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In The News - 2011

  News from 2012
December 23, 2011 Municipals Outperform Treasuries - The Bond Buyer
December 19, 2011 Record Rally Seen as Surging Funds Meet Sales Pause: Muni Credit - Bloomberg
December 14, 2011 Detroit To Sell Muni Bond As State Considers Takeover Of City - Dow Jones Newswires
December 13, 2011 Record Spread Lures Buyers to Longer-Dated Bonds: Muni Credit - Bloomberg
November 22, 2011 Munis Flat-Higher, Following Treasurys - Dow Jones Newswires
November 18, 2011 California Laws Impair Holders of $22B of RDA Bonds, New Suit Says - The Bond Buyer
November 16, 2011 New Jersey Sells $1.3 Billion as Transports Outpace: Muni Credit - Bloomberg
November 14, 2011 Most Borrowing Undeterred by Jefferson County Bust: Muni Credit - Bloomberg
October 28, 2011 Indexes Up Amid Middling Buyer Interest, Sell-Off - The Bond Buyer
October 21, 2011 Once Rare 'Super Downgrades' Become More Common - The Bond Buyer
October 19, 2011 California Beats Bond Forecast on Default-Risk Drop: Muni Credit - Bloomberg
October 7, 2011 Deutsche Bank Buying May Signal Slump Nearing End: Muni Credit - Bloomberg
October 6, 2011 Muni Yields at Two-Month High After Biggest Jump Since January - Bloomberg
October 5, 2011 Cook Co. Preps for $600M - The Bond Buyer
September 27, 2011 Banks Boost Their Tax-Free Investments in First Half - The Bond Buyer
September 23, 2011 Yields Plunge on Fed Move - The Bond Buyer
September 23, 2011 California GOs Snag Low Yields - The Bond Buyer
September 22, 2011 New Deals, Not FOMC, Will Bring in Buyers - The Bond Buyer
September 16, 2011 Refunding Threatens Rally With Sales at 2011 High: Muni Credit - Bloomberg
September 9, 2011 Jobs Plan May Be Tough To Enact - Dow Jones Newswires
September 9, 2011 Tax-Backed N.Y. Sale Shows Bet on Wall Street Gains: Muni Credit - Bloomberg
August 31, 2011 Debt Delivers Yields With a Kick - The Bond Buyer
August 31, 2011 The Long and the Short on Premium "Kicker" Bonds - The Bond Buyer
August 24, 2011 "Budding Weakness" In Munis - Dow Jones Newswires
August 24, 2011 Rhode Island's Offer Unfazed by City's Bankruptcy: Muni Credit - Bloomberg
August 11, 2011 Mostly Small Deals Selling In Muni Market - Dow Jones Newswires
August 10, 2011 Puerto Rico Prices as Tax-Exempt Yields Get Cheaper: Muni Credit - Bloomberg
August 9, 2011 Pros Wonder What U.S. Downgrade Means for Munis - The Bond Buyer
August 7, 2011 U.S. municipal debt may prove resilient despite S&P - Reuters
August 4, 2011 Philadelphia to Sell $214.8 Million of Transit Debt: Muni Credit - Bloomberg
August 2, 2011 Munis Rally As Key Ratio Attractive - Dow Jones Newswires
July 27, 2011 Munis A Bit Weaker Ahead Of Maryland Bond Sale - Dow Jones Newswires
July 26, 2011 Maryland Cuts Sale $206 Million as Debt Talks Stall: Muni Credit - Bloomberg
July 22, 2011 Yields Mostly Fall, Highlighting Muni Market's Return to Health - The Bond Buyer
July 13, 2011 Market Post: Munis Charting Their Own Firm Path - The Bond Buyer
June 20, 2011 N.Y.C. to Bid $300M Of Bonds - The Bond Buyer
June 17, 2011 Credit Markets: Activity Limited As Greek Hope Does Little To Inspire - Dow Jones Newswires
June 17, 2011 Yields Slide on Intermediate and Long Ends - The Bond Buyer
June 13, 2011 Munis Stay Put Despite Treasury Rally, Stock Drop - The Bond Buyer
June 8, 2011 Scarcity Value Gives BABs a Boost - The Bond Buyer
May 17, 2011 Florida Issuers Borrow $1 Billion as Outflows Slow: Muni Credit - Bloomberg
May 11, 2011 Virginia $600M Deal Pushes Muni Prices - Dow Jones Newswires
May 10, 2011 Data Overload for Retail Investors - The Bond Buyer
May 9, 2011 With Two Virginia Offerings, Volume Picks Up a Tick - The Bond Buyer
May 3, 2011 N.J. TTFA Selling $600M After Appropriation Debt Downgrade - The Bond Buyer
April 27, 2011 A bad economy and negative news bruise municipal bonds' image - American City & County
April 27, 2011 Moody's cuts New Jersey rating a notch on finances - Reuters
April 25, 2011 Credit Markets: Deals From BB&T, Univision Awaken Primary Market - Dow Jones Newswires
April 21, 2011 New York Sells $2.6 Billion for World Trade Center: Muni Credit - Bloomberg
April 4, 2011 Philly Eyes Retail in GO Deal - The Bond Buyer
April 4, 2011 Howard University Issues to Help End Goldman Swap: Muni Credit - Bloomberg
March 30, 2011 Households Boost Debt Ownership to $1.095 Trillion - The Bond Buyer
March 14, 2011 Boston Sets $181.5 Million Sale - The Bond Buyer
March 11, 2011 Munis Survive Supply Test - The Bond Buyer
March 11, 2011 Tax-Exempts' Three-Week Rally Stalls as Sales Jump: Muni Credit - Bloomberg
March 7, 2011 New York City Set to Kick Off First GO Sale of 2011 for Debt Savings - The Bond Buyer
February 28, 2011 Tax-Frees Top Treasury, Corporate Debt in February: Muni Credit - Bloomberg
February 17, 2011 Big Borrowing Plan Roils Illinois - The Wall Street Journal
February 11, 2011 Long Yields Up; Light Supply Tempers Losses - The Bond Buyer
February 10, 2011 S&P Drops New Jersey GOs to AA-Minus Over Pension Woes, High Debt - The Bond Buyer
February 9, 2011 New Issues, S&P New Jersey Downgrade Mark Muni Market Developments - The Wall Street Journal
January 26, 2011 Assured Blasts S&P's New Rating Criteria; CDS Tell the Tale - The Bond Buyer
January 14, 2011 Yields Rise as Even Good Credits Have Hard Time - The Bond Buyer
January 13, 2011 New Jersey Cuts Bond Sale After Christie's 'Bankrupt' Comments - Bloomberg
January 11, 2011 Muni Watch: Brown Would Be Hero, If Wishing Could Make It So - Dow Jones Newswires
January 3, 2011 Issuers Offer $1.6 Billion Amid Months of Losses: Muni Credit - Bloomberg
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Municipals Outperform Treasuries

Friday, December 23, 2011
By James Ramage

The municipal market didn't need to do a lot to have a decent week.

Amid modest pre-holiday activity, muni yields have outperformed those of Treasuries on the week by firming very little. Munis have also seen a narrowing in their ratios to Treasuries and in their credit spreads, especially in the belly of the curve.

"There's a slight downward bias to yields on the week," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "In particular, credit spreads are narrowing, specifically in the intermediate part of the yield curve."

Muni bond indexes were mostly unchanged. After a slack week, Treasury indexes rose accordingly.

The Bond Buyer's 20-bond GO index of 20-year general obligation yields was unchanged this week, at 3.92%. It's still at its lowest level since Sept. 22, when it was 3.85%. The 11-bond GO index of higher-grade 20-year GO yields rose one basis point, to 3.66%, but stayed below its 3.67% level from two weeks ago.

The yield on the Treasury's 10-year note increased four basis points this week, to 1.96%, but was below its 1.98% level from two weeks ago. The yield on the 30-year Treasury gained seven basis points this week, to 2.99%, but still hangs below its 3.00% level from two weeks ago.

Thanks to a sell-off starting on Tuesday, Treasury yields have increased on the week, particularly as one ventures farther out along the curve. The two-year Treasury rose five basis points on the week, according to Municipal Market Data numbers, compared with its muni equivalent, which was flat.

The 10-year Treasury yield rose 11 points, while the 10-year muni was two basis points firmer, landing at a record low 1.91%. The 30-year Treasury yield rose 14 basis points, against a muni equivalent that ended up flat. Ratios also continue to tighten, according to MMD. The 10-year muni-Treasury ratio ended Thursday's session at 97.45%, close to its average for the year, which is 97.39%.

