond prices, climbed eight basis points this week to 5.03%. That is the highest weekly average for the yield to maturity since the week ended Aug. 12, when it was 5.04%.

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L.A. County May Pay 'Punitive Yield' on Debt Sale: Muni Credit

Monday, November 8, 2010
By Brendan A. McGrail and Alexandra Harris
of Bloomberg

Nov. 8 (Bloomberg) -- The Los Angeles County Public Works Financing Authority is selling a combined $700 million in Build America and Recovery Zone Economic Development Bonds this week, as California issuers offer more than $3.9 billion in debt.

States and municipalities are poised to offer $11.7 billion in securities this week, the most since the five-day period ended Oct. 8, according to data compiled by Bloomberg. About $5.2 billion of sales are scheduled as taxable, an increase of 72 percent from last week, Bloomberg data show.

Recovery zone securities, like Build America Bonds, were created as part of the economic stimulus package in 2009. More than $156 billion in Build Americas have been sold to date, compared with $3.8 billion in so-called RZEDBs, Bloomberg data show. Los Angeles County will likely pay more yield because of the infrequent issuance of those bonds, said Mike Pietronico, chief executive officer of New York-based Miller Tabak Asset Management.

"The punitive yield you'll see on a deal like that relative to a BAB is a question about liquidity moving forward," said Pietronico, who oversees $330 million in municipal holdings. While Build Americas are more common, there are "unknowns around both programs and questions about the expiration," he said.

RZEDBs offer a 45 percent federal subsidy on interest costs, while Build Americas come with 35 percent. Both programs will expire at year's end. The county plans to sell $181 million in recovery-zone debt and the balance in Build Americas, Glenn Byers, the county's assistant treasurer, said in an e-mail.

Georgia Sold Both

Georgia, which carries top rankings from the three major credit-rating companies, sold both types of debt on Oct. 5. Twenty-year Build Americas were priced to yield 4.57 percent, compared with a 4.67 percent yield on the same maturity recovery-zone bond.

The public works agency's sale will be the second-biggest taxable offering this week after the University of California's $710 million issue. The authority has Moody's Investors Service's fifth-highest investment grade at A1, and the same from Standard & Poor's and Fitch Ratings, who rank it A+. The debt will be backed by lease payments made by the county for use and occupancy of the Los Angeles County-University of Southern California Medical Center, according to Fitch. Some of the $700 million in bonds may be sold as Build Americas, preliminary offering documents show.

The largest recovery-zone bond offering was $320 million on Oct. 20 by Alameda County, California, the state's seventh largest, according to Moody's, which rated the debt A1. The county's bonds were ranked AA by S&P, third-highest, and AA- by Fitch, fourth-highest.

Extra Yield

The county's 34-year bonds were priced to yield 7.05 percent, or 3.15 percentage points above 30-year Treasuries, Bloomberg data show. The securities traded Nov. 4 at an average yield of 6.98 percent, or 2.9 percentage points above federal debt. Yields on 30-year Treasuries have risen about 0.23 percentage point since the Alameda sale.

Alameda's pricing may have included extra yield based on "people's concerns about California credit, a state with a political system encumbered by its governance issues," said Evan Rourke, portfolio manager at the New York unit of Eaton Vance Corp., which has $10 billion in assets under management. "That concern is causing spreads to widen."

California is the lowest-rated U.S. state, according to S&P. Lawmakers agreed on an $87 billion budget last month, 100 days after the start of the fiscal year, the longest period ever in which the state operated without a spending plan. S&P ranks the state A-, two levels below Illinois, and fourth lowest of 10 investment grades. Both are rated A1, fifth-highest, by Moody's.

The Los Angeles County agency plans to sell $105 million in tax-exempt debt as well, according to offering documents.

Yields on top-rated tax-exempts fell for a third straight day Nov. 5, the longest such streak since Oct. 14, according to a Bloomberg Valuation index. The 2.46 percent rate was the lowest in more than a week.

Following are descriptions of pending sales of U.S. municipal debt:

HARVARD, the oldest and richest U.S. university, plans to sell $741 million in tax-exempt bonds tomorrow through the Massachusetts Development Finance Agency. Harvard will use the funds to refinance long-term debt and for construction costs related to the Fogg Art Museum, according to a Moody's report. The general-obligation bonds are top-rated by Moody's and S&P, and will be marketed by underwriters led by Morgan Stanley. (Updated Nov. 8)

NEW YORK CITY MUNICIPAL WATER FINANCE AUTHORITY, which funds the capital needs of the water and sewer system in the most-populous U.S. city, plans to sell $500 million of Build America Bonds as soon as this week. The securities are rated second-highest by S&P and Fitch, AA+, and third-highest by Moody's, Aa2. They will be marketed by a group led by Samuel A. Ramirez & Co. (Updated Nov. 8)

REGIONAL TRANSPORTATION DISTRICT, which manages mass-transit operations in the Denver region, plans to issue about $710 million in taxable and tax-exempt debt as soon as tomorrow. About $267 million will be Build America Bonds issued as certificates of participation. Another $300 million will be conventional Build Americas. The RTD is selling $100 million in traditional tax-exempts and another $43 million in tax-exempt certificates. Bonds, rated AA, will be backed by sales tax, with the so-called COPs, rated AA-, backed by system revenue, according to Fitch. Banks led by Morgan Stanley will market the COPs, and Goldman Sachs Group Inc. will handle the bonds. (Updated Nov. 8)

UNIVERSITY OF CALIFORNIA, one of the largest higher-education systems in the country with more than 220,000 students, tomorrow plans to sell $700 million in taxable Build Americas, $50 million in tax-exempts and $10 million in traditional taxables, all backed by revenue from the system's five medical centers. The sale will be used for refinancing debt and funding construction projects. The bonds are rated Aa2 by Moody's, third-highest. Banks led by Barclays Plc will market the issue. (Updated Nov. 8)

--Editors: Walid el-Gabry, Pete Young

To contact the reporters on this story:
Brendan A. McGrail in New York at +1-212-617-6818 or bmcgrail@bloomberg.net;
Alexandra Harris in New York, at +1-617-913-1515 or aharris48@bloomberg.net.

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net.

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Harvard Taps Bond Markets for $1.04 Billion While Hoarding Cash

Friday, November 5, 2010
By Sapna Maheshwari and Brendan McGrail
of Bloomberg

Nov. 5 (Bloomberg) -- Harvard University plans to sell $741 million of tax-exempt municipal bonds next week as the oldest and richest U.S. academic institution seeks to refinance outstanding debt and fund construction while hoarding cash.

The offering follows Harvard's $300 million sale yesterday of taxable 30-year bonds at a coupon of 4.875 percent, its lowest borrowing cost for that maturity, according to data compiled by Bloomberg. Harvard last sold taxable debt in December 2008.

Harvard more than tripled holdings of cash on hand outside its endowment to $1 billion over two years, according to its annual financial report. The Cambridge, Massachusetts-based college is bolstering cash after losing a record 27 percent on investments in the year ended June 30, 2009.

"In terms of balance sheet strength, it has definitely improved," said Kimberly Tuby, the lead analyst on Harvard at Moody's Investors Service, adding the school is scaling back some projects. "I would expect the pace of capital projects and the resulting borrowing needs to be slower than what we saw earlier in the decade."

Harvard suspended work at the end of 2009 on a planned science center in Allston, the Boston neighborhood across the river from the school's main campus.

The planned debt is graded Aaa by Moody's and AAA by Standard & Poor's. The reason for the top rating goes beyond the school's balance sheet, said John Nelson, a Moody's managing director.

'Philanthropic Flow'

The university has a strong reputation, is increasingly a global institution and has a "huge philanthropic flow of revenue that comes to it every year from supporters and donors," Nelson said.

Proceeds from Harvard's debt offerings will be used to repay outstanding bonds, pay down commercial paper and help fund renovation of the Fogg Art Museum and other "capital projects," preliminary offering documents show.

"The Harvard deal will be of great interest to us," said Mike Pietronico, who oversees $330 million in municipal holdings as chief executive officer of New York-based Miller Tabak Asset Management. "They're bringing a high-quality tax-exempt deal at an optimal time. With the Massachusetts market thin in supply, that deal will see significant demand."

Harvard was forced to borrow $2.5 billion in December 2008 at the height of the financial panic because many of its investments were tied up in hard-to-sell assets. It held $300 million of cash, Treasuries and other easy-to-sell assets on June 30, 2008, it said.

Harvard plans to sell the municipal debt through the Massachusetts Development Finance Agency, the documents show, which the state legislature last month merged with the Massachusetts Health and Educational Facilities Authority.

The bonds will be general obligations, backed by the full faith and credit of the university, with maturities ranging from 10 to 30 years. Most of the bonds in next week's offering, more than $444 million, will come due in October 2040, the documents show.

The sale would push Harvard's municipal issuance in 2010 to more than $1.22 billion, Bloomberg data show.

--With assistance from Michael McDonald and John Lauerman. Editors: Richard Bedard, Alan Goldstein

To contact the reporters on this story:
Sapna Maheshwari in New York at +1-212-617-5985 or sapnam@bloomberg.net;
Brendan A. McGrail in New York at +1-212-617-6818 or bmcgrail@bloomberg.net.

To contact the editor responsible for this story:
Alan Goldstein at +1-212-617-6186 or agoldstein5@bloomberg.net.

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The Windy City Looks For A Better Borrowing Climate Down The Road

Thursday, November 4, 2010
By Kelly Nolan
Dow Jones Newswires

The city of Chicago is delaying a roughly $800 million general obligation bond sale originally scheduled for next week, amid hefty municipal bond supply and a flurry of negative fiscal headlines about the Windy City.

"As always, the city looks to price bonds in the most favorable borrowing rate environment," said Peter Scales, spokesman for the city's Chief Financial Officer, Gene Saffold. "We decided to postpone the G.O. bond sale planned for next week to wait for a more opportune time to access the lowest possible rates."

Scales said the city has not decided on a future date when it might sell the bonds.

Chicago's planned general obligation bond sale had included mostly taxable debt, including a $213 million Build America Bond, or BAB, piece.

Risk premiums on BABs have increased, as the extension of the program, created under last year's federal stimulus, is uncertain beyond the end of this year. That uncertainty has encouraged issuers to come to market soon.

The delay also comes a day after the announcement of $600 billion bond-buying program from the Federal Reserve, which has caused the yield on the 30-year Treasury to go up to around 4%. BABs are typically used for later maturities in muni bond deals and are often spread over the 30-year Treasury. The combination of those two factors right now means those issuing BABs are likely offering juicier yields.

That, along with the fact that Chicago has already had to offer more yield on its debt to attract investors recently, creates an unattractive environment to sell the bonds, said Richard Saperstein, managing director and principal of Treasury Partners, a division of financial advisory firm HighTower in New York.

"This is a bet that they believe the BAB program will be extended, which would inhibit the massive supply we're seeing and cause spreads to narrow," Saperstein said. "The risk is that while BAB spreads might narrow, the 30-year Treasury yield can still go higher, so absolute costs won't change."

Thursday, Chicago also sold $280 million in taxable second-lien water revenue bonds, in two parts. A $250 million 2040 tranche yielded 6.742%, or 270 basis points over Treasurys, while the $30 million 2029 tranche yielded 6.642%, or 260 basis points over the comparable Treasurys. Saperstein noted the city may have seen a little "sticker shock" from the pricing of the water deal.

Saperstein also said Chicago "faces a lot of headwinds," as it grapples with declining revenue, and has used reserves to cover its budget gap.

It also doesn't help that Chicago is the economic and cultural hub of Illinois, one of the lowest-rated states with its own set of fiscal woes.

"There's very much an Illinois penalty... and the market is fairly efficient in singling out credits that have weaker fundamental or wider borrowing needs," said Michael Pietronico, chief executive of Miller Tabak Asset Management.

Chicago has certainly seen its share of negative press about its weaker finances recently. Wednesday, the Civic Federation, a local fiscal watchdog group, warned in a press release that the Windy City faces "significant challenges to its fiscal stability: a structural deficit, enormous unfunded pension liabilities, and a growing bonded debt burden." The organization also noted that "large and growing budget deficits" have been a problem for the city since fiscal 2007.

The group said this year's $6.2 billion fiscal 2011 budget doesn't do enough to address the city's structural deficit, as it relies on long-term asset lease funds and other non-recurring revenue to close a $654.8 million shortfall.

"The city's short-sighted budgeting has costly consequences," Civic Federation President Laurence Msall said in the release, noting that Chicago has recently seen its share of downgrades.

Last week, Fitch Ratings downgraded the Windy City's general obligation rating one notch to double-A-minus, citing "weakened financial flexibility," and listing other reasons that mirrored the Civic Federation's concerns. In August, Moody's Investors Service took similar action, bumping Chicago's rating to Aa3. Both ratings--Fitch's double-A-minus and Moody's Aa3--are the fourth highest of 10 investment-grade rankings.

-By Kelly Nolan, Dow Jones Newswires; 615-679-9299; kelly.nolan@dowjones.com

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University of California Selling $760M for Medical Centers

Wednesday, November 3, 2010
By Randall Jensen
The Bond Buyer

SAN FRANCISCO — The University of California will sell $760 million of mostly taxable Build America Bonds next week to help finance upgrades to three medical centers.

The school system's pooled revenue bonds pricing on Tuesday will be split into three series: $700 million of BABs, $50 million of tax-exempt paper, and $10 million of taxable debt.

Some of the money from the sale will be used to refund University of California San Diego Medical Center bonds, while the majority will help finance part of the construction of the University of California San Francisco Medical Center at Mission Bay. Another piece of the deal will go to pay for building and equipping a medical building adjacent to University of California Los Angeles Medical Center and Orthopedic Hospital in Santa Monica.

Because the offering comes amid a rush of BABs and California debt before the end of the year, the market may have less appetite for such a deal than in recent months.

"The Build America Bond market is on the weaker side these days because folks are anticipating a tremendous uptick in supply between now and the end of the year," said Michael Pietronico, chief executive and head of fixed-income research at Miller Tabak Asset Management.

"When you factor that in with the idea that the California calendar should be heavy, that deal may struggle a bit."

BAB issuance is expected to accelerate in November and December as the federal stimulus bond program nears expiration at year's end.

Despite the rising tide of supply, the university still expects a good result because of the solid finances backing the bonds.

"We are aware of the [BAB] market dynamic," said Sandra Kim, executive director of external finance, "but we are confident we will have a successful outcome."

The medical center bonds will be backed by gross revenue from the university's five medical centers, which totaled $5.9 billion in fiscal 2010. The hospitals previously issued debt individually, secured by their own revenues, Moody's Investors Service said in a recent report.

With 220,000 students, the university also does more than $4 billion of research annually and generated over $5 billion of net patient revenue in the last fiscal year at its medical centers.

It also has strong financials, with $1.7 billion in operating cash flow, $2.5 billion of unrestricted financial resources, and a short-term investment pool of more than $10 billion, according to Moody's.

Moody's rated the bonds Aa2 with a stable outlook. Standard & Poor's gives them a AA-minus, also with a stable outlook.

"The rating on the medical center pooled revenue bonds reflects our assessment of the strong performance of the medical centers on a combined basis," Standard & Poor's analyst Jessica Matsumori said in a recent statement.

But according to Moody's, the school's significant capital needs will likely result in further borrowing, even as outstanding debt has grown to more than $12 billion in fiscal 2010 from $8.3 billion in 2006.

In September, the university sold $670 million of mostly taxable BABs to help pay for campus upgrades.

Moody's noted that the university still relies heavily on state funding, has had to shoulder rising pension costs, and is exposed to the health care sector.

Due to budget constraints, the university recently said it would reduce the size of incoming freshmen enrollments on most campuses.

Moody's said the university's retirement benefits are likely to swell and need more funding over time. As of July 2009, the system's full actuarial accrued liability was $14.5 billion, it said.

Barclays Capital and Citi will be the joint book-runners on the deal. Orrick, Herrington & Sutcliffe LLP is bond counsel.

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Ambac Facing Chapter 11; Holding Company Has Until Dec. 31

Tuesday, November 2, 2010
By Patrick McGee
The Bond Buyer

Ambac Financial Group said in a regulatory filing Monday that it may be forced to file for bankruptcy by Dec. 31 due to its inability to raise fresh capital.

The insurance holding company has warned several times over the past year that it could seek a pre-packaged bankruptcy plan in early 2011. By failing to pay a $5.9 million interest payment owed Monday, Ambac could seek bankruptcy protection before year's end.

Helen Remeza, senior analyst at Moody's Investors Service, said a pre-packaged bankruptcy will have limited impact on policyholders. That group includes those holding bonds wrapped by Ambac's primary insurer subsidiary, Ambac Assurance Corp. — a distinct regulated entity.

When insurance holding company Conseco filed for bankruptcy in 2002, its life and health insurance subsidiaries continued to operate, according to Remeza. The holding company didn't re-emerge for nearly a year, but the insurance operating companies were still there when it did.

"For insured bonds, this shouldn't be any news," said Remeza, who wrote about the possibility of this scenario in June. "From a credit perspective, Ambac's policyholders are unlikely to be affected by holding company default."

Ambac, or the American Municipal Bond Assurance Corp., was the first company to offer municipal bond insurance in 1971. The industry would eventually peak in 2005 with nine competitors wrapping 57% of new municipal debt, before most of them collapsed from insuring toxic assets from outside the world of public finance. The percentage of new muni issues that are insured fell to 7% this year.

Assured Guaranty Ltd., the only insurer to survive the crisis, was stripped of its sole triple-A rating last week by Standard & Poor's. The news of a possible Ambac bankruptcy was received with little fanfare within the muni bond market.

"I don't think this is a shock to anyone who currently is involved in the municipal market," said Mike Pietronico, chief executive of Miller Tabak Asset Management in New York. "This is the road they we're heading down."

Ambac's stock value, which dropped 50% to $0.41 Monday, had already fallen more than 99% from May 18, 2007, when shares peaked at $96.08 each.

Ambac Financial is rated CC by Standard & Poor's and C by Moody's, while Ambac Assurance is rated R, indicating regulatory intervention, and Caa2.

Pietronico said he wouldn't expect the trading value of Ambac-wrapped debt to change due to the pending bankruptcy.

Since the financial crisis — when Ambac Assurance was downgraded to junk because of its deep exposure to toxic mortgage-related assets — most of the bonds it insures have traded on their underlying credit value.

"Are we going to be seeing people bid Ambac-insured bonds differently today than last week? I don't think so," Pietronico said. "The market believed they were a non-entity and the announcement today doesn't change the way the bonds will be bid."

Ambac Financial announced the news by notifying the Securities and Exchange Commission. The holding company said if the interest payment is not paid within 30 days, an event of default will occur. The bonds, issued in 1993 with a par value of $75 million, have a 7.5% coupon maturing in May 2023.

The 2023 bonds last traded on Oct. 26 at 36 cents on the dollar, offering a yield of 23.5% and a spread of more than 2,000 basis points over comparable Treasuries.

At the end of the second quarter, Ambac Financial's total indebtedness was $1.622 billion. The next scheduled payment of interest on the company's indebtedness is Nov. 15. Ambac's total interest expense on long-term debt was $44.4 million in the first two quarters, according to its most recent financial statements.

"If the company is unable to reach agreement on a prepackaged bankruptcy in the near term, it intends to file for bankruptcy under Chapter 11 of the United States Bankruptcy Code prior to the end of the year," Ambac said in a filing signed by David Trick, chief financial officer.

The Wisconsin Office of the Commissioner of Insurance, which regulates the insurer but not the holding company, declined to comment. A spokesman for Ambac Assurance also declined comment.

Implications for Ambac debt holders are more direct. The company said a default would permit them to accelerate the maturity of all of the company's indebtedness.

Over the next month, Ambac Financial said it intends either to pay interest on the 2023 notes or solicit acceptances for a prepackaged plan of reorganization. If the solicitation succeeds, it will either file for bankruptcy with a related prepackaged plan or file under Chapter 11.

A pre-packaged plan could help the company maintain a $7 billion netoperating loss tax carry forward, which it calls "a valuable asset." However, that asset could be placed at risk by a change of ownership as defined under section 382 of the Internal Revenue Code of 1986.

ownership change would occur if shareholders owning at least 5% of the company's stock increased their percentage ownership by more than 50%. Ambac took precautionary measures in February to reduce the risk by entering into a tax-benefit preservation plan.

The only institutional holders of the outstanding debt are the Catholic Aid Association, the Croatian Fraternal Union of America, the Greater Beneficial Union of Pittsburgh, the Texas Directors Life Insurance Co., and the Czech Catholic Union, according to Bloomberg LP.

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Chicago, San Antonio Tap Build Americas Amid Audit: Muni Credit

Tuesday, October 26, 2010
By Brendan A. McGrail and Alexandra Harris
of Bloomberg

Oct. 26 (Bloomberg) -- Chicago and San Antonio, the third and seventh most-populous U.S. cities, are selling a total of $750 million in taxable Build America Bonds amid Internal Revenue Service audits of their previous sales.

The cities gave notice of the impending reviews to bond buyers last week. The IRS is probing San Antonio's sale of $375 million in federally subsidized debt for its municipal utility, CPS Energy, in June 2009. The agency is also looking into the Chicago sewer district's sale of $600 million of the securities in August 2009. This week's sales come as Build America issuance reaches $3.9 billion, a 10-month high, according to data compiled by Bloomberg.

While the audits may have no discernible affect on the latest sales, both may be forced to price aggressively given the numbers of Build Americas available, said Mike Pietronico, chief executive officer of New York-based Miller Tabak Asset Management.

"The bigger issue is the gigantic amount of BABs supply coming into the market through the end of the year," said Pietronico, who oversees $315 million in municipal debt. "The audit is a nuisance."

San Antonio's debt from the previous sale, maturing in February 2039, traded yesterday at an average yield of 5.17 percent, or 126 basis points above a comparable U.S. Treasury. The so-called spread was 106 basis points on Oct. 21. Chicago's 2009 sewer-revenue-backed Build Americas traded at a spread of 127 basis points on Oct. 22, up from 119 basis points on Sept. 28. The risk of wider spreads because of the audits, however, isn't enough to keep issuers away from the market, according to Harold Downs, treasurer of the Metropolitan Water Reclamation District of Greater Chicago. A basis point is 0.01 percentage point.

'Most Beneficial'

"BABs are the most beneficial thing on the horizon for municipalities," Downs said. "I'm very optimistic about this sale because the district is a sound place."

The sewer district's senior debt is top-rated by the three major credit rating companies. Chicago's offering this week, secured by a subordinate pledge on the city's sewer-system revenue, is ranked AA by Fitch Ratings, third-highest; Aa3 by Moody's Investors Service, fourth-highest; and A+ by Standard & Poor's, fifth-highest.

The extra yield that investors demand for holding Chicago's August 2009 Build Americas reflects the state's finances, Downs said. Illinois is the nation's second-lowest-rated state after California, with general-obligation debt graded A1 by Moody's and A+ by S&P, both fifth-highest.

Jonathan Baum, director of investment banking for Kansas City-based George K. Baum & Co., the deal's underwriter, did not return calls seeking comment.

San Antonio

San Antonio's $500 million Build America sale, backed by electric- and gas-system revenue, is rated Aa2 and AA by Moody's and S&P, third-highest, and AA+ by Fitch, one level higher.

It's unlikely that the audit will affect the deal's pricing, said Paula Gold-Williams, the chief financial officer of CPS Energy, in a telephone interview yesterday.

"This program has been very, very successful," she said. "It's just prudent on the part of the IRS to ensure the program has been administered responsibly."

Justin Perras, spokesman for JPMorgan Chase & Co., an underwriter on the sale, declined to comment.

Investors Comfortable

Investors are comfortable with San Antonio's credit, so the audit may not have an impact on pricing, said Jeffery Elswick, director of fixed income at Frost Investment Advisors LLC in the city. The firm oversees $6.6 billion in assets.

"It's not what folks will focus negatively on," said Elswick, who said he plans to buy the bonds. "The market right now is receptive to new deals, so it might not affect the market."

The IRS, which monitors abuses by borrowers in the subsidized municipal-bond market, has shifted attention to Build America Bonds since they were created last year. The market has since swelled to more than $148 billion.

The agency is auditing 15 to 20 Build America Bond deals, said Clifford Gannett, the director of the tax-exempt bond division of the IRS.

Among other issues, he said, the IRS is examining initial trading in the securities to see whether jumps in price soon after they are sold run afoul of regulations meant to keep issuers from selling the securities at above-market interest rates. That would boost the cost of the subsidy payments by the Treasury.

In tax-exempt bonds, audits can pose a risk to investors because the IRS can revoke that exemption, exposing holders to tax bills. In the case of Build Americas, investors aren't exposed to that risk.

Following are descriptions of pending sales of municipal debt in the U.S.:

BAY AREA TOLL AUTHORITY, the Oakland-based agency that finances bridge construction using tolls from seven state-owned spans around San Francisco, plans to sell $400 million in taxable Build America Bonds and $400 million in tax-exempts Oct.28 to fund projects including the east span replacement of the Bay Bridge. Underwriters led by Bank of America Merrill Lynch will market the subordinate-lien revenue-backed securities, rated A1 by Moody's and A+ by S&P, fifth-highest. (Added Oct. 26)

CONNECTICUT, the most indebted U.S. state per capita, plans to sell $300 million in tax-exempts and $400 million in Build Americas backed by pledged revenue from transportation-related taxes tomorrow. The special obligations are rated Aa3 by Moody's, fourth-highest, and AA by Fitch, one level higher. Citigroup Inc. will lead underwriters marketing the issue to investors. (Added Oct. 26)

DALLAS-FORT WORTH INTERNATIONAL AIRPORT, the world's eighth-busiest by passenger traffic, plans to sell $301 million in a tax-exempt deal as soon as this week to finance its improvement program. The revenue-backed bonds are rated A1 by Moody's, fifth-highest. Underwriters led by Jefferies Group Inc. will market the securities. (Added Oct. 25)

NEW YORK CITY TRANSITIONAL FINANCE AUTHORITY, the agency that funds a portion of the city's capital projects, plans to sell $750 million in taxable and tax-exempt debt tomorrow. The offer includes $620 million in Build America Bonds, which will be issued in a negotiated sale. Underwriters led by Morgan Stanley will market the issue. TFA also plans to sell $100 million of taxable bonds via competitive bid. The securities are top rated by S&P and Fitch, and graded Aa1 by Moody's, second highest. (Updated Oct. 26)

--With assistance from William Selway in Washington and MichaelMcDonald in Boston. Editors: Walid el-Gabry, Stephen Merelman

To contact the reporters on this story:
Brendan McGrail in New York at +1-212-617-6818 or bmcgrail@bloomberg.net;
Alexandra Harris in New York at +1-617-913-1515 or aharris48@bloomberg.net.

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net.

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Mississippi Sells $650 Million In Muni Bonds

Friday, October 22, 2010
By Kelly Nolan
Dow Jones Newswires

Mississippi sold $650 million in taxable general obligation bonds in the municipal bond market Wednesday, in one of the week's more sizable offerings.

Investors met the deal with warm reception, as they looked to diversify their portfolios with debt from a state that is a relatively infrequent issuer. Many maturities in the offering were said to be two to four times oversubscribed.

Although Mississippi has some of the nation's highest poverty levels and approximately 10% unemployment, it earns points for its conservative fiscal management, some market participants said.

"Mississippi is not in the same sort of fiscal straights" as states like California or Illinois, said Peter Demirali, managing director and portfolio manager for taxable fixed income at Cumberland Advisors in Vineland, N.J.

Indeed, Mississippi's deep reserves helped the state weather the recession, Moody's Investors Service said in a report. That was in part possible because of a state law that requires the deposit of half of any year's surplus--up to a maximum of 7.5% of appropriations--into the so-called rainy day fund.

The state also has a mandated practice of imposing mid-year budget cuts in response to revenue shortfalls, the rating agency added.

Mississippi also doesn't issue debt much in the municipal bond market, which likely made it attractive for investors looking for some portfolio variety.

"There's also a safety net with Mississippi," said Michael Pietronico, chief executive of Miller Tabak Asset Management in New York, referring to the state government's thrift. "They aren't going to be borrowing at the pace" of some other more fiscally stressed states, he said.

The last time Mississippi issued general obligation debt was about this time last year, said Treasurer Tate Reeves, noting the state typically comes to market about once a year.

"The economy and economic well being [of those in the state] is a concern of some, but at the end of the day when you look at our ability to repay ... the risk reward is very attractive," Reeves said.

Among other things, the proceeds for this week's sale will help refinance some old debt, as well as help pay for infrastructure like roads and bridges.

Economic development projects, including some tourist attractions, are getting money, too. That includes Elvis Presley's birthplace, museum and chapel, in Tupelo, which will receive about $2.8 million for upgrades, according to bond offering documents.

Most of the debt sold by Mississippi Wednesday-- about $417 million -- came in the form of Build America Bonds, or BABs, with the rest--about $233 million-- as regular taxable debt. BABs are taxable securities created through the federal stimulus program last year that pay higher interest rates than tax-exempt municipal bonds.

About 11% of the BABs that were sold came in a special form called recovery zone economic development bonds. These bonds, also created as part of last year's federal stimulus, provide issuers a 45% subsidy on interest costs. Regular BABs provide issuers with just a 35% break on such costs.

Pricing for a $303 million BABs tranche maturing in 2034 was 135 basis points over comparable Treasurys, or about a 5.23% yield. The $45 million in recovery-zone bonds, maturing a year later, offered a bit more yield at around 5.43%, or 155 basis points over Treasurys.

For the regular taxable portion of the offering, the longest maturity in 2023 offered a yield of 4.35%, or 187 basis points over the comparable Treasury.

The bonds were priced fairly compared to other comparably rated debt, market participants said. Washington debt, maturing in 2040, for instance, traded at 135 basis points over Treasurys, for a 5.23% yield, in the secondary market Wednesday. Taxable munis are priced relative to Treasury bonds of comparable maturities.

Morgan Stanley and Bank of America Merrill Lynch are joint lead bookrunners on the issue.

-By Kelly Nolan, Dow Jones Newswires; 615-679-9299; kelly.nolan@dowjones.com

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Scheduled Deals Total Almost $8 Billion, Up From Last Week

Monday, October 18, 2010
By Christine Albano
The Bond Buyer

Volume will continue to level off from the highs of two weeks ago as $7.97 billion of municipal debt gets ready to sell this week, according to Ipreo LLC and The Bond Buyer.

That figure is higher than last week's revised $6.10 billion — up from the $5.93 billion originally estimated — but not as significant as the $11.05 billion that sold in the week of Oct. 4, according to Thomson Reuters.

Market participants have predicted that the pending expiration of the Build America Bonds program at the end of the year will keep volume high through Dec. 31 as issuers aim to market the taxable debt, which comes with a 35% federal subsidy, while they still can.

"We see the municipal market maintaining a tentative tone, with the potential expiration of the BAB program keeping the market cautious about supply," said Mike Pietronico, chief executive officer of Miller Tabak Asset Management in New York. "The shape of the municipal yield curve could be biased higher — and steeper — in the coming weeks as the Federal Reserve tries to nudge inflation expectations higher."