Ratios at the two-year and 30-year ranges, though narrowing, still sit above their averages for 2011. The 30-year muni-Treasury ratio, at 121.07%, has a ways to fall before it approximates its calendar-year average of 109.10%.

The two-year ratio, at 128.57%, is closer. For 2011, it has averaged 122.42%.

Munis have seen little volatility since late last week, MMD analyst Randy Smolik wrote. By midday Thursday, secondary market quotes were scarce, as the Street was more comfortable holding its positions than trying to lighten up ahead of the Christmas holiday.

The market is likely preparing for January reinvestment money and an uptick in retail interest next month. The secondary market even strengthened Thursday afternoon as some buyers found sellers reluctant, Smolik added.

With extremely strong technicals, dealers are positioning for light issuance and narrowing ratios in early January. And they may not be eager to let go of inventory, said Steven Schrager, director of research at SMC Fixed Income Management, a firm that builds portfolios for high-net-worth individuals.

"People are going to hang on to what they have right now," he said. "If you put them out there for bid, you're not going to see much action. So, if people have bonds that have had price appreciation, they're going to hang on to them over the next couple of weeks."

The revenue bond index, which measures 30-year revenue bond yields, was unchanged this week, at 5.01%. It remains at its lowest level since Nov. 10, when it was 5.00%.

The one-year note index also was unchanged this week, holding at its all-time low of 0.27%. The index began on July 12, 1989. The weekly average yield to maturity of The Bond Buyer muni index, which is based on 40 long-term bond prices, declined six basis points this week, to 4.89%. This is the lowest weekly average for the yield to maturity since the week ended Oct. 21, 2010, when it was also 4.89%.

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Record Rally Seen as Surging Funds Meet Sales Pause: Muni Credit

Monday, December 19, 2011
By Michelle Kaske
of Bloomberg

Dec. 19 (Bloomberg) -- Tax-exempt yields are set to extend their longest rally in seven months as investors pour the most money into municipal-bond funds in more than a year and debt sales fall to the lowest level since last December.

Investors should buy munis and not wait for higher yields as the U.S. Federal Reserve keeps its benchmark interest rate below 0.25 percent, making money-market funds and other short-term securities unattractive, said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

"In an environment where the overnight rate is essentially zero and short rates are effectively zero and cash yields are next to nothing, waiting is not an option," Pietronico, who manages $620 million of municipals, said in a telephone interview from New York.

Rates on 10-year tax-exempt bonds fell to a record low 1.88 percent last week, according to data compiled by Bloomberg. The $3.7 trillion market has endured the biggest U.S. municipal bankruptcy in Jefferson County, Alabama, and predictions by analyst Meredith Whitney of "hundreds of billions of dollars" of defaults. States cut spending to close more than $325 billion of budget deficits in the last four fiscal years, bolstering their finances and protecting bondholders.

States and cities plan to borrow about $909 million this week, the least since the last week of 2010, when issuers sold $499.5 million, according to data compiled by Bloomberg.

Fewer Issues

Sales this year will total about $285 billion, Chris Mauro, head of U.S. municipal strategy at RBC Capital Markets, said in a Dec. 15 interview. That's down about 30 percent from 2010 as states and cities contracted budgets in the wake of the longest economic downturn since the 1930s. Borrowing will rise 20 percent in 2012 to about $340 billion, Mauro forecast.

Investors added $1.49 billion to municipal-bond funds in the past two weeks, the most since $1.57 billion in the first half of September 2010, according to Lipper US Fund Flows. Tax-exempt securities have outperformed U.S. Treasuries, stocks and commodities this year.

"You're seeing a certain degree of a buying frenzy right now," said Neil Klein, who helps manage $1 billion of municipal assets as senior managing director at Carret Asset Management in New York. "New issuers coming to market are being met with very, very strong demand."

Rates on tax-exempt debt maturing in 2021 recorded their 10th consecutive daily decline on Dec. 16, the longest stretch since May, when they fell for 16 days. The yield is the lowest since at least January 2009, when the Bloomberg Valuation Index began.

Lower Still

"You'll probably see in the next two to three weeks, five to 10 basis points lower in a grinding fashion beyond 10 years," Pietronico said. A basis point is 0.01 percentage point.

Tax-exempt yields have fallen less than those of Treasuries, making them relatively more profitable. Municipals due in 10 years yielded 101.4 percent of equivalent-maturity federal debt last week, more than the 91.33 percent average over the past decade, data compiled by Bloomberg show.

An investor in the 35 percent income-tax bracket would have to earn 2.89 percent taxable to match the tax-free 10-year yield, according to data compiled by Bloomberg. Taxable 10-year Treasuries yielded 1.85 percent on Dec. 16.

Tax-exempts have returned 10.5 percent this year compared with 9.9 percent for federal debt, according to Bank of America Merrill Lynch indexes tracking price change and interest payments. The Standard & Poor's 500 stock index fell 3 percent and the S&P GSCI Spot Index of commodities lost 2.2 percent.

Declining Defaults

Municipal defaults in which an issuer has missed an interest or principal payment totaled $805 million this year through Nov. 30, down from about $2 billion in the same period of 2010, according to J.R. Rieger, vice president for bond indexes at S&P.

"There simply hasn't been the tidal wave of defaults that were predicted by some analysts," Rieger said in a research note last week.

Following are descriptions of coming sales of municipal debt:

MASSACHUSETTS, with the second-highest per-person among U.S. states after Connecticut with $51,302, plans to borrow $400 million of general-obligation bonds as soon as tomorrow. Proceeds will help finance infrastructure projects. The state will sell the bonds through competitive bid. Massachusetts is rated AA+, S&P's second-highest investment grade. (Added Dec. 19)

COLLIER COUNTY, FLORIDA, the state's largest county by area, is set to price $94.7 million of revenue debt through competitive bid as soon as today. Proceeds will refund bonds sold in 2003 and 2005, according to sale documents. The bonds are rated AA, Fitch Rating's third-highest investment grade. (Added Dec. 19)

BEAVER COUNTY HOSPITAL AUTHORITY, which oversees hospitals and finances health-care infrastructure in western Pennsylvania, plans to sell $67 million of revenue debt as soon as this week on behalf of Heritage Valley Health System Inc. Proceeds will refund bonds sold in 1998, according to Fitch. The sale is rated A+, Fitch's fifth-highest investment grade. Barclays Capital is the underwriter. (Added Dec. 19)

--Editors: Jerry Hart, Mark Tannenbaum

To contact the reporter on this story:
Michelle Kaske in New York at +1-212-617-2626 or mkaske@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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Detroit To Sell Muni Bond As State Considers Takeover Of City

Wednesday, December 14, 2011
By Kelly Nolan
Dow Jones Newswires

--Bond sale comes as state mulls a financial takeover of the city
--City owns the water and sewer district, which also serves suburbs
--Outstanding Detroit sewer debt trades at a premium to benchmark

Detroit is likely to have to pay dearly this week to sell $493 million of water and sewer debt in the municipal bond market, just as Governor Rick Snyder is deciding whether to appoint an independent receiver to take over the city's finances.

Moody's Investors Service put some of Detroit's bonds on review for downgrade last week, saying the possible appointment of an "emergency financial manager" over the city would increase the risk that the city would file for bankruptcy. The ratings firm added that since Detroit's water and sewer utility is city owned, it may not be "completely immune" to the risks associated with a bankruptcy filing, if one were to happen.

"Appointment of an emergency manager is a requisite step in the path toward state approval for bankruptcy filing, although is not necessarily a strong predictor of bankruptcy," Moody's said.

Michigan started a preliminary review of Detroit's finances on Dec. 6, and that review could last as long as 30 days, said Terry Stanton, a spokesman for the state Treasury. If the review finds "probable financial stress" in Detroit, the governor would name a team to further review its financial condition. If that team finds a "financial emergency" exists, an emergency manager would be appointed, he said.

The uncertainty surrounding Detroit's financial future means the city may have to pay higher interest rates to attract investors to purchase its debt on Wednesday, when it is expected to sell.

Already, Detroit's 10-year water and sewer debt trades with yields around 1.80 to 2.00 percentage points more than the market's benchmark triple-A scale, said John Flahive, director of fixed income for BNY Wealth Management in Boston, which has $22 billion of muni assets under management.

Since bond yields move inversely to prices, that means Detroit's existing water and sewer debt sells at a discount to some other municipal debt.

"If it comes cheap enough, some people will look at it as an opportunity," Flahive said, declining to comment on whether he would purchase the debt.

But even the remote possibility of bankruptcy could keep others far away from the deal, some market participants said.

"It is virtually impossible to handicap the outcome for the bondholders of Detroit Water given the tremendous uncertainty that a bankruptcy proceeding would have on city assets," said Michael Pietronico, chief executive of Miller Tabak Asset Management in New York, which has $620 million in muni assets under management.

"This is not a credit for conservative investors in our view," he added, saying his firm would pass on the deal.

That said, beyond a juicy yield, other factors could help Detroit. Relatively few muni bonds have been offered for sale this month, while there has been tens of billions in cash on the sidelines from bonds maturing and coupon payments made on Dec. 1. Thomson Reuters estimates that just $12.7 billion of muni debt has been issued so far this month, while estimates of December reinvestment cash range from $20 billion to $30 billion.

Also, while the city owns the utility, the water and sewer district extends beyond the city limits. That may buffer it from Detroit's financial woes. The utility services 4 million people in the city and across eight surrounding counties, according to Standard & Poor's, fulfilling the water needs of 40% of the state.

Matt Dalton, chief executive of Belle Haven Investment, said his firm, which already owns some Detroit water and sewer debt, may buy more if the price is right. He said he wasn't too worried about the possibility of bankruptcy for Detroit, because the decision ultimately lies with the state.

The Michigan Treasury isn't aware of any local governments or school districts that have filed for bankruptcy, its spokesman said, although four cities and Detroit Public Schools are under the supervision of an emergency financial manager.

"Detroit could be a case for Chapter 9 bankruptcy, but it's not going to be as easy as it is in Alabama," where the state's biggest county, Jefferson County, recently filed the largest muni bankruptcy in history due to its burdensome sewer debt load, said Dalton, whose White Plains, N.Y., firm has $950 million of fixed-income assets under management. "You're in a better level of security than you were in Jefferson County's deal."

Bryan Bailey, senior vice president and portfolio manager for Waddell & Reed Advisors Municipal Bond Fund and the Ivy Municipal Bond Fund, said he is also considering buying the Detroit water debt.

"We like the credit because we don't think Detroit will file for bankruptcy, and we're comfortable with the security structure on this bond," said Bailey, whose firm oversees $2.35 billion in muni assets and is based in Overland Park, Kansas.

The Detroit water deal received midlevel investment grade ratings of A1 from Moody's and A-plus from S&P. Proceeds of the deal will be used for capital improvements and to terminate all of the water system's outstanding swaps. Net termination value of the swaps is currently about $210 million, according to S&P.

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Record Spread Lures Buyers to Longer-Dated Bonds: Muni Credit

Tuesday, December 13, 2011
By Michelle Kaske
of Bloomberg

Dec. 13 (Bloomberg) -- The biggest rally in 10-year municipal bonds since August is pushing investors into longer-term securities as 30-year tax-exempts yield more than comparable-maturity U.S. Treasuries for a fifth straight month.

Rates on debt due in 2021 have dropped 31 basis points since Nov. 17, the most since 58 basis points from July 28 to Aug. 23, while 30-year yields fell 12 basis points, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

The difference between 10- and 30-year yields widened to as much as 1.85 percentage points last week, the most since at least January 2001, when the Bloomberg Valuation data began. That's prompted Ed Reinoso, chief executive officer of Castleton Partners, and George Friedlander, senior municipal-bond strategist at Citigroup Inc., to recommend longer maturities.

"The long end of the muni curve -- 20 years on out -- is pretty compelling," Reinoso, whose New York-based firm manages about $250 million, said in a telephone interview.

Ten-year tax-exempt yields were as much as 123.4 percent of Treasuries on Oct. 6, the most since April 2009, as investors seeking refuge from possible defaults in Europe pushed down U.S. government rates.

The 10-year muni yield fell to 1.98 percent yesterday, the lowest since the Bloomberg Valuation index began in January 2009, shrinking the ratio to 98 percent. It was 96.6 percent Dec. 9, the lowest since Aug. 24.

"Yields for good credits were pretty generous relative to alternatives," said Reinoso. "People may have woken up to that."

Opportunity for Investors

Municipals due in 30 years yielded 3.75 percent yesterday, 122.8 percent of similar Treasuries. The ratio was as much as 137.7 percent on Nov. 23 and has exceeded 100 percent since July 18. That's created an opportunity for investors in maturities of 18 years and beyond, said Friedlander.

"The problem is a structural one," Friedlander said in a telephone interview. "There just aren't enough obvious buyers of longer-term paper."

Investors added $354 million to long-term municipal-bond funds in the week that ended Dec. 7 and $209 million to funds with debt due in three to 10 years, according to Lipper US Fund Flows. It was the first time long-term funds outdrew intermediates since the week ended Sept. 14, according to Lipper.

Investors are buying longer maturities of DeKalb County, Georgia, water and sewer bonds. A security due in October 2033 traded yesterday at an average of 4.18 percent, 37 basis points below its offering yield on Dec. 5. A bond maturing October 2041 traded at an average of 4.46 percent, 26 basis points less, according to data compiled by Bloomberg.

'Dramatic Move'

"That's a pretty dramatic move," Reinoso said. Demand may have "gravitated to that part of the yield curve because the bonds were too cheap."

Municipal bonds have rallied as states and localities are set to borrow $6.5 billion in the next 30 days, down from the $14.4 billion one-month forecast on Nov. 15, the most in 2011, according to Bloomberg data.

Investors should wait to buy until March or April, when issuance increases and January's coupon redemptions subside, pushing yields higher, said Michael Pietronico, who manages $620 million of municipals as chief executive officer at Miller Tabak Asset Management in New York.

"That will be a better entry point for long-term investors," Pietronico said in a telephone interview.

Following are descriptions of coming sales of municipal debt:

NORTH CAROLINA, with an unemployment rate higher than the national average at 10.4 percent, plans to sell $156 million of bonds secured by federal transportation funds as soon as Dec. 15. The sale will help finance a 20-mile roadway, according to bond documents. The bonds are rated AA, Standard & Poor's third-highest grade. Bank of America Merrill Lynch will lead a group of banks on the deal. (Added Dec. 13)

PUERTO RICO INFRASTRUCTURE FINANCING AUTHORITY, which funds capital projects, will sell $568.2 million of taxable and tax-exempt revenue debt as soon as Dec. 15. Proceeds will repay loans of another commonwealth agency and terminate a swap, according to bond documents. Wells Fargo & Co. is the underwriter. The transaction is rated Baa1, Moody's Investors Service's third-lowest investment grade. (Updated Dec. 13)

SONOMA-MARIN AREA RAIL TRANSIT DISTRICT, which oversees a 70-mile passenger rail line being built in California, plans to sell $190 million of sales-tax debt as soon as Dec. 15. Barclays Capital will price the deal. (Updated Dec. 13)

--Editors: Jerry Hart, Mark Tannenbaum

To contact the reporter on this story:
Michelle Kaske in New York at +1-212-617-2626 or mkaske@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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Munis Flat-Higher, Following Treasurys

Tuesday, November 22, 2011
Dow Jones Newswires

10:12 (Dow Jones) Prices of top-rated muni bonds are flat to slightly higher, an initial read from Thomson Reuters Municipal Market Data shows, following the bid for safe-haven Treasurys after the apparent collapse of US budget talks. "Anytime Congress fails to act, it should be viewed as a positive for municipals as the 'status quo' will be seen as prevailing in terms of the tax exemption," says Miller Tabak Asset Management's Michael Pietronico. (kelly.nolan@dowjones.com) Copyright (c) 2011 Dow Jones & Company, Inc.

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California Laws Impair Holders of $22B of RDA Bonds, New Suit Says

Friday, November 18, 2011
By Randall Jensen

SAN FRANCISCO — Holders of more than $22 billion of bonds tied to California redevelopment agencies may be impaired if the RDAs are stamped out, according to a second lawsuit filed in a legal battle over this year's legislation targeting the agencies.

A coalition of Southern Californian cities and redevelopment agencies has filed the lawsuit in Superior Court in Sacramento challenging two new laws that force the RDAs to either cough up money for the state budget or else close their doors.

The state Supreme Court is already weighing a challenge by redevelopment agencies and their advocates to two new laws the Legislature passed as part of the budget. One eliminates the state's 400 RDAs, while the second gives them the option of coming back to life if they pay $1.7 billion this year to fill a gap in the current budget.

"In multiple ways, [the legislation] impairs bondholders, said Jeffrey Oderman, a lawyer with Rutan & Tucker in Orange County representing the plaintiffs, which include Cerritos and Carson. "We are really all sitting for the moment waiting to see what the Supreme Court will do.