Investors, on the other hand, will be seeking out bargains on the very short end of the yield curve due to the uncertain nature of both Federal Reserve policy and the possible expiration of the BAB program, Pietronico said.

"We would expect good demand for two-year municipals, which in most cases yield in excess of 150% of the comparable U.S. Treasury," he said. The New Jersey Transportation Trust Fund took the spotlight last week when it issued $1.5 billion of transportation system revenue bonds — $1 billion of which were structured as taxable BABs and priced by Barclays Capital on Thursday into a relatively flat municipal market, according to traders.

The final 2028 bond was a split maturity that yielded 5.754% and 6.014% at par — or 3.74% and 3.97%, respectively, after the 35% federal subsidy, which was 195 basis points and 230 basis points over the 30-year Treasury yield at the time of the pricing.

The tax-exempt series of the New Jersey transportation deal had a 2024 final maturity that carried a 5% coupon and was priced to yield 3.97% — 26 basis points higher in yield than the generic, triple-A general obligation scale in 2024 tracked by Municipal Market Data on Thursday.

On Friday, the 30-year triple-A GO in 2040 ended at a 3.77% yield after little movement through the week, ending at a 3.71% Tuesday following last Monday's Columbus Day holiday, and rising to a 3.73% on Wednesday and Thursday, according to MMD.

This week, Mississippi is hoping to gain some attention with its approximately $651 million of taxable GO debt in the negotiated market — $371.69 million of which is structured as Series 2010-F taxable, direct-pay BABs.

That portion of the deal — as well as a $45 million series of recovery zone economic development bonds — is being priced by Morgan Stanley on Thursday. While a source at Morgan Stanley said the structures were not finalized at press time, the deal's preliminary official statement indicates bullet maturities in 2034 and 2035 on the RZED bonds, and serial bonds 2023 to 2034 on the BAB portion as the tentative structures.

The largest deal of the week also includes $233.9 million of traditional taxable GO debt expected to be priced for retail investors on Wednesday by Bank of America Merrill Lynch and for institutions on Thursday. The financing has obtained ratings of Aa2 from Moody's Investors Service, AA from Standard & Poor's, and AA-plus from Fitch Ratings.

An undetermined amount of tax-exempt bonds could also be included as Series 2010 G, depending on market conditions, according to state officials.

The Northeast, meanwhile, will see a flurry of activity, beginning with a three-pronged senior bond financing from the University of Massachusetts Building Authority totaling $568 million and planned for pricing in the competitive market on Thursday.

The deal consists of $126.3 million of Series 2010-1 bonds maturing from 2011 to 2020; $438.25 million of Series 2010-2 taxable BABs maturing from 2021 to 2040; and $3.02 million of Series 2010-3 traditional taxable bonds maturing from 2011 to 2040. The bonds are rated Aa2 by Moody's, and AA by Fitch.

The New York Health and Hospitals Corp. will also come to market with $513.8 million of Series 2010 A health system revenue bonds, which will be priced by JPMorgan on Tuesday after a retail order period on Monday and is rated Aa3 by Moody's, and A-plus by Standard & Poor's and Fitch.

The bonds, which are structured to mature from 2011 to 2024, are secured by health care reimbursement revenues of the corporation and all funds and accounts established by the general resolution, including investment income, according to the POS.

New York's Triborough Bridge and Tunnel Authority is gearing up to issue $346.9 million of senior general revenue bonds — $66.5 million of which will be sold as Series 2010 A-1 maturing serially from 2011 to 2020, and $280.4 million of which are structured as taxable BABs in Series 2010A-2 structured to mature serially from 2021 to 2040.

The bonds are secured by a net pledge of revenues under the Senior Bridges and Tunnels Resolution that includes revenues, tolls, rates, and fees — after operating expenses are paid.

The District of Columbia Water and Sewer Authority will issue $300 million of public utility subordinate-lien revenue bonds that are structured as BABs. Senior-managed by JPMorgan, the bonds are expected to be priced on Wednesday and rated Aa3 by Moody's and AA-minus by Standard & Poor's and Fitch. The structure was unavailable at press time.

Switching gears to Texas, a $409 million revenue refunding is on tap from the Lower Colorado River Authority on Thursday, following a retail order period planned for Wednesday by senior-manager Goldman, Sachs & Co.

The two-pronged deal, which consists of Series 2010 A and B, is secured by a gross revenue pledge and is expected to be rated A1 by Moody's, A by Standard & Poor's, and A-plus by Fitch. Proceeds will refund outstanding commercial paper and certain outstanding bonds of the authority, which is a conservation and reclamation district created by the Texas legislature in 1934 and is the largest public power wholesale provider the state.

The Alameda County, Calif., Joint Powers Authority will add to the negotiated activity when it sells $320 million of recently upgraded lease revenue bonds on Tuesday to finance multiple capital projects.

Barclays Capital will price the two-pronged bond offering, which is rated A1 by Moody's, AA by Standard & Poor's, and was upgraded to AA-minus from A-plus earlier this month by Fitch due in part to financial strength in the face of ongoing economic, federal, and state pressures, a large, diverse economy, and a low to moderate debt burden, among other factors, according to an Oct. 6 Fitch report.

The bonds, which mature serially from 2036 to 2045, are backed by Alameda County's lease rental payments to the authority, subject to annual appropriation by the county, and will finance some of the costs associated with the Alameda County Medical Center Highland Hospital rebuilding project.

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Elvis Museum Draws on $372 Million Mississippi Build Americas: Muni Credit

Monday, October 18, 2010
By Brendan A. McGrail and Alexandra Harris
of Bloomberg

The Elvis Presley Museum in the rock 'n' roll legend's birthplace of Tupelo, Mississippi, is tapping into $651 million in taxable state debt for a makeover.

Mississippi leads taxable issuers this week with offerings including $372 million in Build Americas, $234 million in traditional taxables and $45 million in recovery-zone debt to finance capital improvements. The state hasn't borrowed since October 2009, creating a relative dearth of Mississippi notes, that may boost market demand, said Mike Pietronico, chief executive officer of Miller Tabak Asset Management in New York.

"There's some scarcity to it," said Pietronico, who oversees $315 million in municipal debt. "Given the size and the fact that it doesn't come to market frequently, I could make a case that it'll be well-received."

The issue will price Oct. 20 and 21, and early indications suggest "very good response" from the market, according to Treasurer Tate Reeves's office.

In the 2009 sale Mississippi's 25-year Build Americas were priced to yield 5.67 percent, or 138 basis points above U.S. Treasuries maturing in May 2039. The bonds traded Oct. 12 at an average yield of 5 percent, 114 basis points above the federal debt.

Outstanding Debt

This week's borrowing will increase the state's outstanding general-obligation debt 19 percent to $4.11 billion, according to preliminary offering documents. Mississippi has third-highest ratings from Moody's Investors Service and Standard & Poor's, two levels below top-rated Maryland.

"Though Mississippi may not be as strong as Maryland, it's still a state without a lot of debt outstanding," Pietronico said.

States and local governments are poised to sell about $7 billion in the next five days, the lowest total for a regular trading week since the period ended Sept. 3, according to data compiled by Bloomberg. About $3.3 billion will be offered as taxables, a three-week low, Bloomberg data show.

Build America Bonds, the fastest-growing part of the $2.8 trillion U.S. municipal debt market, were first sold in April 2009 as part of the economic-stimulus package and include a 35 percent federal subsidy on interest-rate costs. Legislation introduced by Senate Finance Committee Chairman Max Baucus would extend the program, which expires Dec. 31, by one year with the subsidy reduced to 32 percent. Previous extension attempts stalled in Congress. About $146 billion have been issued to date.

Less Common

Zone Economic Development Bonds, also part of last year's stimulus, provide the issuer with a 45 percent subsidy. About $3 billion have been sold.

Though recovery bonds are less common than Build Americas, Mississippi should see the same demand for both products, Pietronico said.

"Ultimately, the market judges deal on the issuer's ability to repay," he said. "Because it's a state G.O., it'll get the benefit of the doubt."

the state's pension funding ratio has fallen to 67 percent from 73 percent in 2007, this year Mississippi raised employees' contributions to 9 percent from 7.25 percent. The state has the potential to increase foreign investment, according to an Oct. 14 report from Moody's. Nissan Motor Co. and Toyota Motor Corp. are projected to supply the state with more than 6,000 jobs, Moody's said.

Stable Outlook

"The outlook for Mississippi is stable, based on expectations the state's conservative fiscal practices will enable it to effectively manage budgetary stress associated with economic challenges," wrote Edward Hampton and Edith Behr of Moody's.

The Elvis Presley museum, which includes the house where he was born in 1935 as well as a chapel added in 1979, will receive about $3 million for renovations as part of a statewide tourism project.

Elvis Presley Birthplace, Museum and Chapel attracts 50,000 to 100,000 visitors a year, according to Judy Schumpert, a tour guide since 1996. The money will be used to build a theater at the 15-acre (6.07-hectare) facility, which the museum will use to screen movies and host other activities.

"They saw the importance of tourism for the city and the state," Schumpert said.

Following are descriptions of pending sales of municipal debt in the U.S.:

DISTRICT OF COLUMBIA WATER AND SEWER AUTHORITY, which serves 600,000 people in Washington, plans to sell $300 million of Build America Bonds as soon as this week. The obligations are backed by revenue from consumer water bills and will be used to preserve and upgrade the district's water and wastewater systems. Underwriters led by JPMorgan Chase & Co. will market the issue, which is rated Aa3 by Moody's and AA- by both S&P and Fitch Ratings, all fourth-highest. (Updated Oct. 18)

PORT AUTHORITY OF NEW YORK AND NEW JERSEY, which owns the World Trade Center site in addition to operating Newark Liberty International, John F. Kennedy International and LaGuardia airports, will sell $850 million in taxable bonds as early as this week. The issue will fund construction at the trade center site. Citigroup Inc. will market the issue, which is rated Aa2 by Moody's, third-highest, and AA- by S&P and Fitch, both fourth-highest. (Updated Oct. 18)

To contact the reporters on this story:
Brendan McGrail in New York at bmcgrail@bloomberg.net; Alexandra Harris in New York at aharris48@bloomberg.net.

To contact the editor responsible for this story:
Mark Tannenbaum at mtannen@bloomberg.net.

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Almost All Yields Decline in Short Week

Friday, October 15, 2010
By Michael Scarchilli
The Bond Buyer

Nearly all The Bond Buyer's yield indexes declined slightly during this holiday-shortened week amid moderate secondary trading activity and rising Treasury yields.

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said the market has handled the past month's onslaught of primary issuance well.

"However," he added, "there is the BAB extension or lack thereof hanging over the market, and an anticipation of heavy supply from issuers to come before the program potentially goes away."

Pietronico said that secondary trading volume seems to be down, but transactions are occurring, albeit with a little more give in the offered side.

Leading the new-issue market, Barclays Capital priced $1.5 billion for the New Jersey Transportation Trust Fund Authority, including $1 billion of taxable Build America Bonds.

Also, Siebert Brandford Shank & Co. priced $267 million for Los Angeles, including $177.4 million of BABs.

The Bond Buyer 20-bond index of 20-year general obligation bond yields declined two basis points this week to 3.82%.

That is the lowest level for the index since May 4, 1967, when it was 3.79%.

The 11-bond GO index of higher-grade 20-year GO yields also fell two basis points this week, to 3.56%, which is the lowest the index has been since April 20, 1967, when it was 3.53%.

The revenue bond index, which measures 30-year revenue bond yields, declined one basis point this week to 4.57%. That is its lowest level since May 31, 2007, when it was 4.57%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, also dropped one basis point this week, to 0.47%, but remained above its 0.44% level from two weeks ago.

The yield on the 10-year Treasury note rose 10 basis points this week to 2.50%, but remained below its 2.52% level from two weeks ago.

The yield on the 30-year Treasury bond gained 18 basis points this week to 3.90%, its highest level since 3.93% on Sept. 16.

The weekly average yield to maturity on The Bond Buyer's 40-bond municipal bond index, which is based on 40 longterm municipal bond prices, finished at 4.87%, unchanged from last week.

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Fed Considers Raising Inflation Expectations to Boost Economy

Wednesday, October 13, 2010
By Scott Lanman and Craig Torres
of Bloomberg

Oct. 13 (Bloomberg) -- Federal Reserve policy makers may want Americans to expect inflation to accelerate in the future so they spend more of their money now.

Central bankers, seeking ways to boost flagging growth after lowering interest rates almost to zero and buying $1.7 trillion of securities, are weighing strategies for raising inflation expectations as well as expanding the balance sheet by purchasing Treasuries, according to minutes of the Fed's Sept. 21 meeting released yesterday.

Some Fed officials are concerned that expectations of lower inflation will become self-fulfilling, damping demand by increasing borrowing costs in real terms, the minutes said. By encouraging Americans to believe prices will start rising at a faster pace, the Fed would reduce inflation-adjusted interest rates and stimulate the economy. Chairman Ben S. Bernanke said in 2003 that Japan could beat deflation by using a "publicly announced, gradually rising price-level target."

"The Fed is on the verge of actively targeting a higher inflation rate," said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. U.S. stocks advanced, sending benchmark indexes to five-month highs, the dollar fell and gold declined for the first time in three days after the minutes were released.

Trying to raise inflation expectations is untested in the U.S. The policy may backfire if actual inflation drifts higher than the Fed would like, potentially eroding gains won in the early 1980s by former Fed Chairman Paul Volcker, who raised interest rates as high as 20 percent to subdue prices.

'Elegant' Theory

"The theory is elegant, but it's unclear in practice whether short-term moves in inflation expectations really drive real growth," said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York and a former Fed researcher.

Jim O'Sullivan, global chief economist at MF Global Ltd. in New York, said in a Bloomberg Television interview that the biggest risk is "boosting long-term inflation expectations more than they lower real interest rates."

Bernanke on Oct. 15 will deliver a speech on "Monetary Policy Objectives and Tools in a Low-Inflation Environment" at a conference at the Fed Bank of Boston. Some of the panels at the conference will deal with Japan's experience of deflation.

The Sept. 21 statement saying the Fed "is prepared to provide additional accommodation if needed" was meant to accord "with the members' sense that such accommodation may be appropriate before long," the minutes said. The Standard and Poor's 500 index is up 2.6 percent since Sept. 21 and rose 0.4 percent yesterday to 1,169.77.

Consumer Confidence

The Thomson Reuters/University of Michigan consumer confidence survey showed consumers expect an inflation rate of 2.2 percent over the next 12 months in September, the lowest in a year and down from 2.7 percent in August.

The Fed gave several options for raising short-term price expectations, including providing more information on the inflation rate policy makers consider consistent with their long-term goals and targeting a path for the price level. For the first time, the Fed said it could also target a path for nominal gross domestic product, which isn't adjusted for inflation.

"The minutes are one of their key communication tools, but it's not clear what that approach will be," Maki said.

The report provides more detail on the timing and components of potential easing actions without giving the amount of any additional asset purchases by the Fed. Since the meeting, weaker-than-forecast job growth in September and comments by policy makers, including New York Fed President William Dudley, have fueled speculation that the central bank will soon start a second wave of unconventional easing.

Projection for Purchases

Goldman Sachs Group Inc. economists are projecting that the Fed will announce $500 billion of purchases at the next meeting Nov. 2-3.

"They're still ironing out the details," said Chris Low, chief economist at FTN Financial in New York. At the same time, "if we don't get an announcement in the next meeting I think we'd see quite a bit of disappointment in the bond market and the stock market," Low said.

Bond traders expect the Fed's actions to generate higher prices. Their inflation expectations for the next five years, measured by the breakeven rate between nominal and inflation-indexed bonds, rose to 1.47 percent from 1.2 percent on Sept. 20, the day before the Fed's meeting. Gold prices hit a record $1,366 an ounce on Oct. 7.

Removing Punch Bowl

"The bottom line is, they are trying to reflate, and the market is concerned that historically they have always been late in removing the punch bowl," said Richard Schlanger, a vice president at Pioneer Investments Inc. in Boston who helps oversee $18 billion. "We are going to be very judicious in our asset allocations here."

Moderate growth and 9.6 percent unemployment are curbing price gains, prompting U.S. central bankers to warn for the second time in a decade that inflation is too low.

Inflation, measured by the personal consumption expenditures price index, minus food and energy, has been below the Fed's goal for five consecutive months. The price measure rose 1.4 percent for the 12 months ending August. Prices excluding food and energy have gained at a 1 percent annual pace in the three months through August.

The European Central Bank and Bank of England are among central banks that target an inflation rate through monetary policy. The Fed, by contrast, has no formal inflation objective; instead, Fed officials state a long-run inflation rate they see as consistent with achieving the legislative mandates of stable prices and maximum employment.

Inflation Target

The FOMC could adopt a combination of inflation targeting and price-level targeting to get inflation expectations up, said Mark Gertler, a New York University economist and research co-author with Bernanke.

The Fed could restate its commitment to keep inflation rising annually at around 1.7 percent to 2 percent. At the same time, the FOMC could announce some tolerance for inflation above that goal to make up for recent undershooting of those rates, Gertler said.

That would help convince the public that the Fed wasn't going to raise rates rapidly if inflation moved above 2 percent, he said. Such a strategy "tells the market that the farther we undershoot, the more aggressive we are going to be," he said.

A nominal GDP target is "a pretty unlikely outcome," Gertler said. "I don't think it is on the table as a serious proposal."

Attends Meeting

The Fed's consideration of price-level targeting may draw on research co-written by Gauti Eggertsson, a New York Fed researcher, and Michael Woodford of Columbia University. Eggertsson attended the FOMC meeting last month, his second since joining the Fed in 2004.

Eggertsson and Woodford said in a 2003 paper that a publicly announced price-level target is better than targeting the rate of inflation as a way to increase expectations. Bernanke cited their work in a 2003 speech about monetary policy in Japan.

Woodford said in an interview it would be "desirable" for the Fed to commit to keep rates low to ensure prices rise along a path identified by the central bank.

If people expect higher inflation, "that's a reason to spend more," said Woodford, who as a professor worked with Bernanke in the Princeton University economics department.

Japan Policy

Japan, by contrast, tied its low-rate policy last decade to an inflation rate instead of the price level. Woodford declined to discuss his talks with Fed officials.

Dudley, who serves as FOMC vice chairman and is the only regional Fed president to vote at every meeting, said in an Oct. 1 speech that, for example, "if inflation in 2011 were 0.5 percentage point below the Fed's inflation objective, the Fed might aim to offset this miss by an additional 0.5 percentage-point rise in the price level in future years."

"There's some evidence that inflation expectations are playing a role both in limiting demand and keeping prices low," FTN's Low said.

"You look at housing now and one of the reasons people aren't buying is they expect they can get a better price if they wait," he said. "If that behavior spreads into other markets, it could be a real problem."

--With assistance from Caroline Salas in New York and Joshua Zumbrun in Washington. Editors: James Tyson, Christopher Wellisz

To contact the reporter on this story:
Scott Lanman in Washington at +1-202-624-1934 or slanman@bloomberg.net; Joshua Zumbrun in Washington at +1-202-624-1984 or jzumbrun@bloomberg.net.

To contact the editor responsible for this story:
Christopher Wellisz at +1-202-624-1862 or cwellisz@bloomberg.net.

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Yields Rise as New Supply Weighs on Munis

Friday, October 1, 2010
By Michael Scarchilli
The Bond Buyer

Nearly all The Bond Buyer's weekly yield indexes rose slightly as an influx of new-issue supply weighed on municipals.

"It looks like the market is in the midst of a slow bleed lower," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "Too much supply is coming too fast to absorb."

"Fundamentally speaking, though, this is a unique supply story for munis," he said of the abundance of new issues. "It's probably a good time to be looking to buy."

In the new-issue market this week, Bank of America Merrill Lynch priced $729.4 million of taxable BABs for Dallas Area Rapid Transit, Morgan Stanley priced $500 million of taxable BABs for the Salt River Project Agricultural Improvement and Power District in Arizona, and New York's Empire State Development Corp. competitively sold $467.3 million of revenue refunding bonds to Citi.

The Bond Buyer 20-bond index of 20-year general obligation bond yields rose one basis point this week to 3.84%, but remained below the 3.89% level from two weeks ago.

The 11-Bond GO index of higher-grade 20-year GO yields increased two basis points this week to 3.59%, but still fell below the 3.63% level from two weeks ago.

The revenue bond index, which measures 30-year revenue bond yields, gained one basis point this week to 4.59%. That was still below its 4.63% level from two weeks ago.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, rose one basis point this week to 0.44%, but still remained below its 0.46% level from two weeks ago.

The yield on the 10-year Treasury note declined four basis points this week to 2.52%. This is the lowest the yield has been since Aug. 26, when it was 2.50%.

The yield on the 30-year Treasury bond fell five basis points this week to 3.69%, which is its lowest level since Aug. 26, when it was 3.53%.

The weekly average yield to maturity on The Bond Buyer's 40-bond municipal bond index, which is based on 40 longterm municipal bond prices, dropped two basis points this week to 4.87%. That is the lowest weekly average for the yield to maturity since the week ended Sept. 2, when it was also 4.87%.

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Muni Mkt Already Penalized IL, NJ Bonds

Friday, September 24, 2010
Dow Jones Market Talk

1459 GMT [Dow Jones] Not much reaction in the secondary market for NJ or IL bonds, despite Moody's souring on outlooks for both states. The muni market has already penalized those credits, says Miller Tabak CEO Michael Pietronico. Some pockets of weakness emerging in morning trade, in tandem with Treasury losses, he says.

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Yields Fall as Munis Rally Behind Fed Warning

Friday, September 24, 2010
By Michael Scarchilli
The Bond Buyer

The Bond Buyer's weekly yield indexes declined this week as the municipal market rallied behind the economic warning the Federal Open Market Committee sounded Tuesday to end a weeks-long pattern of losses.

"It looks like we've reversed the pattern of earlier September and we're back in rally mode again," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "You can look to that Fed statement as the catalyst. It caught some people off guard. Now it seems as if retail is engaged and putting money to work."

Appetite for Treasuries began strengthening after the Federal Reserve indicated the economic recovery would be "modest" and inflation would likely remain "subdued."

Muni yields declined an average of five to 10 basis points, depending on maturity, during the past three sessions.

The central bank suggested further quantitative easing could be possible if conditions warrant - a step that could further reduce interest rates, thereby making Treasuries more attractive.

Fed chairman Ben Bernanke also expressed concern that the Fed might fail to meet its dual mandate to promote price stability and full employment if the current inflation rate remains too low and unemployment too high.

In the new-issue market this week, Utah sold more than $1 billion of taxable and tax-exempt debt.

The Bond Buyer 20-bond index of 20-year general obligation bond yields declined six basis points this week to 3.83%. This is the lowest level for the index since May 4, 1967, when it was 3.79%.

The 11-bond index of higher-grade 20-year GO yields also fell six basis points this week to 3.57%, which is the lowest the index has been since April 20, 1967, when it was 3.53%.

The revenue bond index, which measures 30-year revenue bond yields, declined five basis points this week to 4.58%. That is its lowest level since May 31, 2007, when it was 4.57%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, declined to 0.43%, which is its lowest level since March 31.

The yield on the 10-year Treasury note narrowed 20 basis points this week to 2.56% - the lowest yield since 2.50% on Aug. 26. The yield on the 30-year Treasury bond fell 19 basis points this week to 3.74%, its lowest level since Sept. 2, when it was 3.72%.

The weekly average yield to maturity on The Bond Buyer's 40-bond municipal bond index, which is based on 40 longterm municipal bond prices, dropped one basis point this week to 4.89%.

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New York City Selling $1.3 Billion in General Obligation Debt

Thursday, September 23, 2010
By Brendan A. McGrail
of Bloomberg

Sept. 23 (Bloomberg) -- New York City, which issued about $963 million in municipal bonds in July, plans to sell another $1.3 billion in general obligations next month.

The most populous U.S. city, whose debt is ranked third-highest by all three rating firms, will offer $800 million as taxable debt, including $650 million in Build America Bonds, earmarked for capital projects and carrying a 35 percent federal subsidy on the interest cost.

"The city is a very sophisticated issuer," said Mike Pietronico, who oversees about $300 million in municipal debt as chief executive officer of New York-based Miller Tabak Asset Management. "They understand when it's a good time to issue, and I think they nailed it. It should be well received."

Mayor Michael Bloomberg anticipates a $3.3 billion budget gap for the 2012 fiscal year that begins July 1. He told officials this week to seek savings of about $800 million in the remaining nine months of this fiscal year and $1.2 billion in 2012.

The remaining $500 million will be raised in tax-exempt securities and used to refinance existing debt and convert $90 million in outstanding variable-rate demand bonds to fixed rate, according to a statement released today by the Office of Management & Budget.

"The City is constantly reviewing refunding opportunities to lower the cost of the City's debt service, and the refunding component of our upcoming deal will help us achieve this goal," Ray Orlando, an OMB spokesman, said in an e-mail.

The bond offerings will price the week of Oct. 4, with marketing to individuals for the tax-exempts beginning Oct. 1, the statement said.

The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

--Editors: Walid el-Gabry, Stephen Merelman

To contact the reporter on this story: Brendan A. McGrail in New York at +1-212-617-6818 or bmcgrail@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net.

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New York City Receives Record-Low Yield on $750 Million Water-System Bonds

Friday, September 17, 2010
By Brendan A. McGrail and Ashley Lutz
of Bloomberg

The New York City Municipal Water Finance Authority, which has been granted rate increases of 10 percent or more for three consecutive years, boosted its Build America Bond sale by a quarter to $750 million as investor demand pushed yields on the agency's debt to a record low.

The agency will pay a 5.44 percent yield on its 33-year bonds, a record-low, according to executive director Tim Paolicelli, and about 28 basis points, or 0.28 percentage points less than the 32-year Build Americas it sold in June, Bloomberg data show. The authority has issued more than $2.2 billion of the federally subsidized debt this year, according to data compiled by Bloomberg.

Yesterday's sale, the week's largest taxable offering, was planned for $600 million and was increased after institutional orders, the largest buyers of Build America Bonds, exceeded the securities available, Paolicelli said in a telephone interview.

"There hadn't been a lot of Build Americas offered until this week, and we benefited from that," Paolicelli said.

The sale came amid proposed legislation from Senate Finance Committee Chairman Max Baucus, a Montana Democrat, that would extend the Build America Bonds program for one year while reducing the subsidy to 32 percent.

The program, which provides a 35 percent interest-cost subsidy to issuers from the U.S. Treasury, was created in 2009 to stoke the economy and will expire at the end of this year unless Congress passes an extension. The House of Representatives twice passed measures to preserve the program with a smaller subsidy, only to see them falter in the Senate.

Fastest-Growing

Build America Bonds are the fastest-growing part of the $2.8 trillion municipal market and have raised more than $133 billion to date, Bloomberg data show.

The extra yield investors demand to hold the federally subsidized obligations instead of 30-year U.S. Treasuries fell to 185 basis points, or 1.85 percentage point, on Sept. 15, the lowest since June 23, according to the Wells Fargo Build America Bond index.

"The lack of yield globally is benefiting the BAB market right now," said Mike Pietronico, who oversees $300 million in municipal holdings as chief executive officer of New York-based Miller Tabak Management. "It helps to have a big issuer come to market when there's a massive search for yield."

The authority's Build Americas in the June sale were priced to yield 5.72 percent, or 162 basis points above 30-year Treasuries. Those securities traded Sept. 7 at an average yield of 5.09 percent, about 143 basis points above Treasuries.

Outstanding Debt

The securities are rated AA+ by Standard & Poor's and Fitch Ratings, second-highest, and Aa2 by Moody's Investors Service, one level lower, and will be backed by a subordinate lien on the authority's gross revenue, according to preliminary offering documents. The authority, which has no taxing power, has about $24 billion in debt outstanding, with about $10 billion under a first lien claim, the documents show.

Proceeds from the sale will help fund portions of the capital improvement plan. The authority plans to sell an additional $200 million in tax-exempt to refinance existing subordinate lien debt.

In May, the New York City Water Board increased fiscal 2011 rates by 12.9 percent, the third double-digit increase in three years, according to a Sept. 10 Moody's report.

The authority issued $250 million Build Americas yesterday maturing in 2041, which included a 10-year call option. Those bonds priced to yield 5.79 percent, 33 basis points below the callable Build Americas sold in June, Bloomberg data show.

Taxable Offerings

The Ohio State University and the University of Texas System each sold Build Americas this week to finance campus improvements, the second- and third-largest taxable offerings of the week. About $3.2 billion of the bonds were sold, the most since the week ended June 25, Bloomberg data show.

"The level of activity indicated augurs well for continued expansion of the market through to year end - and speaks to the potential that BABs have as a rapidly expanding asset class once the overhang of legislative uncertainty is removed," CreditSights strategists Louise Purtle and Isaac Codrey wrote in a Sept. 15 report.

Following are descriptions of pending sales of municipal debt in the U.S.:

UTAH, the second-fastest growing state by population in the U.S., plans to sell $1 billion in tax-exempts and Build America Bonds as soon as next week to fund the expansion and renovation of state highways. The securities, rated highest by Moody's, Fitch and S&P, will be marketed by underwriters led by Goldman Sachs Group Inc. The borrowing will increase the state's debt by 50 percent, to $3 billion. In 2009, Utah sold almost $1 billion of tax-exempt and Build America bonds for highway projects. Utah's anticipated 2010 budget deficit is about 20 percent of its initial projections as revenue was boosted by tourism and companies such as Adobe Systems Inc. and Twitter Inc. (Updated Sept. 17)

TEXAS TRANSPORTATION COMMISSION, which oversees the department that manages highway, rail, port and rural transit systems in the second-largest U.S. state, plans to sell $1 billion in Build America Bonds and tax-exempts next week to pay for highway improvements. The debt will be backed by the full faith and credit of the state. JPMorgan Chase & Co. will lead the marketing of the bonds, which have top ratings from Moody's and Fitch, and the second-highest rating from S&P. (Added Sept. 17)

To contact the reporters on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net; Ashley Lutz in New York at alutz8@bloomberg.net.

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Build America 1-Year Extension Offered in Senate Bill

Thursday, September 16, 2010
By William Selway and Brendan A. McGrail
of Bloomberg

Sept. 16 (Bloomberg) -- The Build America Bond program, a federal subsidy behind the fastest-growing segment of the $2.8 trillion municipal debt market, would be extended through next year under a bill introduced by Senate Finance Committee Chairman Max Baucus.

More than $133 billion in securities have been offered by state and local governments since the subsidy began last year, under the economic stimulus program. It refunds 35 percent of the interest cost on bonds sold for public works.

The latest bill would give the Senate another chance to extend the program before it is set to lapse at the end of the year. The House of Representatives has previously passed longer extensions, only to see the legislation stall in the upper chamber.

"This bill helps our economy grow by investing in our infrastructure and cutting taxes for employers," Baucus, a Montana Democrat, said in a statement.

The extension, coupled with tax cuts and paid for by closing so-called loopholes for investment fund managers and corporations, would reducing the subsidy to 32 percent, according to a copy of the legislation on the finance committee's website. The bill would also allow local governments to refinance outstanding Build America bonds, a step that may save them money should interest rates slide.

Stimulus Program

Unlike conventional municipal bonds that give investors a source of tax-free income, Build Americas provide direct subsidies to the borrowers. The taxable securities pay higher yields than tax-exempt bonds, making them attractive to foreign investors and others who aren't seeking tax shelters.

The average Build America debt yields 5.72 percent, according to a Wells Fargo index. That compares with 4.18 percent for a top-rated tax-exempt bond maturing in 30 years, according to Municipal Market Advisors Inc. indexes.

State and local governments have pressed Congress to keep the program alive. Ending it would eliminate a source of low- cost financing for governments and potentially make the market for the bonds less liquid by capping its size.

The program has also buoyed the market for tax-exempt bonds by curbing the supply of those securities, a trend that could reverse if it is allowed to lapse.

'Good Sign'

"The fact that it was introduced by the senate finance chairman is a good sign that it has the votes to pass," said Mike Pietronico, who oversees $300 million in municipal holdings as chief executive officer at New York-based Miller Tabak Asset Management.

The securities have been used to help finance projects such as nuclear reactors in Georgia and a bridge over San Francisco Bay. Companies including Nuveen Investments Inc. and Eaton Vance Corp. have set up mutual funds linked to the securities.

The proposed subsidy reduction to 32 percent from 35 percent isn't likely to boost the number of Build America issues coming to market before the current program expires, Pietronico said.

"The 3 percent difference is not the driver, it's the absolute rates," he said. "If you're an issuer and you need to borrow, if the rates are good, you go."

--Editors: Pete Young, Ted Bunker

To contact the reporters on this story: William Selway in Washington at wselway@bloomberg.net; Brendan A. McGrail in New York at bmcgrail@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.

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Yields Rise as Munis Weaken in Short Week

Friday, September 10, 2010
By Michael Scarchilli
The Bond Buyer

Nearly all The Bond Buyer's yield indexes rose this week, as tax-exempts weakened throughout the holiday-shortened week, erasing some of the pronounced gains taken in August.

Michael Pietronico, chief executive officer of Miller Tabak Asset Management, said that over the past week, the muni market has seen a reversal of the overbought condition in August.

"We see 30% to 40% reversal of August gains before stability comes back," Pietronico said. "In munis, the beauty is it drops a lot faster than it goes up. It should be over pretty soon. We probably could see another 10-12 basis points of losses before we level out."

Pietronico noted that the sell-off has been "just the market probing" unsustainable yield levels.

The Bond Buyer 20-bond index of 20-year general obligation bond yields increased six basis points this week to 3.92%. That is the highest the index has been since Aug. 19, when it was 4.03%.

The 11-bond index of higher-grade 20-year GO yields rose seven basis points this week to 3.67%, which is the highest level for the index since Aug. 19, when it was 3.76%.

The revenue bond index, which measures 30-year revenue bond yields, rose two basis points this week to 4.65%. This is the highest level for the index since Aug. 19, when it was 4.69%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, declined seven basis points this week to 0.44%, which is its lowest level since March 31, when it was 0.43%.

The yield on the 10-year Treasury note rose 13 basis points this week to 2.76%. This is the highest the yield has been since Aug. 5, when it was 2.91%.

The yield on the 30-year Treasury bond gained 12 basis points this week to 3.84%, which is its highest level since Aug. 12, when it was 3.95%.

The weekly average yield to maturity on The Bond Buyer's 40-bond municipal bond index, which is based on 40 longterm municipal bond prices, increased three basis points this week to 4.90%. It is the highest weekly average for the yield to maturity since the week ended Aug. 19, when it was 4.95%.

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New York State Mortgage Cuts Borrowing Costs 31% on $127 Million

Wednesday, September 1, 2010
By Brendan A. McGrail
of Bloomberg

Sept. 1 (Bloomberg) -- State of New York Mortgage Agency, which provides subsidized home loans to low- and moderate-income families, cut its borrowing costs 31 percent since April on about $133 million in tax-exempt housing bonds as demand from individual investors helped drive down yields.

Top-rated tax-exempt municipal yields on debt due in 10 years fell 1 basis point, or 0.01 percentage point, yesterday to 2.58 percent, equaling the lowest ever, according to data from Concord, Massachusetts-based Municipal Market Advisors dating to January 2001. Bond yields move inversely to prices.

Interest rates have been driven to record lows as investors sought the perceived safety of the municipal market amid concern the economic recovery may be slower than expected. Demand for high-grade assets coupled with the state tax exemption boosted New York investor interest in the agency's bonds, according to Matt Dalton, chief executive officer of Belle Haven Investments in White Plains, New York.

"They caught fire with retail investors," said Dalton, who oversees $450 million in municipal holdings. "It was attractively priced and AAA-rated. That combination in New York is hard to find these days."

Top-rated Sonyma, the biggest U.S. state housing-finance agency, sold bonds due in 2017 priced to yield 2.3 percent, or 38 basis points above a seven-year MMA index. That yield compares with April's mortgage-backed securities of the same maturity, which had borrowing costs of 3.13 percent, or 55 basis points above the benchmark.

Extra Yield

Investors still demand extra yield for housing bonds because of the call option on the securities, said Mike Pietronico, who oversees $290 million in municipal holdings as chief executive officer at New York-based Miller Tabak Asset Management. Housing bonds can be redeemed before the due date because of early repayment or if the proceeds aren't spent.

"They have little room to appreciate in price because issuers can call the bonds early for unexpended proceeds or prepayment," Pietronico said. "In an environment where rates are falling, housing bonds are defensive and need to be priced cheaper for that reason."

The agency's sale came as Standard & Poor's/Case-Shiller announced its June index of property values increased 4.2 percent from a year earlier. The median estimate of economists surveyed by Bloomberg News called for a 3.5 percent advance.

The Case-Shiller index is a moving three-month average, which means the June data are still being influenced by transactions in April and May that benefited from the government's first-time homebuyer tax credit. A pullback in demand since that ended, mounting foreclosures and an unemployment rate near a 26-year high, may weigh on prices in coming months.

"There's still a little bit of tarnish on it, but the AAA adds that extra layer of comfort," Dalton said of Sonyma's sale. "And there's some pent-up demand for good quality New York paper."

Following are descriptions of pending sales of municipal debt in the U.S.:

TENNESSEE STATE SCHOOL BOND AUTHORITY, which helps finance school construction and student loans, is offering $227 million in tax-exempts and $18 million in taxable debt through competitive sales today to refinance debt and fund capital expenditures at state universities. The bonds are rated at the second-highest investment grade Aa1 and AA+ by Moody's Investors Service and Fitch Ratings, respectively, and AA by S&P, one level lower. (Added Sept. 1)

MINNESOTA, which sold $865 million in tax-exempts through competitive sale last month, plans to issue about $900 million in refunding bonds as early as next week. RBC Capital Markets, which won the competitive bidding in August, will lead underwriters in marketing this latest sale to investors. The state's general obligations carry top ratings from S&P and Fitch, and Aa1 from Moody's, one level lower. (Added Sept. 1)

--With assistance from Timothy R. Homan in Washington. Editors: Walid el-Gabry, Pete Young

To contact the reporter on this story: Brendan A. McGrail in New York at +1-212-617-6818 or bmcgrail@bloomberg.net.

To contact the editor responsible for this story: Pete Young at +1-415-617-7072 or pyoung13@bloomberg.net.

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Muni market unphased by California's overdue budget

Monday, August 30, 2010
By Jim Christie
FOX Business

SAN FRANCISCO (Reuters) - California should have had a budget in place 61 days ago. Instead, Republican Governor Arnold Schwarzenegger and the state's Democratled legislature remain at odds over balancing the state's books -- and it is uncertain when they may settle in for serious negotiations.

The municipal debt market, however, seems unconcerned about the prospect of a prolonged budget fight on how to close a $19 billion shortfall, potentially past election day in November.

Instead, the market expects the biggest issuer of debt among U.S. states will pay interest on it even as budget talks stumble along.

Analysts said Monday the market has become accustomed to tardy budgets -- in 2008 a spending plan was not approved until mid-September -- that have not interrupted scheduled bond payments.

"It's familiar territory," said Parker Colvin, managing director and head of California underwriting at investment bank Stone & Youngberg in San Francisco. "The state has been very careful to make sure that there is no interruption or delay to payments for debt service."

Michael Pietronico, chief executive officer at Miller Tabak in New York, noted that "Market participants have got used to a late budget ... Something highly unusual would have to happen for the market to grow very nervous because the state has shown that they consider paying interest on their bonds to be of the highest priority and the market believes that."

Not even the prospect of California issuing IOUs at some point this month, just as it did last year during a budget impasse, has the market concerned.

Promissory notes to vendors and others expecting state money may produce ugly headlines. But they comfort bondholders because they will be near the head of the line for payments, which the state government can manage with its and by borrowing from its various funds.

"It wouldn't rattle bondholders because it would imply they're going to get paid," Pietronico said.

Investors holding California debt last week received a reassuring message via state officials telling local officials that $3 billion in state money for local governments and agencies would be delayed until the state budget is approved.

The money will in part go to help cover the state's $803 million general obligation debt service on Oct. 1.

However, moves to bolster the state's cash position are putting a squeeze on local debt issuers, forcing them into difficult budget decisions until state money arrives, said Tim Heaney, a senior portfolio manager with San Francisco-based independent investment firm SCM Advisors LLC.

"It certainly could impact the level of for a variety of issues, particularly school districts," Heaney said. "I think ultimately they'll get their money, but timing could be an issue."

California's regular legislative session ends Tuesday and lawmakers plan to mark it with a debate on budget plans pushed by Schwarzenegger and top Democrats.

Schwarzenegger has proposed a plan built around spending cuts, which Democrats say are too deep for them to support. They have proposed cuts and a mix of tax increases, opposed by Schwarzenegger and Republican lawmakers, who hold the balance of power in budget votes.

After the debate on the rival spending plans and symbolic votes on them, the governor plans to call lawmakers into a special session on the . (Reporting by Jim Christie; Editing by Dan Grebler)

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Nearly All Yield Indexes Down; Two Hit 43-Year Lows

Friday, August 27, 2010
By Michael Scarchilli
The Bond Buyer

Nearly all The Bond Buyer's yield indexes declined this week, with two reaching 43-year lows, as tax-exempt yields plunged to record lows in three sessions during the week.

This week's gains extended the ongoing municipal rally that has dipped 10-year tax-exempt yields below 2.20% and 30-year munis lower than 3.70% for the first time in history, according to the Municipal Market Data triple-A scale.

"The market continues to be surprised by the strength of late," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "It seems as if the very short end, where yields are below 1%, has hit a wall. If there's any more to this rally, it seems likely to be on the long end, with a flattening bias."

He said there is little potential left for price appreciation.

"In our view, people will be surprised by the length of time yields hang around these general levels," Pietronico said, noting that it's "hard to see a situation where the economy turns notably until at least the election."

Radical change in the composition of Congress in November could produce a market pivot-point, he said.

"In this environment where there is no cash-equivalent alternative, selling pressure has really been lacking," Pietronico said. "Even if the calendar would pick up, the supply would have to be timed with the economy being perceived as turning upward" to move the market significantly.

The Bond Buyer 20-bond index of 20-year general obligation bond yields declined 15 basis points this week to 3.88%. That is the lowest the index has been since May 11, 1967, when it was also 3.88%.

The 11-bond index of higher-grade 20-year GO yields also dropped 15 basis points this week to 3.61%, which is the lowest level for the index since April 27, 1967, when it was also 3.61%.

The revenue bond index, which measures 30-year revenue bond yields, declined eight basis points this week to 4.61% — the lowest level since May 31, 2007, when it was 4.57%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, rose four basis points this week to 0.49%, which is its highest level since Aug. 4, when it was 0.55%.

The most recent highs for the 20-bond GO, 11-bond GO, and revenue bond indexes was April 8, when they were 4.45%, 4.16%, and 4.96%, respectively. Since then, they have fallen 57, 57, and 45 basis points, respectively. Since July 1, The Bond Buyer's indexes have fallen 50, 49, and 23 basis points, respectively.

The yield on the 10-year Treasury note declined eight basis points this week to 2.50%. That is the lowest the yield has been since Jan. 15, 2009, when it was 2.20%.

The yield on the 30-year Treasury bond fell 14 basis points this week to 3.53%, which is its lowest level since March 5, 2009, when it was 3.51%.

The most recent highs for 10-year and 30-year Treasuries occurred March 25, when they were 3.90% and 4.78%, respectively. Since then, the 10-year has declined 140 basis points and the 30-year has dropped 125 basis points.

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 4.89%, down six basis points from last week's 4.95%.

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Puerto Rico Sells $1.1 Billion in Bonds as Borrowing Costs Rise

Tuesday, August 24, 2010
By Brendan A. McGrail
of Bloomberg

Aug. 24 (Bloomberg) -- Puerto Rico, which carries credit ratings lower than any U.S. state, sold $1.1 billion in tax-exempt debt as its borrowing costs increased 14 percent from a comparable issue last month.

The sale by the island commonwealth yesterday offered four-year debt priced to yield 4.25 percent, or 134 basis points above a Bloomberg Fair Market Value index of Puerto Rico revenue bonds. The bonds were rated BBB by Standard & Poor's, the second-lowest investment grade.

Puerto Rico sold four-year obligations last month at 4.25 percent, or 118 basis points above the index. A basis point is 0.01 percentage point.

"There's a little more scrutiny of credit quality now," said Mike Pietronico, who oversees $290 million in municipal bonds as chief executive officer of New York-based Miller Tabak Asset Management. "The rating is not one a lot of conservative buyers will be able to act on. It limits the audience, especially on the front end of the curve."

The issue, sold through Puerto Rico's Government Development Bank, was offered in two-, three-, four-, seven- and nine-year maturities, according to data compiled by Bloomberg. The sale was marketed only to Puerto Rico investors, according to Eduardo Inclan, a spokesman for Santander Securities, one of the underwriters.

The week's largest deal came as average yields on Puerto Rico revenue bonds reached the lowest level in more than two years, Bloomberg data show. Yields on 10-year bonds fell to 4.49 percent yesterday, the lowest since Feb. 25, 2008.

Build Americas

The Government Development Bank, the commonwealth's financing arm, also issued about $96 million in Build America Bonds yesterday. The taxable securities are eligible for a 35 percent federal subsidy on borrowing costs.

Puerto Rico's 25-year obligations were priced to yield 5.75 percent, 209 basis points below 30-year U.S. Treasuries. Last month, the same maturities sold at 174 basis points below the benchmark.

Bonds of Puerto Rico, a self-governing commonwealth ceded to the U.S. in 1898 after the Spanish-American War, offer investors an exemption from any state tax, unlike most municipal debt.

--Editors: Mark Schoifet, Walid El-Gabry

To contact the reporter on this story: Brendan A. McGrail in New York at +1-212-617-6818 or bmcgrail@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net.

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Chicago Could Have To Pay Up In Order To Sell $160M Muni Deal - The Wall Street Journal

Tuesday, August 17, 2010
By Kelly Nolan
Dow Jones Newswires

The city of Chicago could have to pay up to find a home for nearly $160 million in debt it's looking to sell in the municipal bond market this week, offering higher yields to entice investors following two recent ratings downgrades.

Price talk for the bulk of the deal, coming as taxable Build America Bonds, suggests the longest maturity in the offering, in 2029, could come in around 280 basis points over comparable U.S. Treasurys. That spread is around 85 basis points more than 20-year maturities on recently sold, comparably rated offerings, said Richard Saperstein, managing director and principal of Treasury Partners, a division of financial advisory firm HighTower in New York. HighTower has about $16.5 billion in assets under management.

"It's coming cheap because of the fiscal issues Chicago has, against the backdrop of a state that also has problems," Saperstein said. "People are looking for greater...yield."

Saperstein said he passed on buying the deal because of Chicago's financial woes and what he views as the possibility for future downgrades.

Given the expanded borrowing the state of Illinois has done thus far in 2010, there's somewhat of an "Illinois penalty," that's evolved in the marketplace, said Miller Tabak Chief Executive Michael Pietronico. Illinois is one of the lowest-rated U.S. states, along with California.

In advance of this week's debt sale--which will be used to fund school building construction and renovation--Fitch Ratings and Moody's Investors Service both lowered their Chicago ratings one notch to double-A and Aa3 respectively, the third and fourth highest of 10 investment-grade rankings.

The firms cited concerns with Chicago's weakened financial flexibility, given the city's continued use of reserves to balance budgets. Fitch noted Chicago faces the largest budget gap of its history, of $654.7 million, in fiscal 2011. Both agencies also said the city's growing unfunded pension liability is a major issue. The debt sale should benefit from the relatively light issuance calendar in the muni market amid continued strong demand.

Also, despite the downgrades, Chicago's credit rating is still relatively strong, said Phil Villaluz, head of municipal strategy at Advisors Asset Management, based in Monument, Colo.

The challenges Chicago faces are "all big concerns for investors, but when you put the city's creditworthiness into perspective and take into account the broad and diverse economy the city benefits from, investors should be comfortable," he said. Villaluz declined to comment on whether he purchased the Chicago debt, citing company policy.

For Chicago's part, public affairs director for Chief Financial Officer Gene Saffold, Peter Scales, said the city doesn't think the ratings downgrade will have a significant impact on its borrowing costs in the long term. Beyond this week's debt sale, Chicago plans to issue $70.5 million in short-term debt later this month and borrow up to $900 million for a refunding in October.

"It is important to note that the current ratings still represent the city's highest ratings since 1979," Scales said.

To be sure, the Windy City also has strengths. The third largest U.S. city, Chicago is the economic hub of Illinois. In addition, it is somewhat sheltered from the financial woes haunting the state, which must pay as much as $6 billion in overdue bills from the just finished fiscal year.

"While the city did have a delayed payment from the state for $32.3 million of income tax revenues that was unable to be recorded in fiscal 2009, we believe the city has limited exposure to the state's fiscal woes," Moody's said.

Tuesday, the city of Chicago initially priced a small portion of tax-exempts--about $29 million--for individual investors, with a top yield of 1.89% for the longest maturity offered in 2015.

Meanwhile, formal pricing for the bulk of the deal, coming as nearly $130 million taxable Build America Bonds, is expected Wednesday. Ramirez & Co. is the lead manager on the debt sale.

-By Kelly Nolan, Dow Jones Newswires; 615-679-9299; kelly.nolan@dowjones.com

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Weekly Yields Drop as Rally Brings Historic Lows

Friday, August 13, 2010
By Michael Scarchilli
The Bond Buyer

The Bond Buyer's weekly yield indexes declined during the seven-day period ending Thursday as tax-exempts continued to rally to historical lows.

"It was sort of a repeat of last week, except with more force behind the rally," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

"From the perspective of the market, the Federal Reserve re-energized the bulls with the statement Tuesday," he said. "It's going to be difficult to see yields go back up in any meaningful way, unless the data turns upward real soon. Right now, the market is just riding this wave."

The Federal Open Market Committee downgraded its outlook for economic growth Tuesday, saying the recovery was likely to be "more modest" than previously anticipated.

When considering just how low yield levels could go, Pietronico noted that after the 10-year reached another record low Thursday - at 2.43% - "the natural answer is 0%."

"One can't get away from comparisons in the press to Japan," he said. "Well, the 10-year JGB is 0.98%, so if you use that as a guidepost, we have a fairly long way to still go."

The Bond Buyer 20-bond index of 20-year general obligation bond yields declined 10 basis points this week to 4.06%. That is the lowest level the index has reached since Oct. 8, 2009, when it was also 4.06%.

The 11-bond index of higher-grade 20-year GO yields dropped nine basis points this week to 3.80%, its lowest level since Oct. 8, 2009, when it was also 3.80%.

The revenue bond index, which measures 30-year revenue bond yields, declined five basis points this week to 4.74% to reach its lowest level since Oct. 8, 2009, when it was 4.69%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, dropped nine basis points this week to 0.46%, which is its lowest level since March 31, when it was 0.43%.

The yield on the 10-year Treasury note declined 16 basis points this week to 2.75%. This is the lowest level since April 2, 2009, when the yield was also 2.75%.

The yield on the 30-year Treasury bond fell 11 basis points this week to 3.95%, which is its lowest level since July 22, when it was also 3.95%.

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 5.04%, down four basis points from last week's 5.08%.

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Tax-Exempt Shortage Aids NY-NJ Port Agency Selling $400 Million

Tuesday, August 10, 2010
By Brendan A. McGrail and Justin Doom
of Bloomberg

Aug. 10 (Bloomberg) -- The Ohio Water Development Authority, whose AAA credit rating is a level higher than the state's, plans to sell $423 million in Build America Bonds tomorrow in the agency's largest offering of the taxable debt.

The sale comes as municipal issuance touches a six-week low, according to data compiled by Bloomberg. About $6.57 billion is scheduled to be sold this week, the lowest non-holiday weekly total since July 2. About $1.39 billion will be sold as taxable debt and $5.18 billion in tax-exempts, the lowest in a month, Bloomberg data show.

A relative dearth of munis may enable the authority to price its debt more cheaply with lower yields, said Mike Pietronico, who oversees $275 million in municipal holdings as chief executive officer of New York-based Miller Tabak Asset Management.

"The market is not generating enough tax-exempt supplies," Pietronico said. "It continues to be a seller's market. We're hoping for some supply in September."

The extra yield investors demand to buy Build Americas instead of U.S. government bonds has fallen in the last month, according to Bloomberg data. The so-called spread above 30-year Treasuries was 196 basis points yesterday, down from its peak of 207 basis points reached July 14, according to the Wells Fargo Build America Bond Index. A basis point is 0.01 percentage point.

The Ohio Water Development Authority was created in 1968 by the state to assist with financing local governments' solid-waste, water-supply and water-pollution-control projects. The Columbus-based entity issued about $45 million in Build Americas in June, part of a larger, $70 million deal, which followed a $366 million tax-exempt offering in January, Bloomberg data show.

Taxable Sale

The agency's June taxable sale included 20-year Build Americas priced to yield 5.74 percent, 160 basis points above 30-year Treasuries at the time. The city of Columbus, which carries the same credit rating, issued 20-year Build Americas on July 29 priced to yield 5.42 percent, about 134 basis points above benchmark Treasuries.

Other recent top-rated Build America issues include Texas Transportation Commission, which sold 20-year securities on July 27 priced to yield 5.18 percent or about 110 basis points above Treasuries.

Tax-Exempts

In addition to the federally subsidized Build America debt, the Ohio authority plans to sell about $28 million in shorter-term tax-exempt revenue bonds, according to Scott Campbell, chief operating officer.

"The tax-exempts make the most sense at the short end of the curve," Campbell said, adding that the current income stream will allow the agency to sell obligations maturing through 2034. "The long end makes a strong case for BABs. We'll go with whichever bonds provide the greatest level of savings."

Yields on 10-year AAA tax-exempts were unchanged yesterday at 2.83 percent, the lowest in at least nine-and-a-half-years, according to Municipal Market Advisors' data since January 2001. Yields on top-rated general obligations have not risen since June 15.

Proceeds from this week's sale will reimburse the authority for about $148 million already loaned for environmental infrastructure in the state and fund further lending, Campbell said. The agency requires that 30 percent of its borrowing be lent within the first year and 95 percent within three years, he said.

'Solid Credit'

"This is a very solid credit, an essential purpose, so demand for this deal is going to be good," Pietronico said.

The debt is being marketed by a group led by Morgan Stanley, preliminary offering documents show.

The agency is optimistic about getting low borrowing costs, Campbell said. "What we're hearing from our underwriters is that there's strong demand for these bonds and a limited supply."

The Build America Bond program, under which the federal government pays 35 percent of the interest costs of taxable bonds sold to pay for public-works projects, was created last year as part of President Barack Obama's economic-stimulus package. The program is set to expire at the end of 2010, although a bill was introduced in the U.S. House two weeks ago to extend it two years. About $126 billion of the securities have been issued.

Following are descriptions of pending sales of municipal debt in the U.S.:

PORTLAND, OREGON, the second-largest city in the Pacific Northwest by population, plans to sell $412 million in revenue bonds as early as this week to pay for capital improvements to the city's sewer system. The securities, with maturities from 2011 to 2035, will be sold competitively, and are rated by Standard & Poor's at AA, its third-highest grade, and one level lower by Moody's Investors Service, at Aa3. (Updated Aug. 9)

PHILADELPHIA GAS WORKS, the nation's largest municipally owned gas utility, plans to sell about $150 million in revenue bonds as early as this week to fund capital projects and refinance debt. The securities are rated third-lowest, at BBB+, by S&P, and second-lowest, at Baa2, by Moody's, and will be marketed by a group led by Morgan Stanley. (Added Aug. 10)

Editors: Walid el-Gabry, Mark Schoifet

To contact the reporters on this story:
Brendan A. McGrail in New York at +1-212-617-6818 or bmcgrail@bloomberg.net and Justin Doom in New York at +1-480-329-5270 or jdoom@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net.

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Tax-Free Munis Firm After Disappointing Jobs Data

Friday, August 6, 2010
Dow Jones Market Talk

1333 GMT [Dow Jones] Cash-strapped state and local governments fired 48,000 workers in July. That's evidence they are "paring down their overhead" to create stronger balance sheets, boosting their ability to pay bond holders, says Miller Tabak's Michael Pietronico. "State and local governments reducing expenses is exactly why default risks are overblown," he says. He adds that the cuts also mean slower growth and reduced inflationary pressures, which is "excellent news" for bond holders.

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Washington Voters to Decide on State Income Tax in November

Friday, August 6, 2010
By Michael Scarchilli
The Bond Buyer

Nearly all of The Bond Buyer's weekly yield indexes fell during the seven-day period ending Thursday as firmness persisted in the municipal market.

"The market continues to grind higher in price," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "There seems to be more inclination by some investors to look further out the curve."

Pietronico noted that the market reached a level this week on the short end where rates could not go much lower, prompting some participants to reconsider longer maturities.

"We're range-bound," he said. "It feels like there's a fair amount of investors who missed the rally and would like to buy as yields come back up, but the selling pressure is just not there. It's a very difficult environment to put cash to work."

The Bond Buyer 20-bond index of 20-year general obligation bond yields declined five basis points this week to 4.16%. That is the lowest the index has been since Oct. 8, 2009, when it was 4.06%.

The 11-bond index of higher-grade 20-year GO yields also dropped five basis points this week, to 3.89%, which is the lowest level for the index since Oct. 8, 2009, when it was 3.80%.

The revenue bond index, which measures 30-year revenue bond yields, declined one basis point this week to 4.79%, but remained above its 4.78% level from two weeks ago.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, rose seven basis points this week to 0.55% — its highest level since hitting 0.59% the week ending July 7.

The yield on the 10-year Treasury note declined nine basis points this week to 2.91%. That is the lowest the yield has been since the week ending April 16, 2009, when it was 2.84%.

The yield on the 30-year Treasury bond declined two basis points this week to 4.06%, but remained above its 3.95% level from two weeks ago.

The weekly average yield to maturity on The Bond Buyer's 40-bond municipal bond index, which is based on 40 long-term muni bond prices, finished at 5.08%, down three basis points from last week's 5.11%.

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Tax-Exempt Shortage Aids NY-NJ Port Agency Selling $400 Million

Wednesday, July 21, 2010
By Brendan A. McGrail and Justin Doom
of Bloomberg

July 21 (Bloomberg) -- The Port Authority of New York and New Jersey, which slashed its 10-year capital spending plan by 17 percent, is selling $400 million in revenue bonds amid a shortage of tax-exempt debt from the two states.

The pace of borrowing in New Jersey has dropped by almost 50 percent in the past year, as revenue declined and opened a projected $11.5 billion budget deficit for fiscal 2011 which began this month. The state sold $1.2 billion in tax-exempts last year after averaging $2 billion annually from 2007 to 2009, Bloomberg data and state debt reports show.

The dearth of highly rated tax-free bonds from New Jersey will help attract investors to the authority's debt, according to Mike Pietronico, chief executive officer of New York-based Miller Tabak Asset Management.

"There's been so little high-quality supply in the state of New Jersey, that even though this is a dual-exempt bond, New York and New Jersey, I think New Jersey, in and of itself, could absorb it," said Pietronico, who oversees $275 million in municipal securities. "I expect it to be bid very aggressively by the street."

New York state investors may be drawn to the sale because it hasn't issued much debt as it struggles to pass a budget, according to Howard Cure, managing director at Manhattan-based Evercore Wealth Management LLC, which oversees about $1.5 billion.

"They have a lot of debt issuances on hold, particularly the personal-income tax bonds, until they essentially pass a budget," Cure said. "The fact that there hasn't been a lot of New York state paper makes this pretty attractive."

New York Deficit

New York, the nation's third-most populous state, has operated without a complete budget since the fiscal year began April 1, as lawmakers and Governor David Paterson failed to agree on how to close the deficit in a $135 billion expenditure plan Paterson proposed in January.

Yields on top-rated tax-exempt general obligations due in 10 years are 2.88 percent, the lowest in at least nine-and-a-half years, according to Municipal Market Advisors data. Yields on Build Americas, meanwhile, have risen this month amid waning demand for the taxable securities.

The bonds, which provide issuers with a 35 percent rebate on interest-rate costs, have an uncertain future. An extension of the Build America program, which is set to expire in December, stalled in Congress. The bonds have offered international buyers higher yields than some corporate bonds, coupled with lower default risk.

Greater Demand

"The tax-exempt demand right now is greater than BABs," said Pietronico. "The situation with BABs is a little bit different in a sense that there's more supply, perhaps more questions about the extension of the program. That combination is keeping that market a little under pressure."

Tax-exempt borrowing costs, coupled with difficult rules for issuing Build Americas, led the authority to eschew the federally subsidized obligations, spokesman Steven Coleman said.

"Under the BAB rules, we have to carry the bonds on our financial statements at the taxable rate, which limits the amount of bonding capacity we can do," Coleman said in an e-mail. "The current tax-exempt rate is the lowest in years."

Yields on 30-year top-rated tax-exempt debt are 4.42 percent, the lowest since February 2008, MMA data show.

The $6.3 billion budget approved in December reduced the authority's 10-year capital spending plan to $24.5 billion from $29.5 billion as a result of the worst economic slowdown since the Great Depression. A 150-position reduction in the current budget has reduced employment to the lowest level in 40 years, according to preliminary offering documents.

Competitive Sale

The bulk of tomorrow's competitive sale, which will refinance debt and fund the capital spending, are backed by system revenue, and will mature in 21 to 30 years, preliminary offering documents show. The bonds are rated Aa2 by Moody's Investors Service, third-highest, and AA- by Standard & Poor's and Fitch Ratings, one step lower. All three assigned a stable outlook.

The 89-year-old Port Authority's facilities include two tunnels and four bridges between New York and New Jersey, five airports, six marine terminals and the Trans-Hudson ferry service, as well as the World Trade Center site, according to the preliminary documents. The authority is able to set tolls and other fees at its facilities.