The main defendants named in both suits are California finance director Ana Matosantos and Controller John Chiang.

If the Supreme Court rules against the agencies by either upholding both laws or just the one that dissolves them, Oderman said his coalition would proceed with its suit, raising several new issues about the process of closing down RDAs.

Oderman said holders of redevelopment agency tax-allocation bonds would be impaired by the state's plan to put bond money from all the extinguished RDAs into a commingled fund.

"The concern is that source of funds is much less secure than the pledge of tax increment from a specific project, he said.

Another concern in the suit is that certificates of participation would be passed to the sponsoring city or county because the lease-leaseback agreements with the redevelopment agencies would be voided.

That result, the plaintiffs said, would put local governments in violation of a state constitutional requirement that voters approve any long-term tax-backed debt.

The state has yet to respond to the suit because it has been granted an extension until after the other case is settled by the high court. California officials declined to comment on the suit.

The plaintiffs in the Supreme Court case said the two cases are separate.

"We haven't really been focusing on that case, said Tom Hart, deputy director of the California Redevelopment Association. "It really has been their bailiwick.

The main thrust of the argument by the redevelopment agency advocates in the Supreme Court case centers around Proposition 22, a ballot measure passed in 2010 prohibiting the state from taking or interfering with revenue dedicated to local governments.

The court heard oral arguments in the case last week and seemed to give weight to the possibility of overturning the law seeking payments from the agencies, but upholding the bill that dissolves them.

The court — which has expedited the case and granted a stay on most parts of the new laws — expects to reach a decision by Jan. 15.

California's RDAs have $19 billion of outstanding tax allocation bonds and $3.5 billion of COPs and revenue bonds outstanding, according to the annual report released this month by the controller on the agencies' fiscal 2010 finances.

The controller's report does not include the agencies' rush to sell bonds in the first half of 2011 after Gov. Jerry Brown released his budget proposal to axe redevelopment.

Aside from the legal issues raised by Cerritos and Carson, their case could have the consequence of prolonging the legal limbo for RDAs and the state.

"This is certainly far from over, Lewis Feldman, a partner at Goodwin Procter in Los Angeles and an expert in public finance and real estate finance law, said about the redevelopment legal fight.

Some RDAs have already been pushed to the brink of default because they have been unable to enter into financing agreements due to the Supreme Court case.

San Jose last month had to hold extended negotiations with JPMorgan in order to extend its redevelopment agency's letter of credit on a variable-rate bond series for six months due to uncertainty caused by the new legislation about the agency's legal ability to enter into an extension agreement. The issue was resolved by having the new LOC placed with the bond trustee.

Further legal wrangling could add to the insecurity felt by banks and investors.

"In general, the market for sure has punished the redevelopment bonds in terms of the bid price, said Michael Pietronico, head of fixed-income research and co-founder of Miller Tabak Asset Management. "The perception is that the credit quality could suffer if the state goes ahead with its plan.

For example, the San Jose Redevelopment Agency's tax allocation bonds maturing in 2020, rated BBB-plus by Standard & Poor's with a yield to maturity of 5.10%, traded over the last 10 days at a spread of 292 basis points compared to triple-A rated bonds, according to Thomson Reuters.

RDA bonds below investment grade are the ones to watch, Pietronico said.

At the end of October, Standard & Poor's put 16 agency bonds on negative CreditWatch because they may come under more financial strain if they lose the ability to use funds other than pledged revenues and reserves to cover shortfalls.

Falling property assessments have reduced many agencies' tax increment that they use to cover debt service. As a result, the RDAs have used other funds, such as intergovernmental loans and tax increment from other projects, to cover debt service rather than dipping into reserves.

If the Supreme Court upholds the two laws next month, the California Redevelopment Association has said that it expects roughly 20% of RDAs to be shuttered because their sponsoring cities or counties will be unable or unwilling to make the payments the state government is demanding.

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New Jersey Sells $1.3 Billion as Transports Outpace: Muni Credit

Wednesday, November 16, 2011
By Michelle Kaske and Elise Young
of Bloomberg

Nov. 16 (Bloomberg) -- New Jersey Transportation Trust Fund Authority is selling $1.3 billion of debt today as its bonds outperform other transit issues, which are rewarding investors with the second-best returns in the tax-exempt market.

About a third of the sale, the largest of the busiest week in a year, matures in 2042. Moody's Investors Service rates them A1, its fifth-highest grade, which means extra income for investors as yields on top-rated 30-year tax-exempt debt hover near the lowest in almost two years.

Bonds rated A "have been sought-after because of their substantial excess yield, Michael Pietronico, who manages $605 million of municipals as chief executive officer at Miller Tabak Asset Management in New York, said in a telephone interview.

The difference in yield between A rated 30-year transport debt and AAA general obligations was 1.28 percentage points yesterday, according to data compiled by Bloomberg, more than the 1.12 percentage point average for the past year. It was as much as 1.54 percentage points on Sept. 26.

Revenue from the "essential service provided by the New Jersey Transportation Trust Fund also "should keep investors comfortable, said Pietronico.

Transportation bonds, backed by fuel taxes, tolls, airport fees and other income, earned investors 9.7 percent this year through Nov. 14, according to Standard & Poor's indexes tracking price changes and interest payments. That tops the 8.4 percent of all municipal bonds and is the most of any segment except debt backed by hospital fees, which returned 9.8 percent.

Outpacing a Rally

New Jersey transport debt is outpacing the transit rally.

Yields on an A1 trust-fund bond sold May 3 and maturing in 2041 dropped 20 percent in the past six months, to 4.4 percent on Nov. 8, based on trades of $1 million or more, from 5.47 percent at sale. Yields on 30-year A+ transport debt fell 14 percent since early May, according to data compiled by Bloomberg.

New Jersey may need extra yield to attract investors to its transport bonds because many already have them, Pietronico said.

"Like a lot of other large issuers, it is well owned in many portfolios, not only in New Jersey portfolios, but national portfolios, he said.

Investors are demanding more to buy longer-term municipals than intermediates. The yield difference between top-rated 10- year bonds and 30-year debt widened to 1.41 percentage points on Nov. 14, the most since Sept. 28, according to data compiled by Bloomberg.

Money for Roads

New Jersey Transit, the third-largest U.S. bus and commuter railroad and a feeder to New York and Philadelphia, will get $103 million from the sale for leases and equipment work. The transportation trust will use the rest for road resurfacing, rail and bridge repairs, land acquisition and highway expansion.

The state's roads are the most heavily traveled in the Northeast, according to the department's capital investment plan for fiscal 2012-2021. More than half the pavement isn't in acceptable condition, commuters waste an average of $1,200 in fuel yearly because of traffic delays, and more than 300 bridges are structurally deficient, according to the March report.

The transport bonds are backed by state sales and fuel taxes appropriated annually under five-year plans. The Democrat- controlled Senate and Assembly must approve another five-year outline by June 30 or capital projects will stop.

Currently, the $900 million received by the trust each year goes entirely to service $12.5 billion of debt. Governor Chris Christie, 49, a first-term Republican, has proposed a five-year $8 billion plan he said would reduce debt and include more "pay as you go cash funding. He opposes raising the 10.5 cent-a- gallon gasoline tax, as proposed by Democrats.

Future Borrowing

The state will ultimately replenish the trust to support future borrowing, said Howard Cure, director of municipal credit research for Evercore Wealth Management LLC in New York, which manages $2.9 billion of munis, including about $5 million of the authority's bonds.

"Transportation has always been fairly well supported by the state, said Cure. "The expectation is they would reauthorize or increase the allotment.