"The near monopoly over regional transportation infrastructure and the resilient demand for transportation services in the regional economy continue to keep the authority's finances healthy, despite very large, complex, and growing future capital needs," according to a July 15 report from Moody's.

Passenger Traffic

Usage of the authority's commercial airports is up 0.6 percent this year through April after a 4.8 percent decline in 2009, analysts Maria Matesanz and Kurt Krummenacker wrote in the report, adding that "aviation enterprises provided approximately 58 percent of authority net operating revenues" or 61 percent of net operating income in 2009.

The authority added about $157 million to its reserve balance in 2009, according to Fitch.

"It's a very solid credit," Cure said. "Critical transportation links around the metropolitan area, and that the airports have been pretty resilient is all good. The development of the World Trade Center is the biggest challenge."

Port Authority owns the land on which the World Trade Center was situated and is responsible for building Tower One, formerly called the Freedom Tower, the signature building that will stand 1,776 feet high.

Tax-Exempts

The authority sold $300 million in tax-exempts in October, with bonds due in 2037 priced to yield 4.75 percent, 4 basis points above AAA debt, according to MMA. Those same securities traded yesterday at an average yield of 4.44 percent, 8 basis points above comparable maturity top-rated obligations.

Debt from an authority tax-exempt sale of about $117 million in March, with a coupon of 2 percent, has performed even better with five-year bonds yielding as much as 14 basis points less than AAA debt in trading on July 12.

"It's just an extremely liquid bond and there should be a good demand," Pietronico said.

Following are descriptions of pending sales of municipal debt in the U.S.:

MASSACHUSETTS, the state with the second-most net tax-supported debt per person, plans to sell about $293 million in general obligation bonds tomorrow to fund capital projects and refinance existing debt. The tax-exempt securities will be marketed by underwriters led by Citigroup Inc. Massachusetts is rated Aa1 by Moody's and AA+ by Fitch, second-highest, and AA by S&P, one step lower. Connecticut has the highest tax-supported debt per person, according to Moody's. (Updated July 21)

SACRAMENTO MUNICIPAL UTILITY DISTRICT, which provides electricity to more than 1 million northern California residents, plans to issue $250 million in tax-exempt securities today for capital-improvement projects. The revenue bonds are rated A1 by Moody's, A+ by S&P, the fifth-highest for both, and A by Fitch, its sixth-highest grade. The debt will be marketed by a group led by JPMorgan Chase & Co. (updated July 21)

NEW YORK CITY, the third-largest U.S. municipal borrower, plans to sell $800 million in general-obligation bonds as early as next week to refinance debt. The bonds, rated Aa2 by Moody's and AA by S&P and Fitch, all third-highest, will be marketed by a group led by Barclays Plc. (Updated July 20)

UNIVERSITY OF VIRGINIA, the school started by Thomas Jefferson that in April 2009 held the first sale under the federal Build America Bond program, plans to issue $190 million in Build Americas on July 21 through a competitive sale. Proceeds of the sale will go toward funding capital improvements including the construction of a parking garage, student housing, research buildings and the expansion of the university bookstore and medical facilities. The securities carry top ratings from S&P, Moody's and Fitch. (Added July 21)

TEXAS TRANSPORTATION COMMISSION, which oversees the department that manages highway, rail, port and rural transit systems in the second-largest U.S. state, plans to sell $1.5 billion in securities including $1.38 billion of Build America Bonds and $116 million in tax-exempt debt on July 26 to pay for highway improvements. Goldman Sachs Group Inc. will lead the marketing of the bonds, which have top ratings from S&P and Moody's. Alaska is the biggest U.S. state by area. (Added July 21)

--With assistance from Henry Goldman and Esmι E. Deprez in New York, and Dunstan McNichol in Trenton, New Jersey.
Editors: Walid el-Gabry, Ted Bunker

To contact the reporters on this story:
Brendan A. McGrail in New York at +1-212-617-6818 or bmcgrail@bloomberg.net and Justin Doom in New York at +1-480-329-5270 or jdoom@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net.

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Washington Voters to Decide on State Income Tax in November

Monday, July 19, 2010
By Rich Saskal
The Bond Buyer

ALAMEDA, Calif. — A measure to impose a state income tax in Washington has qualified for the November ballot, according to the secretary of state's office.

Washington has no personal or corporate income taxes.

I-1098, backed by longtime tax-reform advocate William Gates Sr., would create what supporters call a "high earners income tax." Gates' son is Bill Gates, co-founder of Redmond, Wash.-based Microsoft.

Tax would be paid on income above $200,000 for individuals, or $400,000 for couples. The tax would have two tiers — 5% to start, and 9% for individual income over $500,000, with $1 million for couples.

"That would in our view enhance the value of Washington municipals, because you would then have a captive audience of buyers that does not exist [currently]," said Michael Pietronico, chief executive of Miller Tabak Asset Management. "Should it go through, you would expect to see municipals in Washington trade marginally stronger."

Revenue from the income tax would be dedicated to health care and education programs, while funding offsetting tax cuts designed to make the state tax system less regressive.

The measure would cut the state property tax 20%, and raise the threshold for paying the state's Business and Occupation tax, exempting the smallest 80% of businesses, according to the I-1098 campaign.

In all, the measure is expected to net the state general fund about $1 billion annually — not enough on its own to solve the $3 billion shortfall projected in the state's next two-year general fund budget cycle.

The secretary of state's office certified the ballot measure despite accusations of fraud by one of the campaign's signature gatherers. The fraud investigation involves about 350 signatures on 20 petition sheets, Dave Ammons, spokesman for Secretary of State Sam Reed, said in an email to reporters. "The division is continuing a probe of the apparent fraud, and on Thursday requested the Washington State Patrol to investigate as well, and to turn over the case to local authorities as warranted," he said.

Despite that investigation, election officials determined that the measure had qualified after a random check of the signatures submitted.

The campaign turned in about 385,000 signatures and 11,786 were reviewed, with 10,090 found to be valid, according to Ammons. The error rate for the signature check was 18.1%, about the same as the historical average, Ammons said.

It takes 241,153 valid signatures of registered Washington voters to qualify a ballot measure.

Washington voters are expected to decide nine state ballot measures in November.

They include another measure from perennial tax-limit proponent Tim Eyman. His measure, I-1053, is next in line for signature verification. He submitted about 338,000 signatures for I-1053, which would restate the existing statutory requirement that tax increases must be approved by a two-thirds vote in both houses of the legislature or approved by a majority of voters in a referendum.

Washington voters approved an income tax measure by a wide margin in 1932, only to have it thrown out the following year by the state Supreme Court. Since then, they have turned down four different income tax measures, most recently in 1975, according to the secretary of state's office.

They have also turned down two corporate income tax measures.

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Yields Mostly Down as Munis Keep Firming

Friday, July 16, 2010
By Michael Scarchilli
The Bond Buyer

The Bond Buyer's weekly yield indexes mostly declined this week as the municipal market continued to edge slightly firmer throughout the period.

Michael Pietronico, chief executive at Miller Tabak Asset Management, said that while bond prices "continued to firm," there is "not an imminent sign of a substantial sell-off in the next week or so, because there just seems to be too much cash."

Pietronico also noted that headline risk in the municipal market is "still acting as a headwind to a lot of folks considering investing in munis."

"But one cannot deny the price action in tax-free bonds, and that has been positive now for the last 12 months," he said. "So it gets harder to make the world-is-coming-to-an-end scenario, when you see price action like you do in tax-frees."

Leading the new-issue market this week, Illinois and the Los Angeles Community College District each sold $900 million taxable Build America Bond deals priced by Citi.

The Bond Buyer 20-bond index of 20-year GO yields rose one basis point this week to 4.37%, but remained below its 4.38% level from two weeks ago.

The 11-bond index of higher-grade 20-year GO yields also rose one basis point this week, to 4.09%, but is still below its 4.10% level from two weeks ago.

The revenue bond index, which measures 30-year revenue bond yields, dropped two basis points this week to 4.77%. This was its lowest level since Oct. 8, 2009, when it was 4.69%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, declined eight basis points this week to 0.51%, which is its lowest level since June 2, when it was 0.47%.

The yield on the 10-year Treasury note fell four basis points this week to 2.98%, but remained above its 2.94% level from two weeks ago.

The yield on the 30-year Treasury bond dropped three basis points this week to 3.97%, but it is still higher than its 3.88% level from two weeks ago.

The average weekly yield to maturity of the Bond Buyer Municipal Bond Index, which is based on 40 long-term bond prices, declined one basis point this week to 5.13%. It is the lowest weekly average for the yield to maturity since the week ended June 10, when it was 5.10%.

Priti Patnaik contributed to this column.

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Jobless Claims Show American Job Machine Sputtering in Recovery
Dan Greenhaus of MTAM called it right

Thursday, July 1, 2010
Bloomberg

July 1 (Bloomberg) -- Almost a year ago, chief economic strategist Dan Greenhaus of Miller Tabak & Co. told his clients the U.S. economy would recover while jobs would be scarce. It would follow the pattern of the two prior so-called jobless rebounds, with unemployment climbing after the slumps ended.

"I didn't have enough fingers and toes to count the people I knew getting fired," he said in a telephone interview from New York. "Companies over-fired during the recession and now demand is not picking up sufficiently to bring back a meaningful amount of people."

Jobless claims, a gauge of firings, indicate Greenhaus's July 2009 forecast may be coming true. Applications for jobless benefits have stalled in a range of 440,000 to 490,000 per week this year, a level Bruce Kasman says corresponds with payroll gains of about 100,000 a month, less than the number needed to reduce the unemployment rate.

"We're in danger of facing a recovery in which job growth is taking place, but not sufficient to offset the amount of job losses in the recession," Kasman, chief economist at JPMorgan Chase & Co in New York, said in an interview. "It takes more than 100,000 to 150,000 new jobs a month to feel like we're taking a big step toward unwinding the big losses."

Data compiled by Bloomberg News show claims within this year's range coincide with payroll gains of about 17,000 a month on average over the past four decades. Taking into account variables such as the unemployment rate and the stage of the business cycle, Kasman says claims now are "broadly consistent" with about 100,000 jobs a month and a static unemployment rate. (To see the Interactive Insight story, click here.)

Claims Forecast

The number of applications for jobless benefits last week fell to 455,000 from 457,000 the prior week, according to the median estimate of 46 economists surveyed by Bloomberg News before a Labor Department report today.

Payrolls fell by 125,000 in June, reflecting a drop in the number of temporary federal government employees working on the decennial census, according to the median forecast of economists surveyed before a Labor Department report July 2. Excluding government, companies added 110,000 workers after a 41,000 gain the prior month, and the jobless rate rose to 9.8 percent from 9.7 percent, according to the estimates.

Vince Farrell, chief investment officer at Soleil Securities Corp. in New York, said he's becoming skeptical his forecast for a big increase in jobs will come true. "I'm not willing to throw in the towel yet, but with claims showing such stickiness, it could be we will be at a low level of 40,000 to 60,000 new jobs for some time."

The economy needs to create at least 200,000 jobs a month to reduce the unemployment rate, according to Mark Zandi, chief economist with Moody's Economy.com in West Chester, Pennsylvania. "If that doesn't happen by the end of the year, then this will go down as another jobless recovery."

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Illinois Borrowing $900 Million as Credit-Default Cost Doubles

Monday, June 28, 2010
By Allison Bennett and Brendan A. McGrail
of Bloomberg

June 28 (Bloomberg) -- Illinois plans to add $900 million in Build America Bonds as soon as this week to the $755 million in securities it has sold in June as the cost of insuring the state's debt against default reached a record high.

The cost of an Illinois credit-default swap has more than doubled since April 5 to a record high last week of 360 basis points, or $360,000 to protect $10 million of debt, according to CMA DataVision.

The state paid a premium of 79 basis points on 10-year general obligation debt over top-rated tax-exempts June 25, or 4 basis points more than at the start of the month. A basis point is 0.01 percentage point.

Some of the spread can be attributed to the state's sale of $2 billion in debt in three months, said Mike Pietronico, who oversees $275 million in municipal holdings as chief executive officer of New York-based Miller Tabak Asset Management.

"There's some saturation of the name and that's costing them in terms of pricing," Pietronico said. "Once they move past this borrowing binge, the bonds will begin to perform better."

Illinois's debt is rated fifth-highest by Moody's Investors Service, at A1, and by Standard & Poor's, at A+. The state's obligations are the most expensive municipal debt to insure, at 14 basis points above California, the largest U.S. borrower.

Municipalities and states are scheduled to sell $6.3 billion this week, with taxable Build America securities comprising $1.8 billion of the issues, according to data compiled by Bloomberg.

Yield Spread Widens

The yield spread between the average Build America Bond and the 30-year U.S. Treasury widened 46 basis points this month to 193 basis points on June 25, according to Bloomberg data.

"Look for some stabilization" in the pricing this week, according to Pietronico, who said the state's spreads have widened so much that the deal will bring in "value buyers."

"It's still a state GO and the appealing yields will bring in demand," he said, referring to the general-obligation debt.

Illinois lawmakers went home May 27 without resolving the state's $13 billion deficit in the budget for the fiscal year that begins this week. The $900 million sale would bring the state's outstanding general obligation debt to $26.9 billion, according to Fitch Ratings.

Proceeds of the offering will fund transportation projects, preliminary documents show.

Rating Cut

The state's fiscal troubles led to a one-level rating cut last week of the Illinois Regional Transportation Authority, the second-largest public transportation system in the U.S., by both Fitch and Moody's.

Illinois sold $300 million of Build America Bonds on June 17 in a competitive offering won by Citigroup Inc. The securities mature serially from 2011 through 2021 and in 2025 and 2035. Five-year debt priced to yield 4.5 percent, 250 basis points more than a similar maturity government security. The notes traded June 25 at an average yield of 4.52 percent, a spread of 260 basis points, according to Municipal Securities Rulemaking Board data.

Debt from the sale maturing in 2035 yielded 7.1 percent, 297 basis points over a 30-year Treasury. On June 25 the security traded at an average yield of 6.99 percent, 293 basis points higher.

Peoria, Illinois-based Caterpillar Inc., which is rated on par with Illinois by Fitch and one level below by Moody's and S&P, offered yields of 5.35 percent on June 24 for debt maturing in 2038. The world's largest maker of construction equipment paid 145 basis points below Illinois's higher-rated and shorter-term notes.

Kelly Kraft, a spokeswoman for Governor Pat Quinn, didn't return calls seeking comment on the coming sale.

Corporate Debt

Corporate debt has outperformed Build America Bonds this month, returning 2.57 percent for longer-term AA rated notes through June 24, compared with 0.44 percent for the federally subsidized securities, according to Bank of America Merrill Lynch indexes. Tax-exempts had a loss of 0.34 percent.

Following are descriptions of pending sales of municipal debt in the U.S.:

LOS ANGELES COMMUNITY COLLEGE DISTRICT, the nation's largest two-year system, with about 141,000 students, is scheduled to offer $125 million in taxable bonds tomorrow. The district, rated second highest at Aa1 by Moody's, had planned to sell as much as $1.2 billion in bonds two weeks ago. Citigroup will lead marketing of the securities, which will be used for improvements on the district's nine campuses, including a green- technology student union at Los Angeles City College and a performing-arts center at Los Angeles Valley College. (Added June 28.)

METROPOLITAN TRANSPORTATION AUTHORITY, the New York transit agency that is the largest in the U.S., with an average of 8.5 million weekday riders, plans to sell $600 million of debt, including $555 million in taxable Build America Bonds, on June 30. The securities, rated AA by S&P, the third-highest, will be marketed by a group led by Barclays Plc. (Added June 28.)

MASSACHUSETTS WATER POLLUTION ABATEMENT TRUST, a state agency that provides low-cost loans for local water projects, will sell about $498 million of top-rated municipal bonds tomorrow to refinance debt and fund water-treatment and drinking-water projects. The bulk of the sale will be $330 million of federally subsidized Build Americas. Underwriters led by Goldman Sachs Group Inc. will market the issue. (Updated June 28)

NEW YORK LIBERTY DEVELOPMENT CORP., a state arm created to finance loans for lower Manhattan construction, will sell $650 million in tax-exempt municipal bonds June 30 to refinance debt from the Bank of America Tower project at One Bryant Park. Bank of America Merrill Lynch and JPMorgan Chase & Co. will underwrite the securities, which are top-rated by Fitch and Moody's. (Updated June 28)

--With assistance from Justin Doom in New York.
Editors: Pete Young, Walid el-Gabry

To contact the reporters on this story:
Allison Bennett in New York at +1-212-617-6892 or abennett23@bloomberg.net and Brendan A. McGrail in New York at +1-212-617-6818 or bmcgrail@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net.

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Yields Narrowly Mixed Amid Shifts in Tone

Friday, June 25, 2010
By Michael Scarchilli
The Bond Buyer

The Bond Buyer's weekly yield indexes were narrowly mixed this week as municipals remained unchanged through much of the week, with the tone shifting from negative to positive.

"For the week, underperformance versus Treasuries was the big story," said Michael Pietronico, chief executive officer of Miller Tabak Asset Management.

"Munis have certainly lagged the drop in interest rates on the taxable side. But the bright side is there seems to be some money coming into the market with the recognition that the Fed would be on hold for a lot longer than perhaps what many thought."

"It seems that July will be a lot more fruitful than June has been," he continued.

"Selling pressure on the tax-exempt side will be very minimal. The end of the quarter will be upon us and certainly there is a lot of money around after July."

The Bond Buyer 20-bond index of 20-year general obligation bond yields was unchanged this week at 4.40%, the highest for the index since April 15, when it was 4.43%.

The 11-bond index of higher-grade 20-year GO yields rose two basis points this week to 4.14%, which is its highest level since April 15, when it was also 4.14%.

The revenue bond index, which measures 30-year revenue bond yields, declined one basis point this week to 4.85%, but it remained above its 4.82% level from two weeks ago.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, also declined one basis point this week to 0.56%, but remained above its 0.52% level from two weeks ago.

The yield on the 10-year Treasury note declined seven basis points this week to 3.13%, which is its lowest level since May 14, 2009, when it was 3.11%.

The yield on the 30-year Treasury bond declined four basis points this week to 4.09%, which is its lowest level since Oct. 8, 2009, when it was 4.08%.

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, increased three basis points this week to 5.18%.

This is the highest weekly average for the yield to maturity since the week ended April 15, when it was 5.20%.

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Bond Insurer Stocks Get Pummeled

Monday, June 14, 2010
By Patrick McGee
The Bond Buyer

It's been a rough few weeks for the stock market and an even worse period for the stocks of municipal bond insurers.

Since April 23, Assured Guaranty Ltd., the only guarantor continuing to underwrite new issues, lost 40.7%, or $10.03, of its stock market value.

Last week it dipped as low as $12.68, its lowest price since last July. It closed Friday at $14.59.

MBIA Inc. — which hasn't written new insurance since 2008 but maintains the largest municipal bond portfolio in the industry — shed 42.5% since over the same period.

Share value over that time fell $4.45 to $6.03 Friday from $10.48.

Ambac Financial Group Ltd., once the second-largest insurer but more recently a potential case for bankruptcy, fell 64.8% from April 23. That knocked its share price down $1.27 $0.69 Friday from $1.96. It is 31 cents below the minimum level required to be on the New York Stock Exchange.

Over those same seven weeks, the benchmark S&P 500 fell 10.3%.

Despite the recent performance, Daniel Kim, an analyst at JPMorgan, has a long-term price target for Assured of $40 per share — about 2.7 times its current value — making its current price a bargain.

On May 20, Kim issued a report giving Assured an overweight rating for the next six to 12 months.

Assured also sees its current market value as underpriced.

In late May, it repurchased more than 700,000 shares at $14.74 apiece, completing a two-million share buyback program authorized by its board of directors in November 2007.

Additionally on June 4, Assured submitted 14 filings to the Securities and Exchange Commission indicating that different directors had purchased company stock.

Kim called the actions "notable."

"That management used up its entire remaining buyback authorization in such a short period makes this a notable event, signaling [management's] frustration over the recent sell-off," he said.

"Given the strong capital position that AGO is in currently, we expect further repurchase authorization to be granted by the board in the near future in order to give AGO the ability to take advantage of market opportunities and provide a deterrent to short sellers."

A Shift in Perception

However, to understand the recent sell-off in insurer stocks, Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York, said one has to comprehend the broader shift in perception among municipal bond investors resulting from the financial crisis.

Prior to the crisis, nine insurers led by MBIA and Ambac backed more than half of all primary market municipal issuance. Ultimately, most of the monolines collapsed and were downgraded due to their exposure to billions of dollars of toxic assets they insured.

The lone survivor, Assured Guaranty, backed 8.7% of total municipal market issuance last year, and 6.4% of volume to date in 2010, according to Thomson Reuters.

None of the municipal debt backed by Assured, MBIA, or Ambac has so far gone unpaid. But Pietronico said the value of insurance has still been compromised in the eyes of investors.

"It's not so much about failing to pay on defaulted bonds," he said. "It's the fact that their business model did not hold up when it was needed the most. The test of the value of insurance was basically the financial crisis, and from many investors' point of view, the insurers failed."

Pietronico added that the re-emergence of the industry seems unlikely because investors are now more concerned with "the underlying credit quality of the bonds, because that will ultimately drive the price of the bonds and performance of the bonds."

The more recent decline in shareholder value coincides with the latest slew of headlines and stories shining a harsh light on the muni market.

Fortune Magazine, which in February 2008 said it was "a perfect time to be buying municipal bonds," more recently compared U.S. states to the debt-ridden countries in Europe and in mid-March concluded that "astute investors have already begun selling municipal bonds."

Warren Buffett, speaking before the Financial Crisis Inquiry Commission earlier this month, suggested that if there is no federal guarantee behind municipal debt, current ratings will one day look "crazy" in retrospect.

"I don't think Moody's [Investors Service] or Standard & Poor's or I can come up with anything terribly insightful about the question of state and municipal finance five or 10 years from now," he said, "except for the fact there will be a terrible problem and then the question becomes: will the federal government help?"

Such negative commentary seemed to spook stock market investors.

Additional bad news for bond insurers came as a result of what has been good news for many other market participants.

In April, Moody's and Fitch Ratings each recalibrated their municipal ratings to a global scale, causing thousands of bonds to receive de facto upgrades of one or two notches. Some bonds rallied significantly after the ratings shift.

Justin Hoogendoorn, managing director at BMO Capital Markets, called the recalibration "the largest, by far, ratings revision in 35-40 years of ratings history."

He said the new scales' immediate impact was to broaden the market's buyer base, providing additional liquidity and marketability to bonds, something that bond insurance had historically done.

Among municipal issuers that have traded higher is California. The state's 10-year tax-exempt debt tightened by 34 basis points over a several week period following the recalibration, dropping to 102 basis points from 136 basis points above triple-A Municipal Market Data levels, Hoogendoorn noted.

Business Model Questioned

Lower borrowing costs, more liquidity, and better marketability are all selling points for what you can achieve using bond insurance. With recalibrations helping on all three fronts, the business model of insuring bonds — which involves "renting" the guarantor's higher rating — comes into question.

"It's still a bit early to tell — it's only been since the end of April," Nick Krzemienski, vice president at Capital Markets Advisors LLC, who formerly was a managing director at MBIA, said of the recalibrations. "You're not going to know the macro effect of it, but you've got to realize hundreds of credits got bumped up, in many respects into the double-A bucket."

Moody's, which has a negative outlook on the bond insurance industry as a whole, has graded 54.7% of new issuance this year double-A or higher.

The double-A category is of crucial importance because Assured Guaranty, which is rated AAA by Standard & Poor's, has a Aa3 rating from Moody's. As more credits are rated on par with the insurer, there's less incentive to pay for credit enhancement.

In 2006, when bond insurers were thriving, the spread between natural triple-A rated general obligation bonds and insured bonds ranged between 11 and 15 basis points, according to MMD, meaning that buying insurance resulted in yields very near the natural triple-A.

Over the last six months, the spread between natural triple-A bond yields and insured yields has been between 57 and 81 basis points.

The wider spread means issuers aren't saving as much by wrapping their debt with insurance.

"Overall, it's not making any tangible difference in the borrowing costs, which effectively is keeping [the insurers] locked out of the market," Pietronico said.

Meanwhile, to increase business volume, one tactic the insurers could adopt would be to diversify further into lower-graded credits where there is a greater need for bond insurance. However, doing so would increase the risk of their portfolios.

As Moody's wrote in November 2008, "the preservation of a low-risk business profile" is a core objective of the insurers.

The agency also said the high ratings historically given to insurers was based on their portfolios being diversified investment-grade credits with low volatility.

However, in an interview on Friday, Moody's analysts said insurers don't necessarily have to go down the credit spectrum in order to increase market share. They agreed that the pool of potential buyers for insurance has diminished compared to before the crisis, but said plenty of smaller, high-grade credits could still benefit from the enhancement.

"There are sectors of the muni market — smaller and higher-risk municipal issuers — that are finding it difficult to raise debt at prices that they like to raise debt, without the wrap," said Stanislas Rouyer, senior vice president and team leader of Moody's specialty insurance team.

Moreover, Arlene Isaacs-Lowe, another senior vice president on the Moody's team, pointed out that even though the savings resulting from wrapping bonds with insurance has gone down, insurance has other lasting value.

"There is value to the product in providing liquidity and due diligence, and loss mitigation efforts, for perhaps some of the smaller credits where it's tougher for them to come to the market because of their size, albeit they have to have a relatively high rating or credit profile," she said.

Isaacs-Lowe said negative headlines about the municipal market could be hurting the insurers now, but increased strain could eventually have the effect of validating the need for the product, particularly as insurers work on behalf of investors to make sure they get full and timely payments.

"Once there is some clarity around any differentials between the losses on wrapped transactions and comparable losses on unwrapped transactions," she said, "there could be an additional story there in regards to greater validation of the loss-mitigation value."

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Households Bust $1 Trillion Muni Mark
Ownership Rises in First Quarter

Friday, June 11, 2010
By Christine Albano
The Bond Buyer

Household ownership of municipal bonds catapulted over the $1 trillion mark for the first time ever in the first quarter of 2010. Meanwhile, foreign investors seeking a greater footprint in the municipal market via taxable Build America Bonds held $71.9 billion in their largest-ever presence in the market, according to new Federal Reserve data released yesterday.

Click to see chart

Households held $1.02 trillion — roughly 35% — of the $2.834 trillion in outstanding municipal debt through the end of the quarter that ended March 31. Although households only increased their assets by 2.1%, or $21.3 billion, from $998.9 billion they held at the end of the fourth quarter of 2009, the latest milestone pushed the sector closer to doubling the $531.2 billion it owned in 2000.

Foreign buyers — enticed by the abundance of high-yielding taxable BABs — increased their holdings 18.8% to $71.9 billion from $60.6 billion in the fourth quarter of 2009. It was a jump of 79.9% — or $31.9 billion — compared to their holdings at the end of the first quarter of 2009 and nearly 10 times the amount of muni debt they held in 2000, well before Congress created BABs as part of the American Recovery and Reinvestment Act in 2009.

"We are not surprised by the greater foreign participation in the municipal market as the Build America Bond program continues to find institutional demand from overseas investors looking for additional yield without substantial amounts of credit risk," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management in New York City.

"The trend continues to be positive overall for investor participation to broaden out globally for BABs" going forward, he said.

Pietronico was less enthusiastic, however, about the household sector's holdings rising to more than $1 trillion.

"Cash-alternative yields are so small that this could be a temporary thrust higher subject to a massive reversal should interest rates spike higher," he said.

Still, households have been the largest owners of municipal debt for at least the last 10 consecutive years — steadily increasing their assets year after year.

Broker-dealers and exchange-traded funds also had noticeable increases in their holdings of municipal debt in the quarter, rising by 13.9% and 11.1%, respectively, when compared to the fourth quarter.

With $40.3 billion in holdings, broker-dealers grew their ownership by $4.9 billion from $35.4 billion they held in the previous quarter.

ETFs, meanwhile, captured $6.5 billion of muni assets, up from $5.9 billion in the prior quarter, but a substantial rise of more than double its $3.1 billion held in the first quarter of 2009.

Muni ETFs first appear in the data in 2007, with holdings of $700 million.

Mutual funds and money market funds continued to hold their position as two of the largest categories to own munis, besides households and property and casualty insurance companies.

Money funds slid 8.1% over the quarter due to paltry yields that sparked massive outflows among investors looking for higher-yielding alternatives.

By comparison, mutual funds, driven by steady inflow activity, owned $500.7 billion — up $20.5 billion or 4.3% from the $480.2 billion they held in the fourth quarter of 2009.

Money market fund ownership fell $32.6 billion to $368.7 billion from $401.3 billion in the final quarter of 2009, in line with the 114% drop in holdings from $482.7 billion in the first quarter of 2009.

Property and casualty companies, meanwhile, ended the quarter owning $372.8 billion — $3.4 billion, or 0.9% more — than the $369.4 billion they held at the end of 2009.

The modest increases compare to a decline of 0.8%, or $2.9 billion, compared to $375.7 billion the insurance companies held in the first quarter of 2009.

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Tax-Free Munis Firm After Disappointing Jobs Data

Friday, June 4, 2010
Dow Jones Market Talk

1410 GMT [Dow Jones] Tax-free munis firming alongside Tsys, though not to the same degree, after a disappointing key U.S. monthly jobs report and worries about the eurozone sovereign-debt crisis resurface amid concerns about Hungary's economy. Prices up 1-2 BP in the intermediate part of the curve, says Deutsche Bank Wealth Management's Gary Pollack. "We could see substantial gains in the 'belly' of the curve due to professional managers extending duration as a longer wait for a tightening of monetary policy by the Federal Reserve is now more apparent to many participants," Miller Tabak CEO Michael Pietronico says.

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Yields Trend Down, Lagging Treasury Losses

Friday, May 28, 2010
By Michael Scarchilli
The Bond Buyer

The Bond Buyer's weekly yield indexes were narrowly mixed this week, lagging Treasury market losses.

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said the "factors that seemed to be most overriding to the markets this week are the low supply and the perception that risk is moving higher in the market."

"I would not say any one deal influenced the market, but it seems the market is trying to find the balance between demand and supply," Pietronico said. "Yields are down, right now probably retail is less interested, but nonetheless there is a fair amount of cash as we move into a stronger technical part of the year."

"The muni market is slowly lagging the Treasury market in both directions," he said. "It looks like a low supply, low liquidity type of affair, as more and more investors take their vacations and people move to the sidelines. There's somewhat of a positive backdrop because of low supply, but the liquidity should be challenged also."

The Bond Buyer 20-bond index of 20-year general obligation bond yields rose one basis point this week to 4.28%, below its 4.32% level from two weeks ago. The 11-bond index of higher-grade 20-year GO yields was unchanged this week at 4.00%.

The revenue bond index, which measures 30-year revenue bond yields, declined two basis points this week to 4.84%. That is the lowest the index has been since Oct. 8, 2009, when it was 4.69%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, rose two basis points this week to 0.51%, but remained below its 0.52% level from two weeks ago.

The yield on the 10-year Treasury note gained nine basis points to 3.35%, but it is still below its 3.55% level from two weeks ago.