States and municipalities are set to borrow $12 billion this week, the most in a year and up from $7 billion last week, according to data compiled by Bloomberg. Following are descriptions of planned sales:

UNIVERSITY OF CONNECTICUT, with more than 30,000 students, will offer $220 million of general-obligation bonds as soon as next week to fund a $3 billion 23-year capital program started in 2000. The bonds are also secured by a state commitment. S&P rates the bonds AA, its third-highest grade. Loop Capital Markets will lead the deal. (Added Nov. 16)

NORTH CAROLINA TURNPIKE AUTHORITY, which borrows for capital projects, will sell $220 million of appropriation revenue bonds as soon as this week, according to a preliminary official statement. The bonds will finance a 20-mile toll road connector in Mecklenburg and Union Counties. S&P rates the bonds AA, third-highest. Bank of America Merrill Lynch will lead the deal. (Added Nov. 16)

OMAHA PUBLIC POWER DISTRICT, Nebraska, which serves 345,000 customers, will sell $300 million of revenue bonds for capital improvements as soon as this week, according to a preliminary official statement. S&P rates the bonds AA, third-highest. Bank of America Merrill Lynch will lead the deal. (Added Nov. 15)

WESTCHESTER COUNTY, New York, plans to offer $200 million of general-obligation bonds as soon as this week by competitive bid. The bonds will refund a 2010 bond-anticipation note sale used for capital improvements. A $24 million portion of the sale will be federally taxable. The county has the top credit ratings of Fitch Ratings, Moody's and S&P. (Added Nov. 15)

--With assistance from Andrea Riquier in New York

--Editors: Jerry Hart, Ted Bunker

To contact the reporters on this story:
Elise Young in Trenton at +1-609-278-3173 or eyoung30@bloomberg.net and Michelle Kaske in New York at +1-212-617-2626 or mkaske@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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Most Borrowing Undeterred by Jefferson County Bust: Muni Credit

Monday, November 14, 2011
By Michelle Kaske and Andrea Riquier
of Bloomberg

Nov. 14 (Bloomberg) -- States and localities are poised to borrow the most in a year in a bet that investors in the $2.9 trillion municipal market, which has beaten U.S. stocks, Treasuries and commodities, will be undeterred by the record bankruptcy of Alabama's Jefferson County.

Issuers from Hawaii to Massachusetts are set to offer $12.2 billion of securities this week, the most since November 2010, according to data compiled by Bloomberg. The wave follows the biggest weekly flow into municipal-bond mutual funds in a year.

Tax-free securities rallied last week even as Jefferson County, struggling with $3 billion of sewer-system debt, filed the biggest U.S. municipal bankruptcy on Nov. 9. The 10-year tax-exempt yield dropped 11 basis points, the most in three weeks, according to data compiled by Bloomberg. Its ratio to interest rates on equivalent-maturity Treasuries fell to a two-week low of 108.9 percent as yields on U.S. government debt rose.

Jefferson County isn't "a trigger for anything further," Joseph Pangallozzi, a credit analyst at New York-based BlackRock Inc., which manages $95.6 billion of municipals, said on a conference call last week. "This is not the beginning of a rush to bankruptcy."

Investors pulled more than $30 billion from municipal-bond mutual funds from November 2010 to June on concern that the fiscal strain from the longest recession since the 1930s would increase government-debt defaults.

Fewer Defaults

The worries didn't materialize as state tax collections headed for their seventh straight quarter of growth, according to data from the Nelson A. Rockefeller Institute of Government.

This year, municipal defaults through September totaled $949 million, compared with $2.9 billion in the first nine months of 2010, according to the Distressed Debt Securities Newsletter, published by Miami Lakes, Florida-based Income Securities Advisors Inc.

Tax-exempt debt has beaten Treasuries, company debt, commodities and stocks this year. Its 8.9 percent return compares with 8.6 percent for Treasuries and 7.1 percent for corporate bonds, according to Bank of America Merrill Lynch indexes comprising price changes and interest payments.

Munis have also outpaced the 5.4 percent gain this year of the Standard & Poor's GSCI Spot Index of commodities prices. The S&P 500 stock index increased about 0.5 percent in the period.

Follows Harrisburg

Jefferson County's Chapter 9 filing followed bankruptcies involving Central Falls, Rhode Island, in August and Harrisburg, Pennsylvania, last month. It came as the county, the receiver, bondholders and Alabama state lawmakers failed to implement a tentative deal struck in September that would have cut the amount owed on the sewer bonds and increased rates.

Investors added about $761 million to U.S. municipal-bond mutual funds in the week through Nov. 9, according to Lipper US Fund Flows. It was the biggest inflow since Sept. 8, 2010, when investors added $933 million.

Yields on top-rated municipals due in 10 years have fallen four straight weeks, the longest stretch since May. Ten-year tax-exempt debt yields 2.24 percent, down 34 basis points from Oct. 13. A basis point is 0.01 percentage point.

Falling rates have encouraged borrowing to refund debt sold at a higher cost, Chris Mauro, a municipal strategist at RBC Capital, said in a Nov. 4 report. About 67 percent of the week's 10 biggest sales, which total $6 billion, are refundings, according to data compiled by Bloomberg.

Rates may need to increase this week to attract enough buyers, Michael Pietronico, who manages $605 million as chief executive officer at Miller Tabak Asset Management in New York, said in a telephone interview.

"You'll probably see a little bit of a move up in yields to clear that supply, but then the calendar's going to start dropping notably when we reach the holidays," Pietronico said. "And then we'll get some of our rally back in terms of yields moving lower."

Following are descriptions of planned debt sales:

NEW MEXICO plans to offer $122 million of severance-tax bonds as soon as this week by competitive bid, according to a preliminary official statement. Severance taxes are collected from the gas, oil and mining industries and are typically used to retire debt issued to fund capital projects. (Added Nov. 14)

BALTIMORE COUNTY will offer $255 million of general-obligation bonds as soon as this week by competitive bid, according to a preliminary official statement. The bonds will redeem debt issued to fund the water and sewer system and capital projects including schools and parks. Fitch Ratings grades the bonds AAA, its highest grade. (Added Nov. 14)

AUSTIN, Texas, will offer $235 million of water-revenue refunding bonds for a district that covers five municipalities as soon as this week, according to a preliminary official statement. S&P rates the bonds AA, its third-highest grade. First Southwest Co. will lead the deal. (Added Nov. 10)

DORMITORY AUTHORITY OF THE STATE OF NEW YORK, which issues debt for schools and other nonprofit entities, will offer $134 million of revenue bonds as soon as this week, according to a preliminary official statement. The bonds will finance capital facilities and equipment. Fitch grades the bonds A+, its fifth-highest rank. RBC Capital Markets will lead the deal. (Added Nov. 10)

--Editors: Jerry Hart, Mark Tannenbaum

To contact the reporters on this story:
Michelle Kaske in New York at +1-212-617-2626 or mkaske@bloomberg.net and Andrea Riquier in New York at +1-212-617-0409 or ariquier@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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Indexes Up Amid Middling Buyer Interest, Sell-Off

Friday, October 28, 2011
By James Ramage

The Bond Buyer's weekly yield indexes outperformed Treasuries during a week that saw middling investor interest in the primary market and a dramatic sell-off in Treasuries during the latter half of the week.

While Treasury bond yields saws jumps of more than 25 basis points from Tuesday through Thursday from 10 years and 30 years, those for munis were far more modest.

The Bond Buyer's 20-bond GO index of 20-year general obligation yields increased four basis points this week to 4.12%, but it remained below its 4.17% level from two weeks ago.

The 11-bond GO index of higher-grade 20-year GO yields also rose four basis points this week, to 3.85%. It remained below its 3.91% level from two weeks ago.

By comparison, the yield on the Treasury's 10-year increased 22 basis points this week, to 2.40%. It sits at its highest level since Aug. 4, when it was 2.44%.

The yield on the Treasury's 30-year bond rose 26 basis points this week, to 3.45%. That represents the highest it's been since Sept. 1, when it was 3.51%.

Muni bond investors have had an overwhelming need to put cash to work. And that, more than relatively attractive yields and ratios, drove demand in new issuance this week, industry pros say.

Yields on the triple-A muni curve by midweek had fallen modestly in the 10-year range. The market absorbed much of the week's new issuance. Demand overall has been strong at current yields, said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

"The Street might have gotten too bearish a few weeks ago, regarding whether the calendar would overwhelm the market," he said. "It seems the calendar is certainly manageable at current levels. Certainly the negotiated deals, if priced attractively, have been able to be put away."

But as European governments reached a deal by midweek to contain the region's debt crisis, investor interest in risk reignited. That led to sell-offs in both Treasuries and tax-exempts Thursday. Muni yields subsequently rose across the curve, experiencing the greatest lift from the belly on out.

The equities market had a strong session, benefiting from investors' call for more risk. The major indexes all rose by at least 2.86% on the day.

Muni-Treasury ratios in the two-year, 10-year and 30-year ranges are all attractive and remain north of 100% — but they are falling. By Thursday, they stood at 144%, 103% and 111%, respectively. Regardless, they're not the engine behind the market's demand for new issuance, Pietronico said.

"When we saw the correction in yields a few weeks ago we were acting on the absolute yields moving higher," he said. "And we were able to buy a fair amount of 4% yields inside of 15 years on some fairly decent credits. From that perspective, the ratios didn't matter; the absolute yields did. I'm not so sure that ratios are driving the market here so much as the need to put cash to work."

The revenue bond index, which measures 30-year revenue bond yields, gained three basis points this week, to 5.10% — its highest level since Sept. 15, when it was 5.11%.

The Bond Buyer's one-year note index increased one basis point this week, to 0.31%. That's the same level it reached two weeks ago.

The weekly average yield to maturity on The Bond Buyer's 40-bond muni index, which is based on prices for 40 long-term municipal issues, was unchanged this week at 4.99%.

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Once Rare 'Super Downgrades' Become More Common

Friday, October 21, 2011
By Patrick McGee

Super downgrades remain rare events, but they reflect a more aggressive posture by the rating agencies, market observers say.

According to Municipal Market Advisors, the three major rating agencies issued 196 super downgrades between June 2010 and August 2011.

One of the more prominent super downgrades this year was in April when DeKalb County — Georgia's third-largest county — was slashed five notches to BBB from AA-minus, by Standard & Poor's. S&P simultaneously withdrew its rating, citing poor disclosure by the issuer.

The rating had been affirmed at AAA just five months earlier.

In August, a speculative-grade West Texas jail in Jones County got hit with a 13-notch bombshell from Standard & Poor's that knocked the rating to CC from A-minus. Jones County officials had indicated plans to default on the debt; following through on that promise earlier this month, the credit got stamped with a D.

Municipal Market Data analyst Dan Berger wrote in August that the chief difference between those two credits is that DeKalb County "was widely followed but offering poor disclosure, whereas Jones County, Texas, offers excellent disclosure but it is not widely followed."

Moody's said in an Aug. 31 special comment that it had delivered super downgrades to 102 credits, or 0.6% of its rated muni database, in the previous 18 months.

Such downgrades "remain relatively rare," are "heavily concentrated" in sensitive sectors, and tend to be driven by "a confluence of factors," it said.

Standard & Poor's, in a 70-page document on rating changes in 2010, only looks at rating categories rather than intra-category nuances. The most pertinent data point is that 0.16% of AAA-rated credits were dropped to the single-A category, and 3.35% of top-rated credits had their ratings withdrawn.

Fitch Ratings couldn't comment on the trend by press time.

Alan Schankel, head of fixed income at Philadelphia-based Janney Capital Markets, noted that just in the past five weeks his coverage area has seen super-downgrades for Collingswood, NJ, and Lackawanna County, Pa.

"It reflects the rating agencies being more aggressive, particularly when they don't get the financial information as quickly as they like," Schankel said. "The rating agencies are under the gun a little bit and it's good — it's a positive development. They are acting more quickly than might have in the past."

Critics, however, have said super downgrades are the result of the agencies sleeping at the wheel while the economy undergoes a secular shift, causing them to issue harsh updates upon waking.

"The rating agencies, just by their structure, are reactionary," said Michael Pietronico, chief executive at New York-based Miller Tabak Asset Management. "In most cases they wait for information provided by the issuer, and when you wait for that information to be sent, it's already priced into the market, and for folks like ourselves who do their own credit research, its 100% discounted by the time the rating agencies make their move."

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California Beats Bond Forecast on Default-Risk Drop: Muni Credit

Wednesday, October 19, 2011
By Michael B. Marois and Michelle Kaske
of Bloomberg

Oct. 19 (Bloomberg) -- California, with the best-performing debt among U.S. states, is defying forecasts its borrowing costs would rise as much as 15 percent on a $1.8 billion sale, signaling confidence the lowest-rated state won't default.

The biggest issuer of municipal bonds this week is offering 10-year bonds at 3.51 percent, or 105 basis points above benchmark yields on top-rated 10-year state and local debt, according to a Bloomberg Valuation Index. That's down from a difference of 109 basis points in a sale last month. The decline is contrary to a forecast by Gary Pollack at Deutsche Bank Private Wealth Management. He said last week the gap might swell to as much as 125 basis points, or 1.25 percentage points, as municipalities sold the most debt this year.

California's securities are in short supply after Governor Jerry Brown, to curb debt-service costs, imposed a nine-month sales moratorium that cut issuance by more than half from last year. Buyers may also be encouraged by spending cuts that would be triggered if revenue trails projections by at least $1 billion this fiscal year.

Investors "have been more comfortable with the state lately and they've done a few things in terms of their budgeting process," said Michael Pietronico, who manages $590 million as chief executive officer at Miller Tabak Asset Management in New York.

"It looks like the sentiment toward the credit has improved," he said in an interview.

Market Rebound

The most-populous U.S. state is also benefiting from a rebound in the $2.9 trillion municipal market. Yields on top-rated 10-year bonds fell the past three days. They dropped to 2.46 percent yesterday after reaching a two-month high of 2.58 percent Oct. 14 following the biggest week of borrowing this year. Local governments sold about $8.9 billion of debt in the Oct. 7 week, the most since December. Municipalities plan $7.9 billion of sales this week.

California marketed the 10-year securities to individuals the past two days at yields 11 percent higher than it paid last month on bonds of similar maturity. The rate of increase is about half that of benchmark 10-year muni yields in the same period, according to a BVAL Index. The sale, which includes maturities from 2014 through 2041, concludes today.

Debt from California state and local issuers has earned 8.7 percent this year, the most among 26 states tracked by Standard & Poor's Municipal Bond indexes. Illinois, with the same A1 rating from Moody's Investors Service, is second with an 8.4 percent return. The credit grade is the company's fifth-highest.

2011 Sales

California is set to offer $12.7 billion of debt this year, compared with $27 billion in 2010, according to data compiled by Bloomberg. State Treasurer Bill Lockyer sold $2.5 billion of general-obligation bonds last month.

Pollack at Deutsche said before this week's sale that California might pay a larger spread as municipal yields increased along with issuance.

"Supply is a little bit more manageable," said Pollack, head of fixed-income trading at the New York unit of Germany's biggest lender.

The state said last week that tax revenue in the first quarter of the fiscal year was $654 million below projections. Brown and his fellow Democrats counted on as much as $4 billion of revenue gains to help close a $26 billion projected deficit in the general-fund budget.

Automatic Cuts

The spending plan includes automatic spending cuts if the extra revenue appears unlikely by year-end. Those so-called triggers led Standard & Poor's in July to rescind the state's negative long-term outlook.

"California's still going to pay principal and interest in a timely fashion, despite the headline risks," said Pollack, who helps oversee $12 billion of assets. "As long as I can stomach that risk, I'm earning a lot of additional yield for it, and I think a lot of investors are willing to get paid for that type of risk."

The credit-default swaps market is also signaling investors are less concerned about the debt. The cost of protecting California bonds against default for 10 years is 252 basis points, down from about 300 basis points in January, according to market prices compiled by London-based CMA. The cost is 14 basis points more than a benchmark index, down from a difference of about 60 basis points in January.

The state can spend the proceeds on public projects such as prisons and parks. Lockyer will use $133 million to refinance taxable Build America Bonds sold in a 2009 private offering to the Los Angeles County Metropolitan Transportation Authority. He also is selling $200 million of taxable bonds.

Following are descriptions of pending sales:

ILLINOIS, which approved the biggest tax increase in state history to close a deficit this year, plans to sell $300 million of Build Illinois sales-tax revenue bonds by competitive bid as early as next week, according to a preliminary offering statement. The program will fund infrastructure, educational and vocational projects and provide incentives for businesses that plan to hire workers in the state. The bonds are rated AAA by Standard & Poor's, the top grade. (Added Oct. 19)

PORT OF PORTLAND, Oregon, plans to sell $78 million of revenue bonds backed by airport fees as early as next week, according to a preliminary offering statement. The bonds will be used for capital projects such as runway improvements for Portland International Airport. Bank of America Merrill Lynch will lead the sale. (Added Oct. 18)

NEVADA, with a 13.4 percent unemployment rate that is the highest in the U.S., will sell $175 million of general-obligation refunding debt as early as next week, according to a preliminary offering statement. Morgan Stanley will lead the sale. The bonds are rated AA, the third-highest for S&P. (Added Oct. 18)

--With assistance from James Nash in Sacramento

--Editors: Mark Tannenbaum, Jerry Hart

To contact the reporter on this story:
Michael B. Marois in Sacramento at +1-916-492-6042 or mmarois@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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Deutsche Bank Buying May Signal Slump Nearing End: Muni Credit

Friday, October 7, 2011
By Michelle Kaske
of Bloomberg

Oct. 7 (Bloomberg) -- Miller Tabak Asset Management and Deutsche Bank AG's U.S. wealth-management group are buying municipal securities, signaling that the $2.9 trillion market's worst slide in at least two years may be nearing an end.