The yield on the 30-year Treasury bond increased 11 basis points this week to 4.25%, but it remains below its 4.45% level from two weeks ago.

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 5.06%, down three basis points from last week.

Priti Patnaik contributed to this column.

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Arizona Sells $449 Million in Lottery Bonds to Close Deficit

Tuesday, May 25, 2010
By Catarina Saraiva and Allison Bennett
of Bloomberg

May 25 (Bloomberg) -- Arizona, which last week won popular backing for its first tax increase in 10 years, is selling $449.3 million in lottery revenue bonds to help close a budget deficit that last year led to credit rating downgrades.

Arizona's sale today comes six months after Moody's Investors Service and Standard & Poor's lowered the state's debt rating by one level, citing the inability to rein in its fiscal deficit. S&P changed its ranking to AA-, the fourth highest level, and Moody's lowered to one level lower, A1, before recalibrating it higher to Aa2. The lottery bonds are rated AA- by S&P and A1 by Moody's.

Lawmakers are trying to close a $2.6 billion budget gap for the fiscal year that begins July 1, according to the state's Joint Legislative Budget Committee. Proceeds from the issue of tax-exempt bonds backed by lottery revenue will go to the general fund to provide "budgetary relief," Moody's said. "Considering the state of affairs in Arizona, this deal probably needs to come quite cheap to clear the market," said Michael Pietronico, chief executive officer of New York-based Miller Tabak Asset Management. While "absolute yields are low, there's going to be demand for the loan just because there's so little tax-exempt paper out there."

The total dollar volume of municipal debt scheduled to come to market in the next 30 days fell 31 percent last week to about $9 billion, the lowest since April 29, according to Bond Buyer 30 Day Visible Supply.

Flight to Safety

Investors are concerned that European leaders may fail to contain the continent's fiscal crisis and are turning to the perceived safety of U.S. assets. Top-rated 10-year tax-exempt yields held at 3.11 percent yesterday, the lowest since March 24. Yields on comparable taxable debt fell 1 basis point from May 21 to 4.51 percent yesterday, the lowest since December, according to Bloomberg Fair Market Value data.

U.S. Treasury yields on 10-year debt traded near the lowest level in 12 months, touching 3.16 percent, according to BGCanter Market Data. It touched 3.1 percent May 21, the lowest since May 2009.

The low yield on Treasuries "leaves an investor with cash with very few options, therefore municipal yields tend to grind lower because the demand has picked up," Pietronico said.

Arizona's offering is the week's fifth-biggest as states and municipalities bring $7.7 billion to market. The securities will mature serially from 2013 through 2029.

The state's lottery generated more than $7 billion in ticket sales since its inception in 1981 as of June 2009, according to the website.

Sales-Tax Approved

Voters last week passed a tax increase for the first time in 10 years, adopting a temporary one-cent sales-tax boost aimed at raising as much as $1 billion a year to reduce the budget gap. The vote for the passage will raise the state's portion of sales taxes to 6.6 percent, from 5.6 percent, for three years.

The state's lottery bonds may provide fiscal relief, but they're not a permanent solution, said Treasurer Dean Martin. Lawmakers should make structural changes instead of "one-time" cash infusions, he said in a telephone interview from Phoenix. "It would be better to find a permanent solution, reduce spending by $400 million rather than doing the sale," Martin said. "We're still going to have a problem next year, you can't sell the lottery twice."

Martin is running for governor in Arizona's Republican primary elections.

Lottery Extended

Arizona's lottery, extended this year by its Legislature, generated revenue from ticket sales of $484.5 million in fiscal 2009, a 2.5 percent increase from the prior period, according to the agency. Sales have grown 4.8 percent on average from 1995 through 2009, Moody's said, which has a negative outlook on the state.

The lottery is projected to generate about $166 million in pledged revenue in fiscal 2013, providing coverage of more than four times maximum annual debt service of $40.4 million, Moody's said.

The Arizona Department of Administration, which is issuing the bonds, did not return phone calls yesterday.

Following are descriptions of pending sales of municipal debt in the U.S.:

SAN FRANCISCO, whose population has grown 12 percent in the past 20 years according the U.S. Census Bureau, plans to offer $240.7 million in wastewater revenue bonds through the public utilities commission in a competitive deal tomorrow. The issue will be separated into $192.4 million of Build America Bonds and $48.3 million in tax-exempts. Proceeds will go toward a sewer-system improvement program and refunding notes previously issued for those capital improvements. The securities are rated the fourth-highest level, at Aa3 by Moody's and AA- by S&P. (Added May 25)

MONTGOMERY COUNTY, the home of Bryn Mawr College outside Philadelphia, plans to sell $313.8 million in tax-exempt mortgage revenue bonds through its Industrial Development Authority as soon as next week. Income from the sale will finance the building of a hospital on a former golf course. The securities, market by Goldman Sachs Group Inc., will mature serially from 2013 through 2020 and in 2025, 2030 and 2038. (Updated May 25)

MOUNT SINAI HOSPITAL, ranked 19th best medical center in the U.S. for 2010 by U.S. News and World Report, plans to offer $336.8 million in tax-exempts as soon as this week through the New York Dormitory Authority. The debt will be backed by a dedicated stream of hospital revenue with proceeds going to refunding outstanding debt from 2000. The securities, with the bulk maturing in 2026, are rated the sixth-highest level by Moody's and Fitch at A2 and A respectively. (Added May 24)

--With assistance from Michael Marois in Sacramento, Christopher Palmeri in Los Angeles and William Selway in San Francisco.
Editors: Walid el-Gabry, Ted Bunker

To contact the reporter on this story:
Allison Bennett in New York at +1-212-617-6892 or abennett23@bloomberg.net and Catarina Saraiva in New York at +1-212-617-5067 or asaraiva5@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net.

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Northeast Leads a Big Week
Primary Market May See $8.31B

Monday, May 17, 2010
By Christine Albano
The Bond Buyer

Issuers from the Northeast will take the spotlight as the New York City Transitional Finance Authority and Pennsylvania each plan to sell at least $1 billion this week in the heaviest calendar of municipal bond deals in more than a month.

Those offerings and three other debt sales for transportation and utility projects will be in the forefront as the primary market prepares for an estimated $8.31 billion in new volume this week, according to Ipreo LLC and The Bond Buyer.

The TFA plans to sell $1.14 billion of future tax-secured bonds tomorrow after a retail order period today by senior book-runner Bank of America Merrill Lynch. Structured as seven series — including taxable Build America Bonds and tax-exempt subordinate debt — the deal is rated Aa1 by Moody's Investors Service, AAA by Standard & Poor's and AA-plus by Fitch Ratings.

The structure includes $400 million of refunding bonds — $20 million of which will be bid competitively tomorrow — $342 million of taxable BABs, $250 million of additional BABs that will be the authority's first-ever qualified school construction bond debt, $70 million of traditional taxable municipal bonds that will also be bid competitively tomorrow, and $78 million of taxable BABs to be sold to the New York State Division of Lottery.

The competitive deals will range in maturity from 2011 to 2015, but the exact maturities for the other portions of the deal were still being finalized at press time Friday.

The week's slate should attract a fair amount of attention from both retail and institutional investors looking for value and opportunity as the market approaches spring rollover season, according to Michael Pietronico, president of Miller Tabak Asset Management in New York.

In addition, muni mutual funds, where inflows had slowed from their torrid 2009 pace earlier in the year, continue to garner new money — more than $1.1 billion in the last four weeks.

"The recent volatility in the equity market perhaps adds a more positive backdrop for demand," he said. "With European sovereign debt experiencing some downside pressure, large institutional investors may have a greater appetite for high-quality Build America issuers."

"We expect the New York TFA deal to see the best retail response as the float of sizeable, quality New York paper in the secondary market has been thin," Pietronico added.

Pennsylvania's two-pronged, competitive sale of general obligation bonds is scheduled for Wednesday. The larger of the two series will consist of $548.9 million of taxable GOs structured to mature from 2022 to 2030, and the $451.1 million series consists of tax-exempt GOs maturing from 2011 to 2021.

The state's GOs are rated Aa1 by Moody's, AA by Standard & Poor's AA-plus by Fitch.

Elsewhere in the region, the Massachusetts Department of Transportation and the Metropolitan Washington Airports Authority are gearing up to issue sizable deals.

The $650 million MWAA Dulles Toll Road revenue bond sale, originally planned for last week remains on week-to-week status, according to authority officials. They postponed the deal's pricing due to turbulence stemming from the European debt crisis.

Book-runners Morgan Stanley and Citi were planning to price the deal Wednesday, but MWAA chief financial officer Andrew T. Rountree last week said he was waiting for a "sense of normalcy" before issuing the bonds.

The Washington airport deal was one of the few that were affected by the aftermath of a May 6 monetary policy meeting by the European Central Bank, which triggered a two basis-point gain in municipals, and is considered one of the factors that led to a nearly 1,000-point decline, or 9.2% drop, in the Dow Jones industrial average.

"The benefit we have is we can be very flexible," Rountree said in an interview last week. He added that the timing of the deal "is not absolutely critical to us. We have the luxury to wait a bit until markets settle." Proceeds from the issue will finance an extension of the Metro rail system to Dulles and capital improvement projects.

The Massachusetts transportation deal will bring $893 million of Series 2010B metropolitan highway system senior revenue bonds to market structured as serial bonds maturing from 2011 to 2027. The issue also includes a term bond in 2032 that is subject to a mandatory sinking fund beginning in 2030, and a 2037 term that is subject to a mandatory sinking fund beginning in 2033.

The bonds, which are slated to be priced tomorrow by Citi after a retail order period today, are expected to be rated A3 by Moody's, A by Standard & Poor's and A-plus by Fitch.

The New York State Dormitory Authority will round out the region's activity with its sale of $341 million of revenue debt slated to be priced by Roosevelt & Cross on Wednesday with a structure that includes four series of bonds ranging in maturity from 2011 to 2040. The precise details were still being hammered out at press time.

Elsewhere, a $680.4 million sale of taxable BABs and tax-exempt refunding bonds from the Los Angeles Department of Water and Power and a $318.4 million sale of revenue bonds from the Puerto Rico Electric Power Authority will add to the new-issue activity.

The LADWP deal is expected to be priced by Morgan Stanley on Thursday, though details about the structure were unavailable late Friday.

The triple-tax-exempt Puerto Rico deal is planned for pricing on Wednesday by JPMorgan following a retail order period set for tomorrow. The bonds, which are structured to mature from 2021 to 2028, are expected to carry ratings of A3 from Moody's and BBB-plus from Standard & Poor's and Fitch.

Switching gears to the Southeast, the East Baton Rouge Sewerage Commission plans to sell a total of $375.3 million of debt in a two-pronged offering being senior-managed and priced by JPMorgan on Thursday.

The deal, which is secured by the net revenues of the system, consists of $359.8 million of taxable, direct-pay revenue BABs structured to mature serially from 2015 to 2025 with term bonds in 2030 and 2045, as well as $15.5 million of tax-exempt revenue debt structured as serials from 2011 to 2014. Both series are expected to be rated Aa2 by Moody's, AA-minus by Standard & Poor's and AA by Fitch.

Elsewhere in the region, the North Carolina Municipal Power Agency #1 will bring $145 million of Catawba nuclear project electric revenue refunding bonds to market in a two-pronged deal slated for pricing led by Morgan Stanley on Wednesday.

The bonds, which are rated A2 by Moody's and A by Standard & Poor's and Fitch, are structured as $74.6 million of Series 2010A bonds maturing from 2014 to 2021 and $70.4 million of Series 2010B bonds maturing in 2020 and 2021. Both will refund outstanding Catawba debt and are secured by a first lien on net revenues of the agency.

Among the other deals planned for this week is a $250 million sale of project revenue bonds from Ohio for a major new state infrastructure project. They are being priced by senior-manager Bank of America Merrill tomorrow.

The deal, rated Aa1 by Moody's, AA by Standard & Poor's, and AA-minus by Fitch, will consist of $97.7 million of tax-exempt bonds in Series 2010-1 maturing from 2011 to 2015 and $117.2 million of taxable debt in Series 2010-2 maturing from 2016 to 2021, according to the preliminary official statement. Individual investors will get first crack at the tax-exempt bonds today during a retail order period before tomorrow's official pricing.

This week's upcoming calendar is estimated to include $1 billion more bonds than last week, when a revised $7.15 billion in new volume was priced, according to Thomson Reuters. Although the market was still mulling the European debt mess, many deals came to market as planned.

Seattle, for instance, brought the largest deal of the week Thursday on behalf of Washington Municipal Light and Power. Its $791.7 million sale of improvement and refunding revenue bonds was priced by Citi with a multifaceted structure that included $181.6 million of BABs, $596.9 million of taxexempts, and $13.3 million of recovery zone economic development bonds.

The longest maturity in the BAB series was 2040 priced to yield 5.57% at a time when the generic triple-A GO scale in 2040 was 3.99% and the benchmark 30-year Treasury bond was 4.19%, according to Municipal Market Data. The bonds are rated Aa2 by Moody's and AA-minus by Standard & Poor's.

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Louisiana warns of over-reaction to Gulf spill

Wednesday, May 12, 2010
By Edith Honan
Reuters

NEW YORK (Reuters) - Any effort to limit off-shore drilling in the wake of the massive Gulf of Mexico oil spill would be a "gross over-reaction" that would further batter the Louisiana economy, the state's treasurer said on Friday.

"I think that it would be a gross over-reaction to stop drilling," State Treasurer John Kennedy told Reuters. "Do we need to learn from our mistakes? Certainly we do."

Off-shore drilling drives nearly a third, or $65 billion, of the state's economy in direct and indirect revenue, Kennedy said.

At least 5,000 barrels (210,000 gallons/795,000 liters) of crude per day continue to gush out of an underwater well that ruptured on April 20 when a British Petroleum-leased oil rig exploded and sank.

Kennedy said it is still too early to assess the total impact of the disaster on the state's economy, but he said tourism and commercial fishing -- which together account for about five percent of the state's revenue -- have taken a hit.

The state has closed less than ten percent of its water to fishing as a precaution and Kennedy said there had been no reports of contaminated seafood.

Commercial fishing in Louisiana supplies about a quarter of all seafood produced in the continental United States, according to a report on the Louisiana economy by New York-based Miller Tabak Asset Management.

The state is also the leading producer of shrimp, the report said.

Kennedy said there was no evidence the spill had impacted traffic at the state's ports. Louisiana has five of the largest ports in the United States.

In a separate interview on Tuesday with Reuters Insider, Kennedy said the spill did not appear to be nearly as devastating for the state as Hurricane Katrina was in 2005.

"It will not help our overall state revenues for the current fiscal year," Kennedy said of the spill.

Kennedy said he did not expect the spill to impact Louisiana's credit rating and he said the state was currently considering litigating to recoup its losses from the spill.

"We expect to be compensated to the full extent of our loss and that will be discussed and litigated in the coming days," he said.

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Gulf States Ready and Worrying

Thursday, May 6, 2010
By Jim Watts and Shelly Sigo
The Bond Buyer

DALLAS — The massive oil spill in the Gulf of Mexico could devastate the economy and ecology of coastal regions in several states, but it is too early to know what the ultimate effects will be.

Federal, state and local officials from Texas to Florida are keeping an anxious eye on the oil gushing from almost a mile underwater since the Deepwater Horizon drilling rig exploded and sank about 40 miles off the Louisiana coast on the night of April 20.

British Petroleum officials told a congressional hearing on Tuesday that the oil could be escaping at a rate of up to 60,000 barrels a day.

Louisiana Treasurer John N. Kennedy said the state is working with BP, the owner of the well that blew out two weeks ago, federal agencies, and other states to limit the economic and environmental damage from the spreading oil.

"We're fighting a two-front war," Kennedy said. "There are efforts under way to prevent the oil from reaching land, and to stop the leaks. But nobody has a clear picture of how much oil is coming from those leaks."

Kennedy said he anticipated no credit issues from the oil spill, but wants to meet with the bond rating agencies as soon as the situation becomes clearer.

"We will have a conference call with the agencies sometime, but not within the next few days at least," he said.

Kennedy said the public perception of the situation could be as harmful as the oil.

"The state has shut down some fishing areas not because there is oil in them — there is not — but because we don't want the public to be concerned that the seafood is contaminated," he said.

Concern for the seafood and tourism industries is great in Florida, Mississippi and Alabama, where officials have declared states of emergency, as has Louisiana. All were waiting yesterday to see when the spill would make it to shore.

"Mother Nature has been a little bit kind to us over the last several days," Florida Department of Environmental Protection Secretary Michael Sole told state lawmakers in a conference call Tuesday. "But I will tell you Mother Nature is a fickle thing."

Lawmakers are concerned that some or all of the state's 1,197-mile-long shoreline ultimately could be impacted because of the loop current that flows from the Gulf around the state to the east coast.

"The magnitude of this can be significant," Sole said. "The bad news is we may be dealing with this another two to three months."

Analysts in their initial assessments have noted that BP, which recently reported a triple-digit increase in profits for the first quarter, has indicated it will pay cleanup costs.

BP has already provided $25 million grants to the states for their initial response and said it would "pay all necessary and appropriate cleanup costs" associated with the assessment, mitigation and cleanup of spilled oil; real and property damage caused by the oil; personal injuries, and commercial losses, including loss of earnings or profit.

But there are growing concerns about the long-term effect on local economies already suffering because of the recession and laws that could limit BP's liability for economic damages such as lost wages and tourism.

In response to reports that BP could face limited responsibility for covering economic costs beyond cleanup and containment, federal lawmakers have introduced legislation that would either require companies responsible for offshore oil spills to pay for the full cost of cleanup or raise the existing statutory cap on their liability to $10 billion from $75 million.

A report on the Louisiana economy by Miller Tabak Asset Management of New York said the economic impact across the affected Gulf Coast states could be "catastrophic," but cautioned that it's too early to speculate on harm to tourism and fishing industries.

Commercial fishing contributes $2.6 billion a year to the Louisiana economy, according to the Miller Tabak report. Louisiana accounts for 25% of seafood produced in the lower 48 states. The Louisiana shrimp industry, which totaled 89 million pounds in 2008 to lead the nation, depends on a number of variables, most of which are unknown at this point, the report said.

Louisiana Gov. Bobby Jindal said the spill could harm the state's economy and negate billions of dollars that have been spent to protect the fragile coastal ecosystem, but there is no way to tell how severe the damage will be at this point.

"Although we expect there to be an economic impact, it's too soon to quantify what it is," he said at a news conference on Monday. "It's way too early to know the full extent."

The governor said the state's response to the spill should not be an economic burden in the short term. Jindal said he does not expect to ask the Legislature for additional funds before the current fiscal year ends June 30.

The state agencies involved in the situation have sufficient funds to handle the short-term expenses, he said, and BP has pledged to reimburse the state and parishes for their efforts.

Jindal said the state has more than $150 million set aside for natural disaster relief, including $143.4 million in the emergency response fund, which is normally used for hurricane response expenses, and $3.6 million in the oil spill contingency fund.

The Louisiana Division of Administration said the oil company already has reimbursed the state's homeland security office for $1.1 million in expenses, with additional reimbursements expected soon.

Jindal said the state mobilized its coastal protection efforts because neither BP nor the U.S. Coast Guard had what the state considered to be adequate plans for preventing the oil from reaching environmentally sensitive and economically important wetlands and coastal areas.

"We have asked BP for their plans to address the oil leak many times over the last two weeks since this leak began, and it became clear that there was no detailed plan to address an incident on this scale," said Jindal, whose concerns have been noted by other governors in the affected states.

Stephen Moret, secretary of the Louisiana Department of Economic Development, is working with a team of economists and incident-management experts to assess the economic impact of the oil spill on the state.

Louisiana's annual gross product of $210 billion includes more than $10 billion from the seafood and tourism industries, Moret said.

"Economically, it is of great concern to us because it already has impacted one of our greatest industries, seafood and fisheries, and it's likely to impact another: tourism," Moret said at a news conference on Monday. "At this point we are very concerned."

At the same time, offshore oil drilling is a major contributor to the Louisiana economy. Louisiana is the leading oil-producing state and second in natural gas production, contributing close to $1 trillion to the U.S. economy.

Its coastal waters contain 3,200 of the roughly 3,700 offshore production platforms in the Gulf of Mexico. Platforms off the state's coasts account for 80% of the oil and 72% of the natural gas produced in the continental U.S.

A recent economic impact study by Dr. Loren Scott said that the total direct and indirect effect on the state is approximately $65 billion.

The direct impact comes from the taxes, royalties, fees, salaries, and other money spent in Louisiana by the oil and gas industry. The indirect impact results from the salaries and wages earned by oil and gas employees being spent in the state as well as oil field service companies.

The direct taxes and royalties paid by the industry to the state, along with fees and other taxes, account for approximately 13% of all the general fund revenues collected by the state. At one time the industry accounted for nearly 40% of all state general fund revenues.

A study by Applied Technology Research Inc. said the offshore industry has a direct impact of $3 billion on the state. The offshore industry annually pays more than $500 million in wages to people working in the Gulf of Mexico. Another $2.5 billion is spent with companies operating in Louisiana and doing business with the offshore industry.

The refining segment of the industry has an $8 billion impact on the state.

Greg Albrecht, chief economist at the Legislative Fiscal Office, said no reliable information on the spill's initial economic impact would be available for at least two months.

So far, there are no indications that issuers plan to delay sales or that the oil spill concerns analysts rating upcoming bond deals.

Alabama on Tuesday is planning to competitively sell $110 million of general obligation capital improvement bonds and $80.2 million of GO refunding bonds.

In rating Alabama's bonds AA-plus, a report by Fitch Ratings made no mention of the oil spill.

Florida Gov. Charlie Crist said it's not if but when oil reaches the shore and the initial impact in the form of sheen and tar balls could hit the state today. And one state senator has asked Crist to call a special session of the Legislature to address this "potential economic crisis and to make sure the attorney general has both the power and the tools to hold accountable the companies involved in the oil spill."

Attorneys general from the Gulf Coast states, including Texas, gathered on Sunday to discuss the "shared impacts to the Southeast and explore legal options," said Florida Attorney General Bill McCollum.

Texas will not participate in legal action against BP unless the oil reaches Texas waters, which seems unlikely, said Texas Attorney General Greg Abbott.

However, Abbott said the Gulf states attorneys general have formed the Gulf States Coalition to coordinate their response to the unfolding disaster.

"Our top focus," Abbott said, "is ensuring that BP makes good on its promise to fully compensate individuals, coastal businesses, and taxpayers for any expenses incurred during the cleanup effort."

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Market Drinks Up Water Bond - The Bond Buyer
Yield-Thirsty Investors Flock to California's $2 Billion Deal

Tuesday, May 4, 2010
By Stan Rosenberg
Dow Jones Newswires

A $2 billion bond sale by California's Department of Water Resources saw strong demand from individual investors looking for additional yield in a market starved for new deals.

By late afternoon, almost half the issue—$966 million—had been sold to retail investors. Backed by rates revenue and with solid credit ratings, the bonds are seen as safer than the state's general-obligation bonds.

"They're apples and oranges," said Miller Tabak Asset Management CEO Michael Pietronico.

The large size, which makes the securities easy to trade, and yields close to comparable Treasury securities, added to the offering's attraction.

The bonds will refinance portions of debt sold in 2001 and 2002 during California's energy crisis, when the water department borrowed to finance the purchase of electricity for hard-pressed publicly listed utilities.

The crisis, triggered by speculation that drove the cost of energy sky high, is perhaps best remembered for leading to the 2003 election to recall Democratic Gov. Gray Davis, who lost to current Republican Gov. Arnold Schwarzenegger. That made Mr. Davis the first governor recalled in California history and only the second in U.S. history. The first was Lynn Frazier of North Dakota in 1921.

The securities will be backed by ratepayer revenues and should achieve at least 3% savings on the fixed-rate debt, said Tom Dresslar, a spokesman for State Treasurer Bill Lockyer. Part of the funds raised will be used to terminate swap agreements on $1.6 billion of the debt.

The water department's power revenue bonds boast a Aa3 rating from Moody's Investors Service and AA-minus ratings from Standard & Poor's Corp. and Fitch Ratings. Those are the fourth highest of 10 investment-grade ratings.

The state's general obligations backed by a pledge of its full faith and credit as well as taxes, are lower on the scale, at A1 by Moody's, fifth on the scale, and A-minus by S&P and Fitch, seventh ranked. Still, despite the state's well-documented woes, California's tax-exempt and taxable offerings this year have attracted strong demand as confident investors reached for yield.

The water department's bonds come due between 2011 and 2022, with a 3.80% return for $50 million of 2022, 3.71% for $183.6 million of 2021 and 3.59% for $127.3 million of the key 2020, or 10-year, maturity. Morgan Stanley is lead bookrunner for the underwriters.

"That's a decent yield for a double-A bond, and is getting pretty close to a Treasury," said Dan Solender, director of municipal-bond management at Jersey City-based Lord Abbett. Ten-year Treasurys—the 3 5/8s of Feb. 15, 2020—at mid-afternoon Monday were returning 3.70% and 10-year triple-A municipals 2.94%.

A severe lack of supply in the tax-exempt sector in the past weeks has pushed prices up sharply. That dearth of bonds is likely another reason for the demand for the power bonds: at $2 billion, the issue is set to be the second largest this year behind the $2.5 billion sold by the state itself.

"You don't get $2 billion tax-exempt deals often, and demand has to do with the fact that you can get sizeable blocks," said Mr. Pietronico. "If you're a large mutual fund company and you need large blocks of bonds with some liquidity, here's a deal for you."

Write to Stan Rosenberg at stan.rosenberg@dowjones.com.

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Wake County Sells $383 Million as Treasuries Lose Greek Gains

Friday, April 30, 2010
By Catarina Saraiva and Brendan A. McGrail
of Bloomberg

April 30 (Bloomberg) -- Wake County, North Carolina, sold $383 million in the week's biggest deal yesterday after postponing the issue during the bond market turmoil caused by Europe's fiscal crisis.

Prices on 10-Year U.S. Treasuries rallied to the highest in a year on April 27, after Greece was downgraded by Standard & Poor's, pushing down yields as investors sought a safe haven. The next day, Wake County's scheduled date to come to market, they fell as investor confidence in higher-yielding assets returned. The lower prices created a more favorable market for the issuer, according to Michael Pietronico, chief executive officer of New York-based Miller Tabak Asset Management.

"That was the Greece effect, the Treasury market rallied," said Pietronico, who oversees $255 million in municipal bonds. "Then Treasuries gave back some of the gains and opened up a window."

Municipal refundings frequently involve using proceeds to purchase Treasuries, which are held in escrow until the refinancing can be completed, he said. Wake County, home to the state capital of Raleigh, would have purchased the government debt at a premium, and subsequently lost a portion of the proceeds had it not waited for Treasury prices to retreat, said Pietronico.

Bonds maturing in seven years from Wake County's sale, awarded the top rating by all three companies, were priced to yield 2.39 percent, 17 basis points below similar maturity, top- rated tax-exempts, according to a daily survey by Municipal Market Advisors. A basis point is 0.01 percentage point.

Refunding Bonds

The county sold about $169 million in refunding bonds last May. Seven-year notes from that sale were priced to yield 2.3 percent, 29 basis points below MMA at that time. They traded with the same yield April 8, according to the Municipal Securities Rulemaking Board.

The county's securities mature serially from 2013 through 2026 with yields ranging from 1.35 percent on four-year securities to 3.5 percent on 16-year bonds.

The Municipal Master Index from Bank of America Merrill Lynch, which tracks total return on tax-exempts, is headed for the weakest April since 2007, advancing 1.2 percent this month through April 28. The index returned 1.3 percent in 2008 and 2.5 percent last year.

Municipal debt issuance for the week reached $5 billion, the lowest amount since the five-day period ending April 9, according to data compiled by Bloomberg. States and municipalities sold $917 million in taxable debt, the least since the week ending Dec. 25. Total visible supply for the next 30 days fell to $9.9 billion yesterday from $10.5 billion midweek.

Following are descriptions of pending sales of municipal bonds in the U.S.:

CALIFORNIA DEPARTMENT OF WATER RESOURCES, which sold bonds to buy electricity for privately owned utilities when wholesale prices soared during the 2001-2002 power crisis, plans to sell $2 billion next week in tax-exempt revenue notes to refinance debt. The securities will mature serially from 2011 through 2022 and were assigned the fourth-highest investment grade by all three ratings companies. Morgan Stanley will lead underwriters marketing the notes. (Added April 28)

MICHIGAN STATE UNIVERSITY, which leads the Big Ten Conference in Rhodes Scholars with 16, will issue $229 million in tax-exempt revenue refunding bonds as early as next week. The debt is being sold in two portions, maturing serially from 2011 to 2025 and 2034 through 2044. Proceeds will go to terminating some swaps, retiring $117 million in notes and refinancing bonds. The university currently has 15 outstanding interest rate swaps, according to the preliminary offering document. Bank of America Merrill Lynch and JPMorgan Chase & Co. will market the securities rated Aa2 by Moody's and AA by S&P, the third-highest investment grades. (Added April 30)

METROPOLITAN WASHINGTON AIRPORT AUTHORITY, which operates Ronald Reagan Washington National and Washington Dulles International airports near the nation's capital, will offer $650 million in tax-exempt revenue bonds May 5. The securities are part of the $2.9 billion of notes the authority plans to issue to help fund an extension of the Washington Metropolitan Area Transit Authority's rail system, according to S&P. Citigroup Inc. will market them to investors. The debt is rated Baa1 by Moody's and BBB+ by S&P, the third-lowest investment grades. (Updated April 30)

MASSHOUSING, a state agency that uses bond-sale proceeds to provide mortgages for low- and moderate-income home buyers in Massachusetts, plans to sell $250 million in tax-exempt securities as soon as next week to refund variable-rate debt from 2003. Bank of America Merrill Lynch will lead a group of underwriters in marketing the issue to investors. The debt matures in December and June serially starting December 2010 through June 2021. MassHousing is rated A+ by S&P, fifth- highest. (Updated April 30)

NORTH TEXAS TOLLWAY AUTHORITY, which constructs, maintains and repairs turnpikes such as the Dallas North Tollway, plans to offer $400 million in tax-exempt revenue bonds as soon as next week. Proceeds of the sale will go toward funding the construction and development of 11.5 miles of State Highway 161 in Dallas County and other capital projects, according to the preliminary offering document. JPMorgan Chase & Co. will lead the group underwriting the securities, rated Baa3 by Moody's. (Added April 30)

To contact the reporters on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net; Catarina Saraiva in New York at asaraiva5@bloomberg.net.

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California DWR Pumping in $2B of Tax-Exempts

Friday, April 30, 2010
By Rich Saskal
The Bond Buyer

ALAMEDA, Calif. — The tight supply situation in the primary tax-exempt bond market will get a $2 billion boost from one issuer next week when the California Department of Water Resources prices power supply revenue bonds.

The deal will refund and restructure part of the debt portfolio created by the DWR's landmark $11.3 billion issuance of 2002 in the aftermath of the state's energy crisis.