Interest rates on top-rated tax-exempt debt due in 10 years climbed to the most since August yesterday. They were as much as 123 percent above those on similar-maturity Treasuries, the highest since April 2009, according to data compiled by Bloomberg. The ratio has increased as issuers such as the Oklahoma Turnpike Authority borrow $8.7 billion this week, the busiest period since December.

"There's a very good opportunity to take advantage of two markets which have gotten out of tilt from each other," said Gary Pollack, head of fixed-income trading in New York at the private wealth-management arm of Deutsche Bank. The unit of Germany's largest lender oversees $12 billion in debt.

Pollack said in a telephone interview that he sold 10-year Treasuries this week to buy general-obligation bonds. He declined to say how much he purchased. Philadelphia-based Janney Montgomery Scott LLC, which manages $11.8 billion in fixed income, said in an Oct. 5 report that it saw "opportunity knocking" in the rising ratio, which has eclipsed its historical average.

Finding Value

Investors are finding value in tax-free debt as Treasury rates have dropped since the Federal Reserve said last month it would buy more long-term securities to push down mortgage and other loan rates. Seven straight quarters of year-over-year improvement in state and local-government tax revenue are also spurring confidence that municipal defaults, which are running at about a quarter of last year's rate, won't accelerate.

"The low default rate and fiscally responsible behavior on the part of state and local governments support the strong potential for municipal outperformance" as the supply of new bonds diminishes later this year, Peter DeGroot, a strategist at JPMorgan Chase & Co., wrote in a research note yesterday.

From 2001 through 2007, 10-year tax-exempt yields averaged 86 percent of rates on Treasuries, interest from which is taxable, Bloomberg data show.

The ratio soared to 194 percent by December 2008 as investors fled to government securities following Lehman Brothers Holdings' bankruptcy filing three months earlier. It didn't fall below 100 percent again until the following May. The current stretch of five straight weeks of readings at 100 percent or above is the longest since early 2009.

This Week's Slide

As debt offerings picked up this week, 10-year tax-exempt yields increased about 34 basis points, the biggest four-day jump in at least two years, to 2.45 percent, according to a Bloomberg Valuation index data.

Local-government securities also fell along with Treasuries. Government bonds dropped for a third day as speculation European leaders are stepping up efforts to resolve their debt crisis reduced demand for the safest assets.

The increase in municipal rates offers more yield and makes tax-exempt securities cheap compared with Treasuries, said Michael Pietronico, who manages $590 million as chief executive officer at Miller Tabak Asset Management in New York. He bought municipal bonds on Oct. 5 and Oct. 6, he said in a telephone interview.

"This opens an opportunity for investors to jump in at excellent relative-value levels," he said.

Spur to Refunding

Less than three weeks ago, the 10-year tax-exempt yield had dropped below 2 percent, the lowest since at least January 2009, when the BVAL index begins. Signs the economic rebound is flagging combined with concern about the European debt crisis helped drive 10-year Treasury yields to as low as 1.67 percent last month, the lowest level since at least January 1962.

Falling rates have spurred states and localities to refinance and decrease their interest payments. Municipalities refunded $36 billion from July through September, the most in a third-quarter since 2008, Bloomberg data show.

The municipal to Treasury ratio will fall to the 90 percent range or lower once the pace of municipal sales slows, Alan Schankel, director of fixed-income research for Janney, said in a telephone interview.

"If supply moderated we'd go lower," he said. "I don't see it dropping below 100 percent in the coming weeks."

States and local governments are set to sell $10.6 billion of debt in the next 30 days, the smallest scheduled amount in close to two weeks, according to Bloomberg data.

Pollack said he plans to unwind his trade, selling the municipal debt he bought this week, once tax-free yields drop below Treasury rates. That may happen by January when issuance tends to lessen, Pollack said.

"By the beginning of 2012, we'll be able to turn this trade around and make some money," he said.

Following are descriptions of pending sales of municipal debt:

NEW YORK LIBERTY DEVELOPMENT CORP. plans to sell $2.9 billion of refunding bonds, according to preliminary offering statements issued yesterday. The transaction includes $2.59 billion for refunding the debt on World Trade Center towers 2, 3, and 4 and a reoffering of $338 million of revenue bonds for construction of tower 3. Goldman Sachs Group Inc. will lead the sale. (Added Oct. 7)

NEW YORK CITY TRANSITIONAL FINANCE AUTHORITY, which finances capital projects for the most-populous U.S. city, plans to sell $750 million of subordinate revenue debt next week to convert variable-rate bonds into fixed-rate securities and refund debt. The authority's subordinate debt is rated AAA, the highest grade by Standard & Poor's. Bank of America Merrill Lynch is senior manager of the sale. (Added Oct. 6)

CHICAGO BOARD OF EDUCATION, which finances school construction for the third-largest public-education system in the U.S., plans to sell as soon as Oct. 12 about $398 million of general-obligation bonds secured with dedicated revenue. Proceeds will renovate school buildings and finance expansion. Jefferies & Co. will lead a syndicate of banks on the deal. (Updated Oct. 6)

HUDSON YARDS INFRASTRUCTURE CORP., which finances development of a district west of Midtown Manhattan, plans to sell $1 billion of bonds as soon as next week to help pay for extending the No. 7 subway line to the neighborhood. The sale is rated A2, Moody's Investors Service's sixth-highest grade. JPMorgan Chase & Co. will lead a group of banks on the transaction. (Added Oct. 7)

COLORADO HEALTH FACILITIES AUTHORITY, which issues debt on behalf of hospitals in the state, will sell as soon as next week $309 million of revenue bonds. The proceeds will finance capital projects for Catholic Health Initiatives, part of the CHI Credit Group, a multistate health-care provider. The sale is rated AA, S&P's third-highest grade. JPMorgan will underwrite the deal. (Added Oct. 7)

--Editors: Mark Tannenbaum, Walid el-Gabry

To contact the reporter on this story:
Michelle Kaske in New York at +1-212-617-2626 or mkaske@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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Muni Yields at Two-Month High After Biggest Jump Since January

Thursday, October 6, 2011
By Michelle Kaske
of Bloomberg

Oct. 6 (Bloomberg) -- Yields on top-rated municipal debt reached a two-month high following the biggest one-day increase since January as municipalities brought $8.8 billion of debt to market.

Ten-year tax-exempt interest rates climbed 1 basis point to about 2.3 percent today, the highest since Aug. 10, according to BVAL index data. The yield surged about 10 basis points yesterday, the most since Jan. 13. A basis point is 0.01 percentage point.

"The market collapsed based on the weight of supply," said Michael Pietronico, who manages $590 million as chief executive officer at Miller Tabak Asset Management in New York.

Yields will "probably inch up more over the next few days and we would suggest investors take advantage of that," he said in a telephone interview.

Borrowers including the Triborough Bridge & Tunnel Authority and the Oklahoma Turnpike Authority sold debt this week. It is set to be the busiest week this year, according to data compiled by Bloomberg.

Ten-year yields have rebounded since falling to about 2 percent last month, the lowest since at least January 2009, when the BVAL index begins.

Municipalities refinancing debt will help drive tax-exempt sales to about $75 billion this quarter, up from an earlier projection of $60 billion, Chris Mauro, a municipal-debt investment strategist at RBC Capital Markets in New York, wrote in a report.

--Editors: Mark Tannenbaum, William Glasgall

To contact the reporter on this story:
Michelle Kaske in New York at +1-212-617-2626 or mkaske@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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Cook Co. Preps for $600M
New Team Offers A Restructuring

Wednsday, October 5, 2011
By Caitlin Devitt

CHICAGO — Cook County, Ill., will enter the market beginning Wednesday with $600 million of taxable and tax-exempt bonds in its new administration's first borrowing since taking office last year.

The transaction is a mix of new-money and refunding bonds for restructuring purposes with some minor net present-value savings. The refunding will push off debt service payments for the next three years, achieving $300 million of budget relief for the cash-strapped county government.

For investors, the finance team played up the county's structural strengths, including its unrestricted ability to tax, its diversity, and its size as the second-largest county in the United States.

The team sought to downplay any connection to Illinois' fiscal problems, to help stem the so-called Illinois penalty that results in some added interest costs for borrowers in the state. They stressed to investors that the county relies little on the state for financial assistance and Illinois' well-known fiscal problems have little impact on the county's position.