Proceeds from the transaction, which prices Wednesday after a two-day retail order period, will be used to redeem outstanding variable-rate bonds, advance refund outstanding fixed-rate bonds, and pay associated swap termination payments, according to the preliminary official statement.

Morgan Stanley, De La Rosa & Co., and JPMorgan are running the books for a syndicate of 25 broker-dealers.

"It is an economic refunding," said Tom Dresslar, spokesman for the state treasurer's office. The deal will reduce interest rate risks, liquidity costs for variable-rate debt, and risks associated with interest rate swaps, he said.

The office is running its retail-targeted Buy California Bonds marketing campaign to promote the deal, with newspaper and radio ads.

"We do expect strong retail," Dresslar said, noting that the maturities, from 2011 to 2022, are well-suited to retail buyers.

As a refunding of outstanding debt, the deal has to come in tax-exempt form, something that has been harder to find as issuers take advantage of federal subsidies by selling taxable Build America Bonds in new-money deals.

That trend has reduced the tax-exempt supply, according to Alex Anderson, portfolio manager at Envision Capital Management in Los Angeles.

"That is why even though municipal finances have really struggled though the credit crisis and are struggling right now, yields are still low," he said.

It will be the third-largest tax-exempt deal of 2010, according to Thomson Reuters.

"The economic tone from California has been better of late, so there should be an increase in demand for California bonds," said Michael Pietronico, chief executive officer of Miller Tabak Asset Management.

"We suspect the deal will go very well, provided it's priced on a national basis," he said. "Our anticipation is that it should be one of the cheapest bonds on the market because of its size and should perform very well in the aftermarket."

The DWR deal comes with underlying double-A-minus ratings from all three ratings agencies, after Fitch Ratings upgraded the credit from A-plus Tuesday.

The credit exists as an outcome of California's failed attempt to deregulate electricity in the late 1990s. That effort led to rolling blackouts in 2000 and 2001 as the state's major investor-owned utilities, faced with caps on the prices they could charge their customers, could not pay skyrocketing wholesale electricity costs.

The state was forced to step in as the buyer of last resort, leading to the $11.3 billion power revenue bond deal to repay loans from private banks and the state general fund that were used to buy electricity.

The bonds are secured with surcharges on customers of the state's three major investor-owned utilities.

The DWR was forced to reevaluate its portfolio after the 2008 financial crisis, because of the collapse of the auction-rate market and the ensuing dislocations in the variable-rate note market as most bond insurers lost investment-grade ratings and the cost of liquidity soared.

In late 2008, a $350 million chunk of the DWR power revenue bonds became bank bonds for a period after the utility could not find buyers for a fixed-rate conversion deal. The deal eventually went ahead in early 2009.

Last year, the DWR sought and received state legislation that clarified its ability to continue to restructure its portfolio of variable-rate power revenue bonds.

In its rating report this week, Fitch noted that DWR's "proportionately large variable-rate debt exposure is a credit concern," but added that several factors mitigate the risk.

Among those factors was that the refunding deal will reduce gross variable-rate debt to about 38% of the DWR power bond portfolio from 52.9%.

However, "a credit concern for the near term is the significant, approximately $3.6 billion (declining to $2.2 billion after this refunding) in bank-provided letters of credit/liquidity facilities which will expire on Dec. 1, 2010," the rating agency said. "Fitch will be monitoring DWR's ability to renew and/or replace the remaining bank-provided support or conversely refinance the variable-rate debt with fixed-rate securities in the fall of this year."

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Yields Dip Amid Light Slate, Lazy Secondary

Friday, April 30, 2010
By Michael Scarchilli
The Bond Buyer

Nearly all of The Bond Buyer's weekly yield indexes declined this week amid a light new-issue calendar and somewhat lackadaisical interest in the secondary.

"The week seems to, in total, be running in place, in terms of overall yield levels," said Michael Pietronico, chief executive officer of Miller Tabak Asset Management. "There's generally a sense that credit spreads have been tightening."

"This market seems to need more supply," he said. "Specifically, it needs spread-product type supply. There hasn't been much interest, but there'd be better interest if there were more A-rated paper available."

The new-issue calendar was somewhat light this week. The largest deal priced was a $383.4 million competitive offering from Wake County, N.C. The issue was priced yesterday, just one day after it was postponed.

The offering, originally set for Wednesday, was postponed indefinitely on Tuesday after rating downgrades of Greece and Portugal caused a Treasury rally that eliminated potential savings. With Treasury yields drifting back to early-week levels on Wednesday, Wake County opted to enter the market yesterday.

The Bond Buyer 20-bond index of 20-year general obligation bond yields was unchanged this week at 4.37%. Last week the index reached its lowest level since March 18, when it was 4.32%.

The 11-bond index of higher-grade 20-year GO yields declined two basis points this week to 4.08%. It is now at its lowest level since March 18, when it was 4.05%.

The revenue bond index, which measures 30-year revenue bond yields, dropped two basis points this week to 4.91%. It is now at its lowest point since Jan. 21, when it was also 4.91%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, declined three basis points this week to 0.51%, but it remained above its 0.48% level from two weeks ago.

The yield on the 10-year Treasury note declined five basis points this week to 3.74%, which is the lowest it has been since March 18, when it was 3.67%.

The yield on the 30-year Treasury bond fell five basis points this week to 4.60%. It is the lowest yield for the long bond since March 18, when it was 4.59%.

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 5.13%, down three basis points from last week's 5.16%.

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Jobless Claims Decline; Inflation Remains Low - The Wall Street Journal

Friday, April 23, 2010
By Luca Di Leo and Sarah N. Lynch

U.S. jobless claims fell last week but were still high, while underlying wholesale inflation remained low in March, the Labor Department said Thursday.

Initial claims for jobless benefits fell by 24,000 to 456,000 in the week ended April 17. The decline comes after two weeks of unexpected jumps in the figures, which the government blamed on the Easter holiday and other seasonal factors.

The government had said the earlier increases didn't likely signal rising layoffs, but the elevated numbers nevertheless had sparked concern among outside experts.

The four-week moving average, which aims to smooth volatility in the data to assess the underlying trend, rose by 2,750 to 460,250.

Jobless claims continue to remain stubbornly high even though the U.S. economy is growing, helping to create new jobs in March. Nonfarm payrolls rose by 162,000, although some of those gains came from temporary hiring for the 2010 Census.

"Even after recent declines, the level of claims is higher than one would expect it to be if private nonfarm payrolls were really poised to begin sustained gains," said Joshua Shapiro, economist at MFR Inc. Meantime, the producer-price index for finished goods rose by a seasonally adjusted 0.7% in March from the previous month. Core wholesale prices, however, barely moved. Excluding volatile energy and food prices, producer prices rose by just 0.1% last month, the same increase seen in February.

To aid an economy still recovering from recession, the Federal Reserve has kept short-term interest rates near zero for more than a year, pointing to low inflation and high unemployment as the main factors behind its strategy.

Inflation has been slowing recently, particularly price readings that strip out volatile food and energy items. In March, core consumer prices moderated to an annual 1.1% increase, the lowest level since 1966. The report Thursday showed that for the year ended March 31, 2010, the unadjusted producer-price index rose by 6.0%, the largest increase since September 2008. However, the core producer-price index rose just 0.9% over the past year.

The producer-price report "does not bring about any renewed concerns about inflation in the immediate future," Dan Greenhaus, an analyst at Miller Tabak, said in a note to clients.

On a monthly basis, adjusted for seasonality, food prices rose by 2.4% in March, the sharpest increase since 1984. The increase was led by higher vegetable prices, which jumped by 49.3%, the largest rise since 1994. The price of dry onions and cauliflower more than doubled.

Write to Luca Di Leo at luca.dileo@dowjones.com
and Sarah N. Lynch at sarah.lynch@dowjones.com

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Build America Yields Lure Washington Utility to Taxable Market

Thursday, April 15, 2010
By Brendan A. McGrail and Allison Bennett
of Bloomberg

April 15 (Bloomberg) -- The Public Utility District of Grant County, Washington, is selling about $166 million in Build America Bonds to upgrade a Columbia River power project as yields on the subsidized debt touch the lowest level in a month.

The utility is selling the bonds as part of a $345 million combination of taxable and tax-exempt securities, according to data compiled by Bloomberg. Proceeds will help finance improvements to the two-dam Priest Rapids Project, the second-largest non-federal hydroelectric complex behind the Niagara Falls development in New York.

Average yields on Build America Bonds fell 4 basis points, or 0.04 percentage point, on April 13 to 6.13 percent, the lowest level since March 17, according to the Wells Fargo Build America Bond Index. Taking into account the 35 percent subsidy, that's equivalent to a 3.98 percent yield -- 81 basis points less than the cost of issuing similarly rated tax-free debt.

"The Build America Bond program continues to be an attractive option for issuers," said Mike Pietronico, chief executive officer of New York-based Miller Tabak Asset Management, which oversees $255 million in municipal bonds. "Within a couple of basis points, depending on the credit, that continues to be the case."

Borrowing costs on 30-year AA rated tax-exempt power bonds have held at 4.79 percent since March 26, the highest since November. Grant County is rated AA by Fitch Ratings, third-highest.

Jim Bunch, treasurer-controller of the Grant County Public Utility District, didn't return calls seeking comment.

Airport Bonds

Chicago's O'Hare airport, rated A- by Standard & Poor's, finished pricing yesterday on $578 million in Build Americas, the bulk of which were 30-year securities priced to yield 6.4 percent. That's an equivalent tax-free yield of 4.16 percent, or 132 basis points less than 30-year transportation bonds rated A-.

"You would expect to see, by the end of the year, more issuers taking advantage of those savings," Pietronico said.

Build America Bonds, created last year as part of the federal economic stimulus package, is the fastest-growing part of the $2.8 trillion municipal debt market. The U.S. House of Representatives voted last month to extend the program, scheduled to expire at the end of this year, into 2013. The bill would reduce the federal subsidy to 33 percent in 2011, 31 percent in 2012, and 30 percent in 2013, according to a congressional summary.

Build America Bonds

BABs accounted for $26 billion of the $97 billion of municipal sales in the last three months, according to Bloomberg data.

"There's definitely a wider acceptance of the product, especially as more of them get issued into the marketplace," said Steven Shachat, senior portfolio manager at Alpine Woods Capital Investors LLC in Purchase, New York. "There definitely is a greater comfort level in the security."

Yields on top-rated general obligations maturing in 10 years fell for the second straight day to 3.26 percent, 4 basis points below the nine-month high they hit on April 7.

Following are descriptions of pending sales of municipal debt in the U.S.:

CATHOLIC HEALTHCARE PARTNERS, the largest health-care system in Ohio, is selling $670 million through the County of Allen, Ohio. The offering includes about $450 million in fixed-rate, tax-exempt revenue bonds to be sold today and about $230 million in variable-rate securities on May 4, according to Moody's. CHP, which operates health-care facilities in five states, will use the debt to refinance existing bonds, help repay a bank credit line used to buy a hospital, and help fund the construction of a new facility in Springfield, Ohio, Moody's said. JPMorgan will lead underwriters in marketing the securities, rated AA- by S&P and Fitch, fourth-highest, and A1 by Moody's, one level lower. (Updated April 15)

TEXAS, the second-most-populous state behind California, will sell $185.4 million of water financial assistance bonds as soon as today. The general obligation bonds, backed by the full faith and credit of the state, will fund development including wastewater treatment and reservoir expansion and will finance payment on previous issues. Barclays Plc will lead the group marketing the serialized bonds, which mature in August 2011 through 2030 and are rated AAA by Fitch and one level lower by S&P and Moody's. (Added April 15)

ILLINOIS, the second-lowest-rated state after California, will sell $700 million of federally subsidized Build America Bonds as early as next week to help fund grants for school district as well as capital projects throughout the state. The securities are general obligations, backed by the full faith and credit of the state, according to preliminary offering documents. Illinois, the fourth-most-populous U.S. state, was downgraded one level by Fitch on March 29 to A-, the fourth-lowest investment grade. The state has an A+ rating from S&P, the fifth-highest, and an A2 from Moody's, one level lower. Underwriters led by William Blair & Co. will market the issue. (Added April 14)

CHILDREN'S HOSPITAL LOS ANGELES will sell $141.2 million in fixed-rate health-care revenue bonds through the California Health Facilities Financing Authority as early as next week to refinance auction-rate securities from 2004 and a portion of variable-rate debt from 2008. Citigroup Inc. will market the notes, rated Baa2 by Moody's, two levels above junk. (Updated April 14)

--With assistance from Catarina Saraiva in New York. Editors: Walid el-Gabry, Stephen West.

To contact the reporters on this story: Brendan A. McGrail in New York at +1-212-617-5048 or asaraiva5@bloomberg.net; Allison Bennett in New York at +1-212-617-6892 or abennett23@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net.

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The Municipal Market today: Prices firm, secondary market steals the show

Wednesday, April 14, 2010
Reuters

NEW YORK, April 14 (Reuters) - U.S. tax-exempt muni bond prices were level to firmer on Wednesday as demand for secondary issues not only stole the spotlight from the primary market but helped fend off some softness seen in Treasuries.

"I don't see one (primary) deal" dominating activity, said Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York. Instead, seasonal and technical factors now favor the secondary market.

Yields on top-rated, 10-year bonds eased 4 basis points to 3.06 percent, while 30-year yields dipped a basis point to 4.15 percent, according to Municipal Market Data, a unit of Thomson Reuters.

The market's recent steady to firmer performance is a bit of a turnaround from a squishy performance in March, often a traditional weak period for munis. In April, the market typically regains its footing ahead of coming redemptions and coupon payments due in the next few months.

"Yields needed to back up -- they did. Supply needed to come and go -- it has," said Pietronico.

"Now we're approaching a technical condition where May, June and July tend to be very friendly toward munis and we're adjusting to that," he said.

An approximately $1 billion revenue bond sale for Chicago's O'Hare International Airport -- the largest of the week -- included $578 million of taxable Build America Bonds. The spread over comparable Treasuries narrowed 5 basis points to 170 basis points in one of the 2040 maturities that was priced at par with a 6.395 percent coupon.

For details, please see: [ID:nWGB14045].

The BABs offering for Nashville and Davidson County's Convention Center Authority, totaled just under $572 million. The final pricing had the 2043 maturity priced at par with a 7.431 percent coupon and a 275 basis point spread over comparable Treasuries.

For details, please see: [ID:nWGB1403C].

Morgan Stanley priced $170 million of general obligation highway capital improvement BABs for Ohio at par with a top yield of 4.944 percent for bonds due in 2025.

(Reporting by Joan Gralla; editing by Andrew Hay) E-mail: joan.gralla@thomsonreuters.com; +1-646-223-6345

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Yields Increase Amid Softness Inside 20 Years

Friday, April 9, 2010
By Michael Scarchilli
The Bond Buyer

Nearly all The Bond Buyer's weekly yield indexes rose this week as weakness inside of 20 years on the municipal yield curve persisted through Wednesday, before subsiding yesterday.

Michael Pietronico, chief executive officer of Miller Tabak Asset Management said yesterday's firmness was "probably an indication that the Street is getting some progress on getting their inventory down."

Softness in the market this week has been mostly situated in the short and intermediate parts of the curve, with the long end remaining mostly flat. But Pietronico said there is "debate as to whether the long end outperformed as much as is being said."

The weakness was "easier to spot in the belly of the curve, because of more residual balances from prior deals that have been building up," he said. "The long end has just not been tested. There hasn't been too much supply."

The Bond Buyer 20-bond index of 20-year general obligation bond yields rose one basis point to 4.45%. This is the highest the index has been since Aug. 27, 2009, when it was 4.53%.

The 11-bond index of higher-grade 20-year GO yields also gained one basis point this week, to 4.16%. It is now at its highest level since Aug. 27, 2009, when it was 4.27%.

The revenue bond index, which measures 30-year revenue bond yields, rose two basis points this week to 4.96%. It is at its highest level since Feb. 18, when it was 4.97%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, rose 10 basis points this week to 0.53%. This is the highest the index has been since Nov. 24, 2009, when it was 0.56%.

The yield on the 10-year Treasury note increased five basis points this week to 3.89%, but remained below its 3.90% level from two weeks ago.

The yield on the 30-year Treasury bond rose three basis points this week, to 4.75%. But it is still below its 4.78% level from two weeks ago.

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 5.22%, down five basis points from last week's 5.27%.

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California Inquiring About CDS Trading in GO Bonds

Tuesday, March 30, 2010
Reuters

11:56 30Mar10 -UPDATE 2-Calif looks into banks' role in underwriting, CDS

(Adds background, comments, previous NEW YORK)

SAN FRANCISCO, March 30 (Reuters) - California's Treasurer has sent a letter to six big banks that underwrite the state's municipal bond sales, asking what the banks' role may be in also selling credit default swaps on California debt.

The letter to Bank of America Merrill Lynch (BAC.N), Barclays Plc (BARC.L), Citigroup Inc (C.N), Goldman Sachs Group (GS.N), JPMorgan Chase & Co (JPM.N) and Morgan Stanley (MS.N), released late Monday, expresses concern spreads on California CDS are mispricing the state's credit risk and inflating interest costs.

"I have no preconceived notions about the effect of CDS trading on California (general obligation) bond prices, or about your firm's activities in the California CDS market," Treasurer Bill Lockyer said in the letter.

"I do, however, worry about firms selling our bonds, on one hand, and trading CDS on our bonds, or otherwise participating in that market, on the other."

Taxpayers have a right to know, Lockyer added -- and others in the municipal debt market agreed.

"If anybody has the right to ask the question it's probably the state of California," said Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York, which oversees $250 million in assets,

"The state pays out substantial underwriting fees because it's one of the top issuers in the country and it has a right to know if they're working on its behalf," Pietronico said.

JPMorgan Chase, Barclays, Goldman Sachs and Citigroup declined to comment. Morgan Stanley said it is reviewing the letter and has no comment. A Bank of America representative was not immediately available.

Credit default swaps are used to insure against potential default or to speculate on the creditworthiness of an issuer. The contracts were widely blamed for adding to fears about financial firms such as Lehman Brothers before it failed in 2008.

When CDS prices are higher, then it suggests the issuer is less credit worthy and more at risk of default. That can increase the premium investors demand to take on extra risk of owning that issuer's debt.

California's CDS have been trading wider than spreads on countries including Kazakhstan and Croatia, said Lockyer.

California's five-year credit default swaps were trading at about 200 basis points early Tuesday, according to Markit Intraday. That means it costs $200,000 a year to insure $10 million of debt for five years.

Swaps on Kazakh debt were trading at 170 basis points, while CDS on Croatian debt was trading at 188 basis points, according to Markit.

Swaps on Californian debt have been widening for the past year as it struggled with a fiscal crisis, peaking above 340 basis points last June as the state issued IOUs to suppliers.

Yet, California has never defaulted on a debt service payment in its history and is very unlikely to do so in the future, said Lockyer.

California's general obligation debt is backed by the full faith and credit and taxing power of the world's eighth-biggest economy, and the state's constitution places debt service in second place after payments to schools, providing another cushion of safety to bondholders.

Investors have recognized that fact. This month alone they snapped up nearly $6 billion of tax-exempt and taxable general obligation debt offered by Lockyer, and there are no signs demand for the state's bonds will cool soon.

"I don't think that's necessarily going to be abating," said Howard Cure, director of municipal research at Evercore Wealth Management in New York, which oversees $1.7 billion in assets, of which two-thirds are in fixed income. "I don't think the state is going to default on its debt."

Nevertheless, Lockyer noted that "despite the security-plus backing of California GOs, and our spotless record of paying our debt on time and in full, market participants actively buy and sell credit default swaps on our bonds."

Still, California's persistent fiscal problems have led the major ratings agencies to assign it the lowest ratings of any U.S. state. Moody's Investors Service rates it at Baa1, or three notches above "junk" status. Standard & Poor's rates it at A-minus, or four notches above junk, while Fitch Ratings rates it at BBB, placing it two notches above junk.

(Reporting by Ciara Linnane; Additional reporting by Jim Christie, Dan Wilchins, Steve Eder, Joe Rauch and Maria Aspan; Editing by Andrew Hay)

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California Taxable Bond Sale Increased To $3.4B

Wednesday, March 24, 2010
By Stan Rosenberg
Dow Jones Newswires

NEW YORK (Dow Jones)--Investors are so eager to purchase debt from California that the economically and fiscally ailing state was able Wednesday to boost the size of a planned $2.5 billion taxable bond sale to $3.4 billion and raise prices.

Demand suggested that people with money at stake don't agree with doomsayers predicting a meltdown for the Golden State.

"It is clear that pension managers around the world believe in the Golden State relative to 'expected' returns on equities," said Michael Pietronico, chief executive of New York-based Miller Tabak Asset Management.

"Right now, the bonds are between two and three times oversubscribed," said one person familiar with the deal earlier Wednesday.

The upsizing comes just two weeks after the state boosted a $2 billion offering of tax-exempt debt to $2.5 billion on voracious demand from yield-hungry investors.

The current offering also started out at $2 billion, was boosted to $2.5 billion earlier this week and now to $3.4 billion.

Earlier in the session, underwriters tested demand for the latest bonds at levels ranging up to 275 and 325 basis points above comparable Treasury securities. Based on Treasurys prices at the time, those "spreads" would have produced yields of 7.4% and 7.9%, levels difficult to turn down.

Now, the spreads have narrowed for key maturities and sizes of those maturities increased to accommodate demand.

The newest sale, to be formally priced Thursday, attracted intense interest from overseas institutions that aren't concerned with tax-exemption, as well as from large domestic buyers like pension funds and college endowments, which also don't require tax-exemption.

What appeals to these investors is holding large blocks of what they believe to be safe sovereign debt, for which active trading markets exist. For them, California's bonds apparently meet those criteria, offering blocks as large as $850 million in 30 years, now bumped up to $1.25 billion, and a $500 million 2036 maturity increased to $1 billion.

Also not lost on investors is that California's bonds are about to undergo a ratings recalibration by a major ratings firm, Moody's Investors Service, as it levels the playing field between its municipal and corporate bond rankings. Municipal bonds had traditionally been ranked lower than their corporate counterparts, despite the fact that they are considered to be much safer securities.

As Moody's rejiggers most of the 70,000 issues it rates, California's Baa1 rating will become an A1, a seeming increase of three notches, although the Moody's Inc. (MO) unit has stated its recalibration doesn't indicate a change in credit quality.

"These are pretty good compared to a lot of other alternatives," said Matthew Freund, vice president of fixed-income investments at San Antonio-based USAA Investment Management Co.

One example might be a $1 billion Aa2-rated 30-year Wal-Mart Stores (WMT) deal priced Wednesday at 95 basis points over the 30-year Treasury. While two grades above the anticipated California rating on Moody's recalibrated scale, the yield differential could easily be enough to entice investors to the nation's most populous state. The fact that the bonds are tax-free at the state level would also be an enticement to shorter-term bonds offered to individual investors since California has one of the highest income-tax rates in the country.

The $1 billion California 2036 maturity is now being tested around 315 basis points over the 30-year Treasury as opposed to 325 basis points earlier. The $1.25 billion 2040 maturity is offered at a spread of about 270 basis points vs 275 earlier. Those spreads would produce 7.81% 7.36%, respectively, if Treasurys remain at the same levels when the bonds are formally priced Thursday.

The same underwriting group is offering the California taxables, but the deal was split so that the bookrunning switches the order of the top two names. A Bank of America Merrill Lynch-Citigroup syndicate is selling $1.72 billion of the debt, while a Citigroup-Bank of AmericaMerrill Lynch syndicate is selling $1.68 billion.

-By Stan Rosenberg, Dow Jones Newswires; 212.416.2226; stan.rosenberg@dowjones.com

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Munis Flat as California Boosts Offering

Friday, March 12, 2010
By Michael Scarchilli
The Bond Buyer

California yesterday increased its general obligation bond sale to $2.5 billion, pricing it against a backdrop of a mostly unchanged municipal market.

JPMorgan priced the bonds, which were upsized from an originally planned $2 billion, following a two-day retail order period during which $1.38 billion was sold, or 69% of the original amount.

The bonds mature from 2011 through 2030, with term bonds in 2033, 2036, and 2040. Yields range from 1.17% with a 2% coupon in 2012 to 5.68% with a 5.5% coupon in 2040. Bonds maturing in 2011 were decided via sealed bid.

The bonds are callable at par in 2020. They are rated Baa1 by Moody's Investors Service, A-minus by Standard & Poor's, and BBB by Fitch Ratings.

Traders said tax-exempt yields were mostly flat, though a slightly firmer tone could still be felt in the secondary.

"It's somewhat flat right now," a trader in New York said. "There might be a little bit of a firmer tone, but right now we're just pretty flat."

"All the attention was focused on the new issues today, especially with the big Cal deal," a trader in Los Angeles said. "Overall, we're unchanged for the most part. Not really seeing a lot of movement."

The Treasury market mostly showed some losses yesterday, though there were mild gains on the long end.

The benchmark 10-year note finished at 3.73% after opening at 3.72%. The yield on the two-year finished at 0.96% after opening at 0.90%. The yield on the 30-year bond finished at 4.67% after opening at 4.69%.

The Treasury Department today auctioned $13 billion of 30-year bonds with a 4 5/8% coupon at a 4.679% high yield, a price of 99.13. The bid-to-cover ratio was 2.89.

Federal Reserve banks also bought $153.8 million for their own account in exchange for maturing securities.

The Municipal Market Data triple-A scale yielded 2.80% in 10 years and 3.78% in 20 years yesterday, matching Wednesday's levels. The scale yielded 4.15% in 30 years yesterday, also matching Wednesday's level.

Wednesday's triple-A muni scale in 10 years was at 75.3% of comparable Treasuries and 30-year munis were at 88.5%, according to MMD, while 30-year tax-exempt triple-A GOs were at 92.4% of the comparable London Interbank Offered Rate.

Elsewhere in the new-issue market yesterday, Goldman, Sachs & Co. priced $250 million of Michigan state aid GOs for Detroit.

The bonds mature from 2014 through 2024, with term bonds in 2030 and 2035. Yields range from 2.47% with a 5% coupon in 2014 to 5.375% with a 5.25% coupon in 2035.

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said the pricing, particularly the 4.25% yield in 10 years, "disappoints many who were sort of circling it and looking for a tremendous amount more yield because of [Detroit's] fiscal situation."

"But the backing of the state obviously is going to be what drives the success of this sale," Pietronico said. "From our viewpoint, if you're looking seriously at the deal, you're looking at the creditworthiness of the state of Michigan, not so much at Detroit."

The bonds, which are callable at par in 2020, are rated A1 by Moody's and AA-minus by Standard & Poor's.

Seattle competitively sold $201.9 million of tax-exempt and taxable bonds in two series, including $66.5 million of taxable Build America Bonds.

The BABs were sold to Citi, with a true interest cost of 4.65%. The bonds mature from 2018 through 2030, with yields ranging from 4.33% in 2021, or 2.81% after the 35% federal subsidy, to 5.23% in 2030, or 3.40% after the subsidy, all priced at par. Bonds maturing from 2018 through 2020 were not formally re-offered.

Seattle competitively sold $135.4 million of limited-tax GO improvement and refunding bonds to Bank of America Merrill Lynch, with a TIC of 3.12%.

The bonds mature from 2010 through 2031, with yields ranging from 0.35% with a 2.5% coupon in 2010 to 4.01% with a 4% coupon in 2028.

Bonds maturing from 2011 through 2020 and from 2029 through 2031 were not formally re-offered. The bonds are callable at par in 2020.

The credit is rated Aa1 by Moody's, AAA by Standard & Poor's, and AA-plus by Fitch.

Bank of America Merrill priced $130.7 million of revenue bonds for the New Jersey Health Care Facilities Financing Authority.

The bonds mature from 2010 through 2025, with term bonds in 2029 and 2033. Yields range from 1.25% with a 2% coupon in 2010 to 5.00% with a 5.25% coupon in 2029. Bonds maturing in 2033 were not formally re-offered.

The bonds, which are callable at par in 2020, are rated A1 by Moody's, A by Standard & Poor's, and A-plus by Fitch.

In economic data released yesterday, initial jobless claims decreased by 6,000 to 462,000 for the week ending March 6, in line with economists' estimates.

Continuing claims rose to 4.558 million for the week ending Feb. 27 from 4.521 million in the previous week, which was revised higher from 4.5 million reported last week.

Initial claims for the week ending Feb. 27 were revised to 468,000 from the 469,000 reported last week.

Economists expected 460,000 initial jobless claims and 4.49 million continuing claims, according to the median estimate from Thomson Reuters.

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The ABC's or 1-2-3 of Munis

Thursday, March 11, 2010
By Lacy O'Toole
Los Angeles Bureau Chief, CNBC

Long thought as one of the safest investments out there, the financial crisis has forced us to take another look at the municipal bond market. Here are the basic (very basic) facts every investor needs to know:

1) What is a municipal bond, anyway?

"Munis" are issued by state, city and county governments to raise capital. There are two main types: General Obligation and Revenue.

What's the difference?

The Securities Industry and Financial Markets Association uses these definitions:

General Obligation (G.O.) Bonds: Bonds issued by state or local units of government. The bonds are secured by the full faith, credit and taxing power of the municipal bond issuer. Such bonds constitute debts by the issuer and often require approval by election prior to issuance. In the event of default, bondholders have the right to compel a tax levy or legislative appropriation to cover debt service.

Revenue Bonds: Bonds payable from a specific source of revenue and to which the full faith and credit of an issuer and its taxing power are not pledged. Revenue bonds are payable from identified sources of revenue and do not permit the bondholders to compel taxation or legislative appropriation of funds not pledged for payment of debt service. Pledged revenues may be derived from sources such as the operation of the financed project, grants or a dedicated specialized tax.

2) How safe is a municipal bond?

Well, if you look at a recent Moody's report ("U.S. State and Local Governments Remain Inherently Resilient, Despite Growing Pressures, February 2010), it seems munis are pretty safe.

While the ratings agency "expects the state and local government sectors will lag the national economic recovery and remain financially challenged through 2010 and into 2011," it says the "vast majority of municipal governments will make timely debt service payments, consistent with the remarkably low default experience seen in this sector over the last sixty years."

But if that's not enough to get you to fork over your savings, you could check out what the other two credit agencies, Fitch and Standard and Poor's say. Given that there is very little information out there on muni bonds, investors look to the agencies as a roadmap to choosing the safest and riskiest bonds.

Another resource is the Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) portal, http://emma.msrb.org. All issuers file "official statements" or "offering circulars" on this site.

Michael Pietronico, CEO of Miller Tabak Asset Management, says the most important thing for an individual to consider when looking to buy a municipal bond is the source. "What is the source that will ultimately repay the interest and the principle on the bond? And if it's a general obligation, is it a full faith in credit? If it's a essential purpose revenue bond, which we happen to be very comfortable with as a firm, what is the coverage on the bond? Water and sewage bonds in particular are very strong" says Pietronico.

Or, he says, read a local paper.

3) What about taxes?

Interest income received from a municipal bond investment is currently federal tax-exempt. Most states also exempt interest income.

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Retail demand hot for California GO debt deal

Wednesday, March 10, 2010
By Jim Christie
Reuters

SAN FRANCISCO, March 10 (Reuters) - Yield-hungry retail investors have snapped up just over half of the $2 billion in general obligation debt California is putting out to market this week, prompting analysts to wonder on Wednesday if any of the bonds will be left for institutional investors.

The tax-exempt deal's two-day retail period opened on Tuesday and its final, institutional pricing begins on Thursday.

By Tuesday evening individual investors had placed orders for $1.15 billion of the debt, which has yields ranging from 1.20 percent on its short end for its March 2012 maturities and 5.72 percent for its March 2035 maturity, according to State Treasurer Bill Lockyer's office.

The yields spurred investors to look past the fiscal troubles facing California's state government -- weak revenues and a budget gap of $20 billion that, if history is any guide, may take months for Governor Arnold Schwarzenegger and lawmakers to close.

"There's not that much supply in our marketplace right now and the state of California is out-yielding the world," said Bill Mullally, president of Alamo Capital in Walnut Creek, California.

Marilyn Cohen of Envision Capital Management in Los Angeles said she considers California a "sick credit." But she said that yields for this week's state GO deal are too much for many to resist. "The appetite out there is voracious," Cohen said.

"Zero on a money market makes you awfully tempted," added Rick Ashburn, chief investment officer at money manager Creekside Partners in Lafayette, California.

Retail investors may also be feeling more secure about California's commitment to bond payments.

Last year the state controller during a dramatic cash crunch sent IOUs in lieu of payments for non-priority bills to preserve cash for priority payments such as legally required payments to bondholders.

Analysts said that helped impress upon investors that California will do what it takes to make its bond payments.

Ken Naehu, managing director and head of fixed income at Bel Air Investment Advisors in Los Angeles, said investors are increasingly separating "headline risk" to California debt from the state's ability and mandate to pay bondholders.

"I've made it a sort of a point to make," Naehu said.

The hot demand for California's GO deal underscores that while investors may have concerns about California's finances they are confident it will honor its debts, said Michael Pietronico, chief executive of Miller Tabak Asset Management in New York.

That points to a big turnout by retail investors for California's deal, despite the state's GO rating hovering a few notches above "junk" status.

"It's quite impressive," Pietronico said. "They should easily hit the $2 billion mark by the time it is officially priced."

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California Ready for Its Return to GOs

Friday, March 5, 2010
By Rich Saskal
The Bond Buyer

SAN FRANCISCO — After a legislative kerfuffle that caused a one-week delay, California is on track to return to the bond market next week with a $2 billion general obligation bond deal.

It is the Golden State's first GO deal in more than four months.

"We're looking forward to kicking off 2010, and putting together the best deal possible for taxpayers," said Tom Dresslar, spokesman for Treasurer Bill Lockyer.

The state last sold GOs in early November, a $1.3 billion tax-exempt deal.

JPMorgan and Morgan Stanley are co-running the books next week for a selling team of 30 broker-dealer firms. Public Resources Advisory Group is financial adviser. The deal is slated to price Thursday, after a two-day retail-order period.

The treasurer's office will engage in what has become its usual retail marketing campaign for tax-exempt GOs, Dresslar said, with radio and newspaper advertising campaigns in northern and southern California markets directing potential retail investors to the office's Web site, www.buycaliforniabonds.com.

The treasurer's office first announced plans for the GO deal in late February, with the pricing originally set for yesterday, before the transaction became ensnared in an unexpected legislative entanglement.

The treasurer's office, in collaboration with Gov. Arnold Schwarzenegger's Department of Finance and the state controller's office, had developed a cash-flow management plan they believed would help California avoid the liquidity crisis it experienced in 2009, when the controller ended up issuing $2 billion of IOUs to some creditors to preserve cash for those with higher legal priority, such as bondholders.

They did not expect any problem gaining passage of the enabling legislation, which gives state finance officials more flexibility to reschedule payments owed to school districts and other local agencies, in order to help the state maneuver around expected liquidity troughs.

But the bill, as an urgency measure, required a two-thirds vote for approval and it was delayed several days in the Assembly as minority Republicans asserted themselves and demanded more say in the budget process.

They eventually approved the bill Feb. 25, with the bare minimum of 54 votes. Schwarzenegger signed the measure Monday.

The cash-flow bill was one of several bills lawmakers approved after Schwarzenegger declared a fiscal emergency in January, warning that the general fund budget, despite two arduous balancing efforts during 2009, had fallen $19.9 billion in the red through fiscal 2011.

As part of the budget emergency session, lawmakers signed off on $2.1 billion in solutions, in the evident hope that April income tax returns will come in ahead of expectations and reduce the need for budget cuts.

According to Controller John Chiang, the state's cash receipts for January came in more than $1.2 billion above projections, perhaps spurring some optimism.

The preliminary official statement paints a much more sobering picture.

"Absent further corrective action by the Legislature and timely adoption of a fiscal year 2010-11 budget, a significant cash-flow shortfall is projected in fiscal year 2010-11, which may require the issuance of registered warrants," the POS says. "There can be no assurances that the fiscal stress and cash pressures currently facing the state will not continue or become more difficult, or that continuing declines in state tax receipts or other impacts of the current economic situation will not further materially adversely affect the financial condition of the state."

Despite California's seemingly endless fiscal follies and long run of bad headlines, Michael Pietronico, chief executive of Miller Tabak Asset Management, expects next week's deal to find receptive investors.

"The bonds are currently trading in the market at relatively stable spread levels," he said. "Considering the reception that the state of Illinois got in the market, just a small correction relative to secondary market levels before the sale, we would not be surprised to see a reasonably good reception for the state of California."

Pietronico added that his firm prefers local credits for California clients — purely for diversification, not as a comment on the state's credit.

Illinois priced $1.5 billion of debt in February. The state's A to A-plus ratings are the second-lowest of any state— only California's are lower.

The three major rating agencies affirmed California's ratings ahead of next week's deal — BBB from Fitch Ratings, Baa1 from Moody's Investors Service, and A-minus from Standard & Poor's. Moody's and Fitch have stable outlooks, while Standard & Poor's has a negative outlook following a January downgrade.

"The rating affirmations reflect our view of the state's credit in light of both its severe fiscal imbalance and our opinion of its continued fundamentally strong capacity to fully fund its debt service obligations in a timely manner," Standard & Poor's analyst Gabriel Petek said in a news release Tuesday.

California plans to follow up next week's offering with another one about two weeks later — a taxable GO deal with a Build America Bond component, also in the $2 billion range.

Lockyer, addressing the Assembly Budget Committee last week, said his office would increase either or both GO deals if demand is there.

Pietronico noted that with changes in the municipal bond market — the creation and likely extension of the federally subsidized taxable BAB program, along with legislation that would end tax-exemption altogether — a big tax-exempt deal such as California's next week could be an increasingly rare bird.

Now add all that together with the inevitability of tax hikes in the long run because of the huge federal deficits, Pietronico said.

"You have what seems to be building a perfect storm," he said. "Lower supply and higher demand for that supply."

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Yields on Tax-Exempt Bond Sales Reach Lowest in Three Months

Friday, March 5, 2010
By Catarina Saraiva
of Bloomberg

March 5 (Bloomberg) -- Yields on local and state government tax-exempt bonds fell to a three-month low as supply shrank to the smallest amount in four weeks.

Yields on top-rated general obligations due in 10 years fell to 3 percent, the lowest since Dec. 10, a daily survey by Municipal Market Advisors shows. Tax-exempt sales totaled $3.6 billion this week, dropping to less than $4 billion for the first time since the five-day period ended Feb. 5.

Issuers led by Georgia's Municipal Electric Authority sold $2 billion in taxable Build America Bonds, which provide a 35 percent subsidy on interest costs from the federal government. The Georgia utility plans to sell an additional $920 million of such debt today.

"There is a lot of interest out there in pure tax-exempt bonds," said Anthony Shields, a principal in the public finance department at Williams Capital Group in New York. "Build America Bonds are sucking out some of the issuance, so that there's less and less pure tax-exempts coming to market."

The New York Dormitory Authority, the second-biggest municipal issuer after California last year, sold $590.8 million secured by personal income tax revenue, including $365.7 million of tax-exempt debt. After getting more than $200 million in orders from individual buyers, the agency finished the pricing ahead of schedule, Shields said.

Benchmark borrowing costs for state and local government selling 30-year revenue bonds fell to a seven-week low of 4.93 percent, according to the weekly Bond Buyer 25 index. Securities in the gauge have an average Moody's Investors Service rating of A1, the fifth highest.

"The demand component is going up just as the supply component is going down," said Mike Pietronico, chief executive officer of Miller Tabak Asset Management in New York. "That has all the makings of a bull market. It's like the perfect storm."

Following are descriptions of pending sales of municipal debt in the U.S.

ASCENSION HEALTH, the largest nonprofit health-care system in the U.S., plans to sell about $1.35 billion in tax-exempt revenue bonds beginning next week. About $745 million will be used to refinance current debt and $600 million will help fund new construction and expansion at five health-care centers, said Stephen Gilmore, director of capital finance for St. Louis-based Ascension. Morgan Stanley will market a $670.5 million fixed- rate sale on March 10 and a $675.4 variable-rate issue later in the month. Ascension is rated Aa1 by Moody's, AA by Standard & Poor's and AA+ by Fitch Ratings. (Added March 5)

MASSACHUSETTS, the second most-indebted state per capita after Connecticut, plans to sell $538.9 million of floating-rate general obligations as early as next week. The date of the sale will be determined by market conditions, according to the state treasurer's Web site. Revenue from the sale will help refinance outstanding variable-rate demand bonds supported by an agreement from Citibank that expires later this month, according to Moody's. Underwriters led by Morgan Stanley will market the issue. The state's general obligations are rated Aa2 by Moody's, while Fitch and S&P rate them AA, the third-highest of 10 investment grades. (Updated March 5)

GUILFORD COUNTY, North Carolina, plans to sell $298.4 million of general obligations next week. The sale includes $82.5 million of tax-exempt debt and the same amount of taxable Build America Bonds to fund public improvements. The remainder, also tax exempt, will be used to refinance existing debt. The county, which includes Greensboro, has a top rating from S&P. Moody's and Fitch grade it one level lower. (Updated March 5)

CALIFORNIA, the lowest-rated U.S. state, intends to raise as much as $5 billion from investors this month with its first debt sales since November, according to Treasurer Bill Lockyer. JPMorgan Chase & Co. and Morgan Stanley were selected to manage a tax-exempt deal of as much as $2 billion on March 11, and Citigroup Inc. and Bank of America Merrill Lynch will handle a taxable offering later in the month, according to the state treasurer's Web site. California is rated A- by S&P, Baa1 by Moody's and BBB by Fitch. (Updated March 2)

DETROIT, the largest U.S. city whose general obligation debt is rated below investment grade, plans to borrow $250 million as early as next week by issuing municipal securities to help fill a budget deficit, Moody's said in a report. State aid derived from a Michigan-wide sales tax as well as the city's full faith and credit secure the bonds, rated A1 by Moody's and AA- by S&P. Without aid from Michigan, the ratings would be B1 from Moody's and BB by S&P. (Updated March 2)

NEW YORK CITY MUNICIPAL WATER FINANCE AUTHORITY, which helps raise capital funding for a system that serves 9 million people, plans to sell $400 million in fixed-rate taxable Build America Bonds on March 9, the second such deal in less than two months. Proceeds from the sale will be used for capital improvements of the city's water and sewer system, city finance officials said in a statement last week. The securities are rated AA+ by S&P, Aa3 by Moody's and AA by Fitch. A group of underwriters led by Jefferies Group Inc. will market the securities to investors. (Added March 2)

ILLINOIS, the second-lowest-rated U.S. state after California, will take bids on March 11 from banks seeking to underwrite $300 million of Build America Bonds and $56 million of non-subsidized taxable notes. The deal will finance school construction, according to John Sinsheimer, director of capital markets for Illinois. The state, which last sold BABs in a $1 billion deal on Jan. 28, is rated A2 by Moody's, A+ by S&P and A by Fitch. A statutory requirement calls for 25 percent of all state debt to be bid competitively, Sinsheimer said. Banks led by William Blair & Co. will negotiate the sale of an additional $700 million in Build America securities in mid-March, he said. (Added March 2)

DISTRICT OF COLUMBIA, the U.S. capital, plans to sell $715 million of tax-exempts backed by income tax revenue as soon as next week. The deal will replace a mixture of fixed- and variable-rate general obligation bonds, which have lower ratings, and reduce the district's amount of adjustable-rate debt, Fitch said in a release March 3. Underwriters led by Goldman Sachs Group Inc. will handle the deal. The debt is rated AAA by S&P, AA by Fitch and Aa2 by Moody's. (Updated March 4)

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva@bloomberg.net.

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Nuclear Bonds Test Muni Market's Appetite For Risk

Wednesday, March 3, 2010
By Kelly Nolan and Romy Varghese
Dow Jones Newswires

NEW YORK (Dow Jones)--A publicly owned Georgia utility is making a big bet on the municipal bond market's appetite for risk, selling more than $2.5 billion in debt to finance its share of two nuclear reactors.

The deal, coming in mostly taxable Build America Bonds, or BABs, along with a small portion in tax-exempt debt, would finance the first nuclear power reactors since the Three Mile Island accident in Pennsylvania three decades ago. While the issuer, the Municipal Electric Authority of Georgia, or MEAG, is familiar to municipal bond investors, and while market participants say the deal is structured well, a nuclear project does involve more risk than most. Even so, pricing on one part of the three-part deal Wednesday seemed to indicate healthy investor demand for the deal so far.

"From the BAB market perspective, the larger the deal, the larger amount of interest it brings," said Michael Pietronico, chief executive of Miller Tabak. "There's certainly risks involved with a nuclear project but the market seems to be comfortable with the deal."

Nuclear power plants typically take a long time to build, and cost overruns have been chronic in the industry, with projects sometimes costing as much as twice the original estimates, said Howard J. Cure, director of municipal research for Evercore Wealth Management.

While the new nuclear reactors to be financed by these bonds would be built next to a long-standing two-unit plant in Waynesboro, Ga., they do involve a new design that could increase the likelihood of extra costs, he said.

"We're very cautious of it," Cure said.

Despite the caution, around $2 billion of the bonds are rated within the middle of investment-grade credit quality ranges by Moody's Investors Service, Standard & Poor's and Fitch Ratings.

Moody's, however, rates a $419 million segment at Baa2--within the lowest tier of the investment-grade category range. That's because the counterparty on the contracts that support debt service on the deal--PowerSouth Energy Cooperative--is rated one notch higher at Baa1 and, in general, there's a lot of construction risk associated with a nuclear project.

Bad headlines could also be another issue. Last month, the Vermont Senate curbed efforts by Entergy Corp. (ETR) to win a 20-year license renewal for one of the country's oldest nuclear power plants, the Vermont Yankee, setting the stage for the plant's closure by 2012. The action came after the discovery of increased levels of tritium--a radioactive material that increases cancer risk--in test wells on the site, potentially from a leak at the plant. The safety concerns were coupled with allegations Entergy misled state officials on the existence of underground piping that potentially caused the leak.

The site in Georgia where the new reactors will be built next to the existing plant, called Vogtle, hasn't had any similar problems, but the Vermont situation shows "you need to be perpetually careful about managing the relationship between plant operators and the public," Cure said.

Despite the risks associated with nuclear power projects, there are things market participants like about the MEAG deal. For one, the Obama administration has been a strong proponent of nuclear energy, touting its environmental appeal. Last month, the government offered around $8.3 billion in conditional loan guarantees to the owners of the nuclear reactor project, which besides MEAG include Southern Co.'s (SO) Georgia Power and Olgethorpe Power Corp. MEAG's share of the loan guarantee is $1.8 billion, its Chief Financial Officer, James Fuller, said in an emailed statement.

The total cost of the two reactors, which are expected to begin operation in 2016 and 2017, has been estimated to be around $14 billion. MEAG, which has a 22.7% stake in the project, estimates its costs to be around $3.7 billion, noting that amount will be more than met through its portion of the loan guarantees as well as the more than $2.5 billion in taxable and tax-exempt debt it sells this week, Fuller said.

Wednesday, pricing information was out on one part of the three-part deal. About $1.2 billion in Build America Bonds, due April 1, 2057, were launched at 205 basis points over the yield of Treasurys, according to lead bookrunner Goldman, Sachs & Co. (GS).

Earlier indications were that the bonds would provide greater yields. The reduction in returns may indicate the deal is going well and that there's good investor demand.

Meanwhile, a $24.4 million portion of tax-exempt bonds was priced to provide a top yield of 4.90% in 2040.

Market participants expect the entire offering to be priced Wednesday.

Some investors also praise the structure of the deal and note that MEAG is a well-respected issuer. The deal also offers protections to mitigate the risks of the project, said Richard Saperstein, managing director/principal of Treasury Partners, a division of HighTower Securities, in New York.

For instance, MEAG has so-called "take or pay" 50-year contracts with 49 municipalities in Georgia, which secures future cash flow since the customers must still pay even if power is unused or the new projects aren't operational.

MEAG's share of the conditional loan guarantees should also help alleviate any construction costs running over estimates, he said. MEAG finance chief Fuller said the bond financing and the conditional loans should finance 120% of its costs.

"MEAG has been a well-run operation, with financial integrity and stable financial operations," Treasury Partner's Saperstein said.

Insurance companies and pension funds would be interested in the bonds due 2057 and other longer maturities, he said.

"This is a way they can extend the average life of the portfolio on an overall basis," he said.

-By Kelly Nolan and Romy Varghese, Dow Jones Newswires; 212-416-2167; kelly.nolan@dowjones.com

(Mark Peters and Stan Rosenberg also contributed to this article.)

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Yields Down as 'Problematic' March Nears

Friday, February 26, 2010
By Michael Scarchilli
The Bond Buyer

Nearly all The Bond Buyer's weekly yield indexes declined this week, as the municipal market spent much of the last week either in unchanged or slightly firmer territory.

"The market has been grinding higher [in price], and credit spreads have been grinding tighter along the belly of the curve," according to Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

"There's been a continuance of lack of supply, and also, from the perspective of where the market might be a few years from now, the fact that taxable influence appears here to stay is putting people on the short duration on the defensive," he added.

"Most people understand March to be a problematic month - at best, it's likely to be sideways in price," Pietronico said. "However, we would view the coming 30 days or so to be a good opportunity to add some paper before the summer months, which could see very thin supply."

Leading the primary market this week, Maryland sold $595 million of general obligation bonds Wednesday, while Miami-Dade County priced $589 million of water and sewer system revenue bonds Tuesday.

The Bond Buyer 20-bond index of 20-year GO yields dropped two basis points this week to 4.36%, but remained above its 4.34% level from two weeks ago.

The 11-bond index of higher-grade 20-year GO yields also fell two basis points this week to 4.07%, while remaining above its 4.06% level from two weeks ago.

The revenue bond index, which measures 30-year revenue bond yields, declined three basis points this week to 4.94%, which is the lowest the index has been since Jan. 21, when it was 4.91%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, declined seven basis points this week to an all-time low of 0.41%. The previous record low for the index, which began on July 12, 1989, was 0.43% on Jan. 13.

The yield on the 10-year Treasury note declined 16 basis points this week to 3.64%, which is the lowest the yield has been since Feb. 4, when it was 3.60%.

The yield on the 30-year Treasury bond dropped 15 basis points this week to 4.59%, which is its lowest level since Feb. 4, when it was 4.53%.

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 5.31%, unchanged from last week.

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N.J. Environmental Trust Sets $130M of Triple-A Debt for Clean-Water Work

Monday, February 22, 2010
By Michelle Kaske
The Bond Buyer

The triple-A rated New Jersey Environmental Infrastructure Trust Wednesday will sell $130 million of tax-exempt bonds via competitive bid to help finance clean water projects throughout the state.

The NJEIT provides low-cost financing for infrastructure projects that improve ground and surface water resources, and create safe drinking water facilities. Since its creation in 1987, it has provided more than $4.3 billion in loans to local governments.

In fiscal 2010 the trust is managing its largest program to date through bond issuance and zero-interest loans - $727 million for infrastructure development. That compares to the previous record of $520 million of capital projects the program supported in 2007.

Additional support this year comes from $240 million of federal stimulus funds from the American Recovery and Reinvestment Act that needed to be committed to qualified projects by Feb. 17. The additional federal funds will reduce reliance on bond proceeds, although the amount of borrowing will be similar to 2007 levels.

The NJEIT plans to sell nearly $198 million of new-money debt this year, including Wednesday's $130 million transaction and $68 million of bonds it sold in December. The trust issued $216 million of new-money debt in 2007.

Acting executive director Maryclaire D'Andrea said the larger program involved approving more shovel-ready projects, which are a stipulation for receiving the federal stimulus funds. That resulted in the trust's typical annual issuance expected in the fall of last year to be postponed to winter 2010, although it did offer a smaller sale in December to generate needed funds. In the past, the trust has approved projects that are a few months away from beginning construction.

Incorporating taxable Build America Bonds would have postponed the bond sale further as the NJEIT has yet to sell BABs and would need to educate its borrowers about the program. D'Andrea said the trust will consider BABs when it again heads to market in November with a potential $130 million to $150 million transaction.

"We did consider [BABs] a while ago but then we realized it was a little late in the process," D'Andrea said. "It would have been too much to inform our borrowers of all the changes and such, but we are still entertaining the idea for November."

With the taxable BAB program, issuers receive a 35% subsidy on interest costs from the federal government.

Typically, bond proceeds comprise 40% to 50% of the program's financing. This year, 25% of the $727 million program will be financed with bonds. The federal stimulus funds enlarged the NJEIT's program, with more local governments submitting projects than in prior years. Wednesday's sale will include 97 borrowers among 116 projects compared to 50 or 60 local governments borrowing through the Trust's bond program in earlier years.

Borrowers typically receive financing comprised of an interest-bearing loan financed through bond proceeds known as a trust loan, and a zero-interest loan financed through the state Department of Environmental Protection and federal funds known as a fund loan.

The zero-interest loan accounts for 50% to 75% of the obligation. The new federal stimulus dollars will offer borrowers a 50% principal forgiveness on the zero-interest fund loans, D'Andrea said. Officials project proceeds of the bond sale will create 12,500 full-time construction jobs.

There is no debt service reserve fund for the Series 2010A bonds or for debt sold in 2007 through 2009. Repayments on both trust loans and fund loans provide sufficient coverage, according to the rating agencies.

"The combination of trust and fund loan repayments covers debt service on the coverage-receiving bonds under a variety of default scenarios, without use of the debt service reserve funds," according to a Standard & Poor's report on the credit. "None of the coverage-receiving bonds are considered parity, as each is first payable from within the respective pool of borrowers; however, the master trust structure effectively provides overcollateralization for those bonds designated as coverage-receiving. Since the amount of coverage-generating bonds is currently greater than coverage-receiving bonds, the overcollateralization currently provides good coverage, in our opinion."

The fixed-rate Series 2010A bonds will offer serial maturities from 2011 through 2029, according to the preliminary official statement. The bonds are secured with general obligation and special obligation pledges of the cities, towns, and local authorities who receive the bond proceeds and repay the Trust in loan repayments annually.

McCarter & English LLP is bond counsel for the Series 2010A bonds. Public Financial Management, Inc. is the NJEIT's financial adviser. The bonds will not carry insurance.

Fitch Ratings, Standard & Poor's and Moody's Investors Service all rate the trust triple-A with a stable outlook. The NJEIT has approximately $1.3 billion of outstanding debt.

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said the strong credit rating should serve the issuer well when it heads to market on Wednesday.

"This particular credit is very highly rated and thought of in the market, so I see this particular loan getting a very good reception by the market," he said. "New Jersey, for the most part, has been very thin for high-quality supply so there will be demand for this loan and it should do very well."

The NJEIT last sold debt on Dec. 2 with yields on $61.9 million of Series 2009A tax-exempt bonds ranging from 0.65% with a 2% coupon on debt maturing in 2011 to 4.15% with a 4% coupon for bonds maturing in 2029.

Last month, former NJEIT executive director Dennis Hart left after five years to take a job in the private sector. He is now managing director at the Construction Industry Advancement Program of New Jersey, a nonprofit that promotes the construction industry. D'Andrea said NJEIT's board will select a permanent executive director after the closing of the Series 2010A bonds.

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U.S. Inflation Report Gives Fed Breathing Room on Rates

Friday, February 19, 2010
By Javier C. Hernandez
The New York Times

Consumer prices were flat in January, the Labor Department said Friday, easing concern that the Federal Reserve will have to raise interest rates to ward off inflation soon.

While the Fed has taken a small step toward scaling back emergency measures that supported the economy by raising an interest rate for short-term loans to banks, the data reinforced a sense that more severe tightening was still a way off.

The report suggested that inflation was largely in check despite a period of extraordinarily low interest rates. That should ease some of the pressure on Fed policy makers as they consider when to raise the federal funds rate, a benchmark for market rates.

The cost of living in the United States remained steady in January, the Department of Labor said, with the price of a variety of goods - including medical expenses and cigarettes - increasing 0.2 percent. A closely watched measure that excludes volatile food and fuel prices, the cost of living underscored the downward trend: it fell 0.1 percent in January, the first decrease since the recession in 1982.

"Despite the extraordinary fiscal and monetary stimulus injected into the economy, many prices are still stagnant or declining," Dan Greenhaus, chief economic strategist for Miller Tabak, wrote Friday in a research note. "The pricing situation still remains fragile."

Despite rumblings on the possibility of deflation - a three-month gauge of prices fell to zero last month - economists generally expected the upward momentum to continue. Prices have risen 2.6 percent in the last year.

"Even though the economy is expanding again, the threat of deflation has not passed," Paul Ashworth, an economist for Capital Economics in Toronto, wrote in a research note. He said that high vacancy rates and a flood of foreclosed homes would continue to depress housing costs.

As it battled the global financial crisis, the Fed printed more than $1 trillion in new money and kept interest rates near zero, prompting criticism that it was setting the stage for rampant inflation.

But prices remain subdued. That could change as banks begin to lend money they hold in reserves, but the Fed hopes tighter monetary policy and efforts to drain some reserves will counteract any inflation.

On Thursday, the central bank moved toward withdrawing its efforts to prop up the economy, announcing that it would raise the interest rate it charges on short-term loans to banks, known as the discount rate, by a quarter of a percentage point. Analysts do not expect the federal funds rate to rise for at least six months.

The Labor Department attributed much of the increase in consumer prices, measured by its Consumer Price Index, to rising energy costs - primarily gasoline, fuel oil and natural gas. A decrease in the price of rent, new cars and airline tickets helped offset rising energy prices.

Economists said the results indicated that businesses were keeping prices low to try to attract price-conscious customers.

"People are very much price-sensitive, they are still paying down their debts," said Anna Piretti, senior economist for BNP Paribas. "That is going to be the theme for some time. Prospects for employment are not looking very bright."

A report on jobless filings on Thursday rekindled worries that the labor market would be slow to rebound. First-time claims last week were much higher than expected - 473,000, up 31,000 from the previous week.

The data on consumer prices beat Wall Street forecasts, and helped calm some of the nervousness that emerged on Wall Street after the Fed said it would raise the discount rate.

On Thursday, the government offered a similar portrait of inflation in its report on producer prices, which rose 1.4 percent in January. Higher prices might be in the pipeline, especially for metals, food and energy products.

It is unclear whether businesses can afford to pass rising costs to consumers. If they do not, that may worsen their financial health and prolong unemployment.

"If producers see their profits being hurt they will be more reluctant to hire," Ms. Piretti said. "It's a circle."

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NJ Budget Plan Shakes The State, But Not The Muni Market

Tuesday, February 16, 2010
By Kelly Nolan and Melissa Korn
Dow Jones Newswires

NEW YORK (Dow Jones)--By declaring a state of fiscal emergency, Gov. Chris Christie of New Jersey enraged his political opponents and alarmed some constituents, but the municipal bond market took the news in stride.

The Garden State's municipal bonds barely budged in secondary markets Friday, a day after Christie said in a speech that New Jersey "is in a state of financial crisis." A $2 billion budget shortfall has driven the state "to the edge of bankruptcy," he said, as he announced significant state funding cuts to schools, universities, hospitals and public transit, among other public services.

In particular, Christie proposed $475 million in cuts to school aid, as well as $32.7 million in cuts to the state's largest municipal bond issuer, New Jersey Transit. The public transportation system, which provides train, bus and light rail service to hundreds of thousands of commuters daily, is also usually among the 10 largest muni bond issuers nationwide, said Michael Pietronico, chief executive of Miller Tabak Asset Management.

Despite the blow to some state issuers, New Jersey paper was little changed Friday, because the Garden State's dire budget problems were already widely known, and cuts from the Republican governor--who campaigned on promises to cut spending and taxes--were anticipated, market participants said.

Beyond that, there is also a relative shortage of New Jersey paper, and "the market's been thinly traded to begin with," said Gary Pollack, head of fixed income and research for Deutsche Bank Private Wealth Management. "I don't notice any new tightening that wasn't already going on."

Christie's invoking the specter of bankruptcy is hardly new, as some state and local politicians who face staggering budget deficits have also used the word. However, generally speaking, they've used it as a political tool, rather than an admission of actual intent.

"This is simply stage one of having to allocate pain," James W. Hughes, dean of Rutgers University's Edward J. Bloustein School of Planning and Public Policy, said of Christie's budget cut plans.

Hughes noted while the current cuts are needed to fill a $2 billion shortfall for the remainder of the 2009-2010 fiscal year, estimates for next year's deficit range as high as $10 billion.

"These [deficits] are unprecedented in scale," he said. "I'm as shell-shocked as anybody."

Municipalities tend to do everything possible to pay bondholders first, including making draconian spending cuts, increasing taxes and -- in cash-strapped California's case--asking the federal government for help. Many states, including New Jersey, have constitutional mandates to balance their budgets -- and pay bondholders first.

Between 1970 and 2009, municipal issuers followed by Moody's Investors Service defaulted only 54 times, the credit-rating agency said in a recent report.

New Jersey is hardly alone in its budgetary woes. The worst recession since the Great Depression has caused a drastic decline in state revenues, with the drop in tax receipts the worst on record, said Jon Shure, deputy director of the State Fiscal Project at the Center on Budget and Policy Priorities in Washington.

As a result, even after making steep cuts, states still face large budget gaps, with at least 41 states having new shortfalls for the current fiscal year. States may be looking at budget gaps as big or bigger in the upcoming fiscal 2011 year.

"This is deeper and more widespread than it's ever been and the reason is this national recession has caused state revenues to collapse," Shure said.

In his speech Thursday, Christie said state sales-tax revenue was down 5.5% this year, and corporate business tax revenue was down 8%.

As its fiscal problems mounted, New Jersey has foregone payments into its employee pension plans in the last fiscal year and is unlikely to resume this year, said Kenneth Weinstein, a Fitch Ratings analyst for New Jersey. Those plans are now significantly underfunded.

Some in the state worry that reduced state spending--particularly state aid to school districts--will force local governments to pick up the slack and raise the state's already high property taxes.

"It remains to be seen on the school district side if these local aid cuts translate into higher property taxes," Weinstein said.

Under Christie's proposal, the state's colleges could also face a big hit. Rutgers University, New Jersey's largest public school, will lose $18.5 million in state funding through June 30.

Rutgers said in a statement that the cuts will "impose additional hardship" for it and other state-subsidized schools.

Paul Shelly, spokesman for the New Jersey Association of State Colleges and Universities, said it's unlikely the group's nine institutions will turn to the bond market for short-term funding. The colleges generally use bonds to cover facilities costs and are already among the country's most leveraged, he said, since the state doesn't help with construction.

Shelly said the schools will instead try to cut expenses, since it's too late in the year to raise this semester's tuition.

New Jersey Transit spokeswoman Penny Bassett Hackett said in an emailed statement that the $32.7 million to be cut from her agency's budget wasn't earmarked for specific programs.

"We're looking at everything--service and fare options, efficiencies, everything," she said.

-By Kelly Nolan and Melissa Korn, Dow Jones Newswires; 212-416-2167; kelly.nolan@dowjones.com

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Quiet Tone in Munis Fri; Prep For $1.4B Deals On Tap

Friday, February 12, 2010
Dow Jones Market Talk

1536 GMT (Dow Jones) -- Muni market has quiet tone Fri, trading around unchanged ahead of three-day weekend. Investors preparing for next week's nearly $6Bln in expected volume. Two major general obligation deals are on tap, both around $1.4Bln, from Illinois as well as the Los Angeles Unified School District. "The most interesting deal will probably be the Illinois deal, considering their credit issues are well known," said Michael Pietronico, CEO of Miller Tabak. "It will be interesting to see how it gets priced." (KNN)

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Muni Bonds Outperform Treasuries as N.Y. MTA Postpones Sale

Wednesday, February 3, 2010
By Jeremy R. Cooke
of Bloomberg

Feb. 3 (Bloomberg) -- Benchmark municipal bonds held their value better than U.S. Treasuries today as strong demand and below-average supply of new issues buoyed a market where the week's largest offering was postponed.

New York's Metropolitan Transportation Authority put off until at least tomorrow a planned $650 million sale, most of it taxable Build America Bonds. The largest U.S. mass-transit system sought new ratings after disclosing that payroll tax revenue will be lower than expected. A Massachusetts authority that helps finance student loans went forward with a $405 million deal, 79 percent of which is tax-exempt.

Ten-year AAA general obligation yields held at 3.08 percent today, according to Municipal Market Advisors. Yields on comparable-maturity Treasury notes rose 6 basis points, or 0.06 percentage point, to 3.7 percent, amid speculation the U.S. will report employment levels improved in January.

"If you look at the Treasury market, that's pretty good relative performance," said Mike Pietronico, chief executive officer of New York-based Miller Tabak Asset Management. "It continues to be a seller's market, and it's very difficult to find paper."

States and local governments have sold or plan to offer about $4.6 billion of fixed-rate bonds by Feb. 5, the slowest non-holiday week in the last five months, according to datacompiled by Bloomberg.

The Massachusetts Educational Financing Authority offered through Morgan Stanley $318.5 million of bonds exempt from federal and state income taxes and $86.5 million of debt subject to calculations of the federal alternative minimum tax. Ten-year, tax-exempts rated AA by Standard & Poor's and A by Fitch Ratings will pay 4.625 percent.

--Editors: Pete Young, Walid el-Gabry

To contact the reporter on this story:
Jeremy R. Cooke in New York at +1-212-617-5048 or jcooke8@bloomberg.net.

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net.

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A New Year for Retail - The Bond Buyer
Investors Exhale and Look Ahead

Friday, January 29, 2010
By Christine Albano
The Bond Buyer

Retail investors have much less apprehension about the municipal bond market heading into 2010 than they had at the start of 2009, according to market participants.

Just 12 months ago, mom and pop investors faced much of the same uncertainty they harbored throughout a tumultuous 2008, when the subprime mortgage crisis erupted and the auction-rate securities market failed, followed by the collapse of several Wall Street firms and the bond insurance industry.

The 2009 market, however, was soon on the mend and the year ended with a 100 basis-point rally on triple-A general obligation yields compared with 2008. That amounted to a reduction in municipal-to-Treasury ratios from early 2009 of over 150% in some spots, and a slight narrowing of credit-quality spreads.

This year, those improvements - as well as potential increases in tax rates by many states and possible federal tax increases for the upper middle class - will help fuel retail demand for municipals, sources said.

In early 2010, a strong market continues to keep municipal yields relatively lower and the ratios are holding steady. The 30-year GO yield ended at a 4.07% last Friday - after starting the year at over 5% - while the 10-year GO ended at a 3%, according to Municipal Market Data.

Retail bondholders saw the value of their bonds strengthen as 2009 progressed as yields inched down and triple-A GOs due in 30 years fell to a 4.15% yield on Dec. 31, after starting at 5.05% on Jan. 2, 2009.

The ratio is also helping to buoy retail demand as the 30-year municipal-to-Treasury ratio was at a 90.4% as of last Friday, down from its high of 179.7% on Jan. 2, 2009, but still above historical levels, according to MMD.

Although credit spreads between triple-A and triple-B GO bonds are still historically wide, the slight narrowing in 2009 continues to be viewed as a positive by the retail market. For instance, spreads fell to 174 basis points as of Dec. 31, 2009, after beginning the year at 258 basis points on Jan. 2, according to MMD.

These key improvements helped boost record retail demand last year as individuals invested $78.6 billion in municipal bond funds while also withdrawing $92.3 billion from tax-exempt money market funds to escape average yields of less than 0.1% for much of 2009.

Using early bond redemption data as a guide, 2010 looks like it will be a strong year for munis as well, with $38.143 billion expected this month, up from the $30.67 billion in total redemptions in January 2009, according to data from Interactive Data.

With 2010 in its infancy and the nation still in a recession, market participants expect to see continued retail demand for traditional, tax-exempt debt, though they noted that supply might again be somewhat limited due to continued issuance of taxable Build America Bonds.

Although issuers sold $409.13 billion in debt last year - just $20 billion shy of the 2007 record - the BAB initiative eventually brought more than $64 billion of debt to market through Dec. 31.

Given the improvements over the last 12 months, the following six market participants offered their predictions about what trends will drive the retail market in 2010.

Michael Pietronico, CEO of Miller Tabak Asset Management in New York City

"We anticipate that retail investors will continue to support the municipal market in 2010. While retail demand will be more modest in 2010, in our view, it will continue to impress - relative to other investment choices - as the eventuality of higher marginal income tax rates will prove to be a tremendous incentive to consider tax-free bonds."

"Our team views the demand in 2009 to be somewhat distorted due to the significant 'cheapness' of the tax-free sector relative to Treasuries as the year began. We anticipate that the eventual removal of excess liquidity by the Federal Reserve will begin to weigh somewhat on retail investors' investment plans and as such a reduction in demand is likely to occur."

"We expect retail investors to enter 2010 with a more defensive outlook which keeps municipal yields on the front end of the yield curve well-anchored and perhaps pulls marginal demand from more aggressive products, such as closed-end funds."

Chris Mier, municipal strategist at Loop Capital Markets in Chicago

"I expect that interest rates will be slightly higher in 2010, enough to draw the interest of retail. That, along with the possibility of an increase in the top federal marginal tax rate, and a reduction of availability of tax-exempts, could generate a little more interest by retail this year."

"With the stock market up big in 2009, retail may view incremental stock purchases as too risky and may come back to the comfort of the municipal market. Working against retail, however, is the continuation of a lot of bad news likely all year long for state and local governments. BABs are taking volume out of tax-exempts on a one-for-one basis with issuers choosing to use BABs whenever they can save relative to tax-exempts."

"Many retail investors will want to stay fairly short on the yield curve because of inflation fears. With BAB yields comparable to the more risky corporate high-grades, the purchase of BABs in an individual retirement account could make a lot of sense to people. We expect registered representatives and financial consultants to use BABs and tax-exempts in a wider variety of high-net-worth investment strategies."

Sam Ramirez Jr., managing director of Ramirez & Co., New York City

"Retail investors have always been the driving force in the tax-exempt municipal bond market and are even more so today. We feel the one situation that could decrease demand would be yields trending to lower levels, forcing retail investors to have yield shock. However, at present levels we see demand remaining strong. Additional trends that support this demand are potential tax increases - which will make the exemption more valuable - as well as the expanded use of the retail order period for new issues."

"The Fed has made it clear that it does not intend to raise rates until the unemployment rate shows signs of improvement. Strategies we are using in this environment include more of a barbell-type strategy and, for well-established laddered portfolios, a similar strategy of a concentration on shorter and longer maturities, avoiding the three-to-15 year maturities. When the Fed tightens, we are expecting the short end of the yield curve to trade off more than the longer end, and in this scenario, a barbell strategy is preferable."

"With the growth of the issuance of taxable municipal bonds and BABs we are seeing a trend of growing acceptance of the asset class for retail in retirement accounts. The supply of tax exempts will be decreased slightly due to BABs, and this could create a scenario where we see more demand than supply, which should cause the municipal asset class to outperform other fixed-income asset classes in 2010."

John Mousseau, vp and portfolio manager at Cumberland Advisors, Vineland, N.J.

"We think the retail investor will continue to be important this year. We have seen more flows into tax-exempt bonds at higher levels than the stock market. We think many investors looked into the equity abyss of March and correctly reasoned that they could not sell into that mess. The fact that equities have rebounded 35% to 60% since March is allowing retail investors to reallocate more money to bonds now."

"BABS will continue to be an important driver in reducing tax-exempt supply, while asset allocation and higher tax assumptions are boosting demand. I see retail investors adding BABs to their IRA and Keogh accounts as BABs are expanding the concept of municipal bonds as an asset class."

"If people start to discount a higher marginal federal tax rate into computing taxableequivalent yields it should boost demand, and push people further out on the curve since higher yields produce greater taxable equivalent yields."

Michael Davern, vp and director of municipal managed money at Nuveen Asset Management in Chicago

"There's a lot of concern about rising rates and that impacts investor demand, but even though we are in recession, retail will be no more cautious than they are at any other time. Overall, demand should remain strong as investors look for asset classes that seek to conserve principal and generate consistent tax-exempt income."

"This will be especially important because many states are expected to increase tax rates to help balance budgets and the Bush tax reforms are due to sunset after 2010. In addition, some budget proposals by the Obama administration may result in tax increases for the upper middle class."

"Supply will likely continue to be constrained with the effects of the recession and the availability of taxable Build America Bonds. If retail already owns bonds, there will be strong demand for, and scarcity of, what they own, and that will push prices up. If they are looking to get involved, the supply constraint could make it difficult to find bonds and more expensive."

"Municipal bonds have moved toward a more normal relationship with Treasuries. These relationships may tighten further in light of pending tax increases. However, many non-traditional municipal buyers have disappeared and often only retail investors are providing liquidity to the market."

Nathaniel Singer, managing director at Swap Financial Group, South Orange, N.J.

"With respect to the short end of the tax-exempt curve, we have come a long, long way. Over the past year, we have seen the opportunity to invest at 200% of taxables for five-year, triple-A rated tax-exempts and now we see yield ratios closer to 65%. Even if tax rates go higher - the anticipation of which appears to be driving money into tax-exempts - municipals still have to be considered 'rich' at the front end."

"Money market yields might as well be considered to be zero. If the belief is that a resurgent economy will cause yields to start going higher - and the Fed embarks on an asymmetric directive - we may start to see a reallocation of money out of short to intermediate tax-exempt fixed income and into the equity market. This may provide a challenge to the tax-exempt market, and retail investors, if volume continues to be heavy into 2010."

"BABs will have the greatest impact on long maturities, which is not the focus for the vast majority of retail investors. If anything, BAB issuance may cause a flattening of the muni yield curve, which will further dissuade retail from any sort of extension trade as an alternative to crossing over to equities."

"With respect to credit, my bet is that 2010 will mirror 2009 - a lot of talk about the impact of the economy on muni credits, but limited impact in terms of retail investment."

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Muni Watch: Puerto Rico's $1.4B Bond Sale Stokes The Market

Tuesday, January 26, 2010
By Kelly Nolan and Stan Rosenberg
Dow Jones Newswires

NEW YORK (Dow Jones)--A Puerto Rico agency is poised to sell $1.4 billion of sales tax-backed bonds this week, the first tax-exempt issue of any size so far this year that doesn't include a preponderance of federally subsidized, taxable Build America Bonds, or BABs.

The bonds, which should help the economically ailing commonwealth balance its budget and pay off some debt, will be sold through the Puerto Rico Sales Tax Financing Corp. That agency's ratings are better than those of the Caribbean island nation itself, which should translate to cheaper financing.

"This gives traditional muni investors the chance to buy tax-exempt bonds at a good yield," said Michael Pietronico, chief executive of Miller Tabak Asset Management. "Given the shortage of plain vanilla tax-exempt financings so far in 2010, it does not surprise us that this deal has attracted substantial demand."

The deal also offers investors the opportunity to snatch up relatively higher-rated, longer-maturity bonds, which have been harder to come by in recent months, as BABs have come to dominate supply at the long end. Investors, however, have been willing to reach for slightly lower-quality bonds, given their higher yields.

Build America Bonds are expected to drive much of the state and local government bond market's growth this year, with sales estimates for them in the $150 billion area. That would be more than twice the amount sold in the last nine months of 2009 after the bonds were created as part of the federal stimulus program.

BABs offer a higher coupon, or initial interest rate, but interest rates are taxable. That often attracts different investors from traditional tax-exempt

Investors' hunger for long-dated tax-exempt bonds was apparent when the Puerto Rico bonds were shopped around. An initial pricing for individual investors Monday offered about 1.5 percentage points more yield than triple-A-rated bonds to compensate for the perceived risk associated with Puerto Rico's struggling economy, Pietronico said.

Reflecting strong individual investor demand, that differential was shaved by about 12.5 basis points, or 0.125 percentage point, on many of the earlier maturities offered in Tuesday's second day of retail pricing. That shrank the substantial amount of bonds that still must be sold to institutional investors, who may not be as eager to commit as individuals. The institutional pricing for the deal is set to take place Wednesday.

The transaction includes about $1.2 billion of current-interest tax-exempt bonds, about $832 million of which are later-maturity bonds being held for institutional investors. The deal also offers about $150 million in so-called zero-coupon bonds, which pay no interest but are sold at steep discounts and gain in value over time. The rest includes similar bonds that carry a conversion feature into other bonds at maturity.

Citigroup is the lead bookrunner.

"There's still a lot to sell" in the later maturities, 2039 and 2042, said Dan Solender, director of municipal bond management at Lord Abbett. But "if they can find the right pricing, there is enough cash out there due to the positive cash flows into municipal mutual funds." Those funds have been growing every week since the beginning of last year, he said.

Puerto Rico has had its fair share of economic problems as it faces chronic budget deficits, high debt levels and roughly 15% unemployment. But the commonwealth's bonds have always been attractive to individual investors in the U.S. because interest on the bonds is free from federal, state and local taxes. Interest on most tax-exempts is free from federal taxes as well as home-state taxation.

Also attracting retail investors is that the financing authority's debt is backed by the greater of a 2.75% slice of the island's 7% sales tax or a pledged base amount. The pledged amount for fiscal 2010 is about $550 million.

In general, Puerto Rico's sales tax has performed well, despite the weakness in the economy. Each 1% of the tax collected produced approximately $208 million in fiscal 2008, declining somewhat to approximately $200 million through mid last-year, according to a recent Fitch Ratings report. Each 1% was expected to generate roughly $191 million annually, the report said.

The sales tax base is broad, and phone service, cable television and Internet access, as well as alcoholic beverages and tobacco, are subject to the tax.

"The fiscal pressure that the commonwealth is experiencing is well documented, but this structure and revenue pledge insulates these bonds from their operations," Miller Tabak's Pietronico said.

Largely because of the sales tax backing, the authority's bonds are ranked A2 by Moody's Investors' Service and A by Fitch Ratings, both the sixth highest of 10 investment-grade credit ratings. Standard & Poor's rates them one level higher at A-plus.

Meanwhile, major ratings agencies rate Puerto Rico's general obligation bonds substantially lower, due to the island's strained economy. Standard & Poor's and Moody's both give them the lowest investment grade, at BBB- and Baa3 respectively. Fitch does not rate Puerto Rico's general obligation bonds.

-By Kelly Nolan and Stan Rosenberg; Dow Jones Newswires; 212-416-2167; kelly.nolan@dowjones.com, stan.rosenberg@dowjones.com

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Puerto Rico to Sell Largest Tax-Exempt Bond Offering in a Month

Monday, January 25, 2010
By Jeremy R. Cooke
of Bloomberg

Jan. 25 (Bloomberg) -- Puerto Rico, more indebted than any U.S. state except for California and New York, plans to raise $1.4 billion from investors this week with the biggest tax-exempt bond offering in a month.

The commonwealth's Sales Tax Financing Corp., which has borrowed about $11 billion against a pledge of revenue from a 7 percent levy that took effect in November 2006, will use the money raised to help the local government meet operating budget expenses and repay debt.

Billion-dollar issues of long-term, tax-exempts have become less common since the U.S. Treasury started subsidizing taxable borrowing for public works under the Build America Bond program early last year.

That makes Puerto Rico's offering more "unusual, but it should give investors a good opportunity on a reasonably priced deal because of its size," Mike Pietronico, chief executive officer of Miller Tabak Asset Management, said in an interview.

Build America Bond issues, for which municipal issuers are reimbursed 35 percent of the interest cost, have totaled $68.6 billion since they began in April and 95 percent are due in 2019 or later, data compiled by Bloomberg show.

Yields on top-rated, 30-year general obligations ended last week at 4.47 percent, the lowest in almost two years, according to a daily survey by Municipal Market Advisors of Concord, Massachusetts.

State and local governments plan to sell about $6 billion of fixed-rate securities this week, compared with $6.5 billion last week, according to data compiled by Bloomberg.

Illinois Capital Projects

This week's next-largest municipal offering comes from Illinois. The second-lowest rated state after California will negotiate the sale of $1 billion in Build America Bonds with banks led by Barclays Plc to fund transportation work and capital projects. Debt will come due from 2011 through 2020 and in 2022 and 2035, preliminary offering documents show.

Earlier this month, Illinois sold $3.5 billion of non-subsidized taxable notes to meet pension payments. Standard & Poor's gave the state its fifth-highest rating of A+, Moody's Investors Service assigned its sixth-highest A2, and Fitch Ratings ranked it A, comparable to Moody's A2.

The Puerto Rico authority selected a group of banks led by Citigroup Inc. to take orders from individual investors today and tomorrow and set final prices and rates Jan. 27, when institutions such as mutual funds can buy.

The commonwealth of about 4 million people draws demand from across the nation since the interest on its bonds is exempt from federal, state and local income taxes.

Tax-Supported Debt

Puerto Rico's $35.2 billion in net tax-supported debt ranks it behind California's $66.4 billion and New York's $56.9 billion, based on an annual report on the states from Moody's.

The Sales Tax Financing Corp., advised by the Government Development Bank in San Juan, was created to dedicate a source of revenue to pay off debt previously secured by appropriations from Puerto Rico's general fund and reduce borrowing costs. The agency is also known as Cofina, after its Spanish acronym.

This week's issue has a first subordinate pledge of sales tax revenue rated A+ by S&P, A2 by Moody's and A by Fitch. S&P and Moody's rate Puerto Rico's general obligation pledge at their lowest investment grades of BBB- and Baa3.

Three types of securities will be on offer, preliminary sale documents show. Debt paying semiannual interest will mature from 2015 through 2030 and in 2039 and 2042. Capital appreciation bonds, whose full investment return won't be paid out until maturity, will come due from 2031 through 2027.

Puerto Rico's offering will be the largest tax-exempt deal since New York Liberty Development Corp. raised $2.6 billion for World Trade Center construction the week of Dec. 21.

Following are descriptions of additional pending sales of municipal debt in the U.S.

NEW YORK CITY MUNICIPAL WATER FINANCE AUTHORITY, which helps fund improvements to the water and sewer system of the nation's most populous city, plans to sell $400 million of Build America Bonds as soon as tomorrow. Underwriters led by Ramirez & Co. will market the debt, rated AA+ by S&P, Aa3 by Moody's and AA by Fitch. (Updated Jan. 25)

SOUTHERN CALIFORNIA PUBLIC POWER AUTHORITY plans to borrow about $236 million this week for the city utilities of Los Angeles, Burbank and Pasadena to buy a 20-year supply of energy from a 97-turbine wind farm near Milford, Utah. Underwriters led by Barclays Plc will market tax-exempts due from 2011 through 2030 to investors to raise the money. The securities, backed by power sales agreements with the three utilities, are rated AA- by S&P and A1 by Moody's. The 203.5-megawatt wind project, owned and operated by affiliates of Newton, Massachusetts-based First Wind Holdings Inc., started commercial operation in November, S&P said. (Updated Jan. 25)

MISSOURI, home to Monsanto Co., Hallmark Cards Inc. and St. Louis, plans to refinance debt originally issued to make low-cost loans for local water and wastewater projects in the state. The $219 million transaction will be handled by BofA Merrill Lynch as soon as this week. The tax-exempt bonds will be issued through Missouri's State Environmental Improvement and Energy Resources Authority. (Added Jan. 25)

CALIFORNIA'S EAST BAY MUNICIPAL UTILITY DISTRICT, which provides water to 1.3 million customers in the area around Berkeley and Oakland, intends to offer $600 million in debt beginning this week. The utility will sell $200 million of tax-exempts to refinance variable-rate debt this week through investment banks led by De La Rosa & Co. During the week of Feb. 8, the district will market $400 million of taxable Build America Bonds through Morgan Stanley to fund construction projects, said Gary Breaux, the district's finance director. (Added Jan. 21)

NEW YORK STATE ENVIRONMENTAL FACILITIES CORP. plans to raise $327 million to provide loans for New York City water infrastructure projects by selling a mix of tax-exempt debt and taxable Build America Bonds the week of Feb. 1. The subordinate notes, backed by loan repayments by the city's Municipal Water Finance Authority, are rated Aa1 by Moody's and AA+ by S&P and Fitch. Underwriters led by Siebert Brandford Shank & Co. will underwrite the deal. (Updated Jan. 21)

--With assistance from Brendan A. McGrail in New York. Editors: Walid el-Gabry, Pete Young

To contact the reporter on this story:
Jeremy R. Cooke in New York at +1-212-617-5048 or jcooke8@bloomberg.net.

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net.

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Yields Show Little Change in an Active Week - The Bond Buyer

Friday, January 15, 2010
By Michael Scarchilli
The Bond Buyer

The Bond Buyer's weekly yield indexes were flat to slightly lower this week as the primary market took center stage with over $9 billion sold, in the most active week of new issuance so far in the new year.

Michael Pietronico, chief executive officer of Miller Tabak Asset Management, said the success of the issuers coming to market this week "really depends on the deal."

"It has to do with credit quality, with what state the issuer was coming from," he said. "There was a large deal that did extraordinarily well, [$713 million from the New Jersey Higher Education Student Assistance Authority]. There's not a lot of Garden State issuance, so this saw huge demand. Some of the other deals were not as fortunate."

"For the most part, the market is sideways," Pietronico said. "There's been some spread compression. But some humongous rally doesn't seem to be in the cards at this point. A range trade should be expected until something happens to change it, in the economy or something."

The new-issue market this week was led by a $900 million competitive sale from Pennsylvania, including $604 million of taxable Build America Bonds, alongside $794 million of debt from Chicago and the New Jersey deal.

The Bond Buyer 20-bond index of 20-year general obligation bond yields was unchanged this week at 4.31%. The 11-bond index of higher-grade 20-year GO yields was also unchanged this week at 4.03%.

The revenue bond index, which measures 30-year revenue bond yields, declined three basis points to 4.93%. That is the lowest level for the index since Dec. 17, 2009, when it was 4.92%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, declined two basis points to an alltime low of 0.43%. The previous low was 0.45% last week. The index began on July 12, 1989.

The yield on the 10-year Treasury note declined nine basis points to 3.74%, which is the lowest it has been since Dec. 17, 2009, when it was 3.49%.

The yield on the 30-year Treasury bond dropped six basis points to 4.63%, but it remained above its 4.61% level from two weeks ago.

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 5.37%, down three basis points from last week's 5.40%.

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Muni Watch: Market Easily Absorbs More Than $4B

Thursday, January 14, 2010
By Stan Rosenberg
Dow Jones Newswires

NEW YORK (Dow Jones)--The municipal bond market swung back into high gear Wednesday, handling a wide variety of tax-exempt and taxable bonds, and finding eager investors for more than $4 billion in state and local debt.

The investor response reflected pent-up demand from individual investors, as well as an institutional appetite, for municipals, despite relatively expensive prices, portfolio managers said. The size of the offerings also provided support for some analysts' projections that new municipal debt this year could reach a record $450 billion.

"Anything on the tax-exempt side seems to be getting aggressive (price) levels," said Michael Pietronico, chief executive at Miller Tabak Asset Management.

Early-year fund flows are "typically strong from reinvestment demand," and now that large issues are reaching the market, "they are being absorbed," said Peter Hayes, a managing director at BlackRock who heads up the firm's municipal bond investment group.

There were plenty of offerings to choose from Wednesday.

Among them, Pennsylvania sold $900 million, Chicago $794 million and Arizona's Transportation Department $706 million. New York City's Transitional Finance Authority offered $500 million, while Washington State sold $488 million and Harvard University $425 million through the Massachusetts Health & Educational Facilities Authority.

The sales marked the first time in weeks that investors had a wide choice of tax-exempt debt from around the country, despite $604 million of the Keystone State's sale being federally subsidized taxable Build America Bonds. That portion of the offering went well, but balances remained in the $296 million tax-exempt segment, sources familiar with the deal said.

That issue contained an unusual bidding requirement in which underwriters bid separately for each of the two issues, but they were awarded on the lowest overall interest cost for the two combined, in this case to Barclays Capital. Some portfolio managers said the tax-exempts ended up being bid at too high a level in order for underwriters to get at the taxable bonds.

But professionals were impressed with the overall continued demand for tax-exempts even with the high price tags hung on the bonds. Tax-frees outperformed all other debt markets last year, gaining over 14%, according to a Merrill Lynch municipal index, and have continued firming into 2010. Professionals said investors were hungry for a place to invest their cash and were looking for high-grade munis, despite headlines concerning states' fiscal problems.

As an example, investor demand Wednesday came even as Standard & Poor's downgraded most of fiscally distressed California's bonds. The ratings firm lowered to A-minus from A its ratings on the Golden State's $63.9 billion of general obligation debt, and to BBB-plus from A-minus its ratings on the state's $9.4 billion of appropriation-backed lease revenue bonds. California already had been the lowest ranked of states.

"There just seems to be more demand than bonds," said Miller Tabak's Pietronico. Money market funds, offering 0% interest rates, "continue to bleed money," and there has been some reallocation from stock market holdings, he said. Money from maturing coupons, which is at its heaviest in January, also is "providing a tailwind," he said.

Harvard University sold $425 million of its triple-A-rated debt Wednesday. The revenue-backed bonds will pay for several projects, including a new law school in Cambridge, Mass., and to refinance and pay off some debt.

The university is the world's wealthiest but carries a heavy debt burden of over $6 billion. It has paid large sums--almost $1 billion--to get out of interest-rate bets gone wrong. Its endowments also have shrunk by about one-third. Nonetheless, Harvard maintained gilt-edged ratings from Moody's Investors Service and Standard & Poor's.

Barclays Capital was lead bookrunner for this issue too.

(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 stan.rosenberg@dowjones.com)

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Good Variety Of Tax-Exempts Being Priced

Tuesday, January 12, 2010
Dow Jones Market Talk

1559 GMT (Dow Jones) -- Tax-exempt buyers get a break Tuesday as calendar offers a good variety of bonds from around the country, some in large deals and some in smaller like $83 mln competitive Virginias. Secondary prices moving sideways with focus on primary sector and with dealers waiting to see final clearing levels for new issues. Deals include $706 mln Arizona, $538 mln NJ Higher Education Assistance Auth. and $313 mln NYC Transitional Finance Auth. in second day of a retail order period. First day saw $178 mln sold. Ohio State University also in retail period for $227 mln. Prices are being hung on new issues and then changed rapidly as market remains firm, notes Miller Tabak's Michael Pietronico. (SDR)

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Employers Cut 85,000 Jobs in December - The Wall Street Journal

Friday, January 8, 2010
By Luca Di Leo and Meena Thiruvengadam

U.S. job losses were higher than expected in December of last year and the unemployment rate remained at a lofty 10%, a sign the labor market has still some way to recover.

Although the November 2009 data was revised to show the U.S. economy added jobs for the first time since the recession began two years earlier, the December payroll number was worse than forecast.

Nonfarm payrolls fell by 85,000 last month, compared with a revised 4,000 gain in November, the Labor Department said Friday.

Economists surveyed by Dow Jones Newswires had expected a payroll decrease of just 10,000. The November figure originally showed an 11,000 drop in payrolls.

The unemployment rate, calculated using a survey of households as opposed to companies, remained at 10% in December, the same level as the previous month. Economists had forecast the jobless rate would edge higher to 10.1%.

Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care continued to add jobs.

Even though the payroll number was worse than expected, the data reflects an improvement in the jobs market. Job losses have been moderating substantially during 2009 as the U.S. economy recovered from its worst recession in decades.

In the fourth quarter of 2009, employment losses averaged 69,000 per month, compared to job losses of 691,000 a month in the first quarter of last year.

Employment in construction fell by 53,000 in December, while manufacturing jobs fell by 27,000. Temporary help services added 47,000 jobs in December and health care employment continued to increase, by 22,000.

Ahead of the release, analysts warned against reading too much into one piece of data.

"The number, as reported, is revised no less than three times, often showing a final number that bears little resemblance to the originally reported figures" said Dan Greenhaus, chief economist at Miller Tabak & Co.

The Federal Reserve's view that U.S. interest rates must remain at a record low for several more months isn't expected to change following the December jobs report.

The central bank's rate-setting committee left interest rates close to zero mid-December in the face of low inflation and still-high unemployment. Since the financial crisis began in 2007, the Fed has slashed its benchmark lending rate from a peak of 5.25%.

Minutes of last month's meeting, released earlier this week, showed that Fed officials remained worried about the labor market's weakness. "Several participants observed that more than one good report would be needed to provide convincing evidence of recovery in the labor market," the December minutes showed.

Fed officials have predicted the unemployment rate will average between 9.3% and 9.7% in the fourth quarter of 2010 due to a slow recovery.

The U.S. economy is expected to have expanded at a healthy pace in the second half of 2009, but the jobs market's weakness, tight bank lending and a fading government stimulus is seen keeping the recovery contained.

Friday's report showed that average hourly earnings rose to $18.80 from $18.74.

Write to Luca Di Leo at luca.dileo@dowjones.com
and Meena Thiruvengadam at meena.thiruvengadam@dowjones.com

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