Cook County chief financial officer Tariq Malhance said the borrowing is expected to result in total interest costs of under 5%, a level he's pleased with.

Malhance said the bankers have told him to expect an Illinois penalty, but it is not clear how much it will cost.

"They do think there will be an impact," he said in an interview Monday. "But it looked like they're showing overall [costs] will be under 5%," he said. "I am happy with that under these economic conditions and our [downgraded] ratings."

Cook is struggling with its own negative headlines, as it heads to market in the wake of two downgrades and just weeks from unveiling a 2012 budget that needs to overcome a $315 million shortfall.

County officials have assembled a finance team made up of nearly all minority-owned and local firms. William Blair & Co. is senior manager and Cabrera Capital Markets LLC is co-senior. BMO Capital Markets, Goldman Sachs & Co., Loop Capital Markets, Mesirow Financial Inc., Melvin & Co. and Podesto & Co. round out the underwriting team.

Chapman and Cutler LLP and Sanchez Daniels & Hoffman LLP are co-bond counsel. A.C. Advisory Inc. is financial advisor.

The finance team began marketing the deal Tuesday and plans to hold a retail order period Wednesday, followed by institutional pricing Thursday.

The transaction is divided into four series, three of which are taxable, and all of which carry Cook County's full faith and credit pledge. Series A, consisting of $240 million of tax-exempt bonds, and Series B, $128 million of taxable bonds, are both refundings. Series C consists of $125 million of taxable GOs, and Series D consists of $110 million of taxable 90-day notes.

The notes are due on Dec. 15 and are payable from property tax revenue the county will collect in November.

The finance team said it expects strong investor interest in the notes, according to an investor conference call held last Friday.

The refunding will generate $25 million in net present-value savings over the life of the bonds. But the main reason for the refunding is to restructure some debt by delaying near-term debt payments to generate shortterm budget relief.

"We will see almost $300 million in up-front relief," Malhance said.

The deal will push off $85 million of payments due this year, $92 million in 2012, and $85 million in 2013.

Proceeds from the $125 million new-money bonds will be used to replenish the county's depleted selfinsurance fund.

The county is one of several Chicago-area issuers hitting the market over the next several weeks. Last week, the Chicago Park District priced $178 million, and the Chicago Board of Education next week will issue $400 million of new money. The city and state also will enter the market this fall.

Malhance said the county has been hoping to price the bonds for months, but was waiting for its 2010 annual audit to be released, which occurred in early September.

"Otherwise it could have happened three months ago," he said.

During the conference call, the finance team pointed out distinctions between Cook County and the state. "The state of Illinois, their fiscal problems have minimal impact on the county," said Andrea Gibson, the county's budget director.

Gibson detailed the state's fiscal ties to the county, the thorniest of which is processing Medicaid payments. The state is not allowed to withhold or delay the county's share of sales tax. "So the state's issues don't have a significant impact on Cook County's finances," she told investors.

Moody's Investors Service in June cut Cook County's rating to Aa3 from Aa2. Fitch Ratings last week dropped it to AA-minus from AA and revised the outlook to negative. Moody's downgrade came after the county released an auditing error that inflated the general fund by $90 million.

Analysts from both rating agencies cited several of the same concerns, including persistent revenue pressures in the face of the gradual rollback of an unpopular sales tax increase, looming pension payments, diminished reserves, and deficits in its massive health and hospital system, which accounts for a third of its budget. Standard & Poor's last week affirmed its AA rating and stable outlook.

Malhance said he thought the market had already absorbed the Moody's downgrade, which came four months ago, while downplaying the importance of Fitch compared to the other two major agencies.

For at least one investor, the rating actions are overdue. "From our perspective, the ratings were too high for too long, and we view it as an A1 credit at this point," said Michael Pietronico, chief executive of Miller Tabak Asset Management.

The county remains a strong credit despite its ties to Chicago and Illinois, Pietronico said. "The issues are wellknown, but Cook County is still an investable credit," he said, citing the area's strong employment base and infrastructure as fundamental credit strengths.

He added that the Illinois connection could work well for investors. "That Illinois penalty could be a gift should the deal come cheap," he said.

Some individual investors may still shy away from Cook County, according to Brad Reynolds, chief investment officer for LJPR LLC, a Michigan-based investment firm that caters largely to individual investors. "I tend to stay away from Illinois right now," he said. "The overall thing is what individuals are comfortable with, and most retail investors, because of the news, don't like to see California or Illinois in their portfolios."

The borrowing will likely be Cook's last for at least a year. The board has authorized it to borrow up to $295 million to finance a capital campaign through 2016. The county's debt totals $3.5 billion, and annual debt service makes up 9% of the government's overall budget, Malhance said.

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Banks Boost Their Tax-Free Investments in First Half

Tuesday, September 27, 2011
By Christine Albano

Yield and spread opportunities in the tax-exempt market in the first half of 2011 led banks to invest a larger portion of their assets in municipal securities compared to the same period last year, according to industry analysts and quarterly data provided by Highline Financial LLC.

The 500 Largest Municipal Portfolios at U.S. Banks

As of June 30, commercial and savings institutions increased their municipal investments by 3.9% to $186.64 billion on a cost basis, up from 2.7% in the first half of last year, according to the Austin-based financial information and analytics provider, which focuses on the U.S. banking sector. Cost basis represents the amortized cost of all securities of states and political subdivisions in the United States not held in trading accounts.

"Banks joined the rest of the investor base and grew more comfortable with municipals as we moved through the year," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "That the municipal yield curve remained much steeper than Treasuries during this time may have played a role in the appetite for banks to own tax-free bonds."

As of June 30, generic triple-A general obligation bonds due in 2041 were yielding 4.35%, while the 30-year Treasury bond was yielding 4.38% — a muni-to-Treasury ratio of 99.3%, according to Municipal Market Data. Triple-A muni yields in 30 years as a percentage of Treasuries were as low as 98.2% and as high as 107% between April 6 and June 30, according to MMD.

"More sophisticated institutions recognized the excellent relative-value opportunity that municipals represented in 2011. Banks likely recognized that value and added to their exposure as needed," Pietronico added.

In all of 2010, banks held municipal debt totaling $179.62 billion on a cost basis as of Dec. 31 — up 13.7%, the highest yearly increase on record — up from the previous year when they owned $157.99 billion, according to the data.

George Friedlander, chief municipal strategist at Citi, said banks increased their direct private purchases in the municipal sector in 2011 as part of their overall strategic business plans, while they also continued to purchase bank-eligible bonds and bank-qualified bonds that were issued in 2009 and 2010 under the American Recovery and Reinvestment Act.

"Banks made a conscious decision to reallocate a modest proportion of assets away from the paltry yields on high-grade taxables into munis to increase the after-tax yield spread versus their borrowing costs," he said.

In addition, he said many others continued to purchase taxable municipal bonds even after the sale of new Build America Bonds authorized under the ARRA expired.

In the first half of the year, Citi ranked first among the top 500 bank holders of municipal debt, though it only expanded its portfolio by 0.3% to $14.98 billion from $14.93 billion as of Dec. 31.

Second-place Wells Fargo Bank demonstrated the largest mid-year increase in its muni portfolio, growing 54.8% to $14.80 billion as of June 30, from $9.56 billion at the close of 2010.

Bank of New York Mellon, which ranked 14th among top holders, showed the second-highest increase, boosting its muni portfolio by 107.9% to $1.25 billion from $605 million at the end of 2010.

While Bank of America showed the largest decline in its municipal assets, dropping 31.6% to $3.69 billion from $5.40 billion, it still managed to snag sixth place overall among the top holders.

U.S. banks generally saw solid profits in 2011 largely due to a steady rise in net interest income, banks' largest revenue component, as a result of a decline in central bank rates and funding costs, according to a recent Deutsche Bank report on bank profitability. In addition, banks have also seen a rebound in trading income due to the broad-based rally in the financial markets following the official end of the financial crisis two years ago, the report said.

Overall, banks have added to their municipal portfolios every year dating back to 1996, when they held a total of $75.022 billion on a cost basis, according to the Highline data. That was up 1.7% from the year before, when holdings dropped 5.5% to $73.80 billion from $78.05 billion in 1994.

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Yields Plunge on Fed Move
Operation Twist Sets Rally in Long-Terms

Friday, September 23, 2011
By Patrick McGee

Eye-popping declines in muni yields on Thursday might finally prod investors into accepting low yields and prompt issuers to take advantage of some of the lowest borrowing costs in history.

Yet the nosedive in tax-free paper was merely a sideshow as the Federal Reserve's monetary policy statement on Wednesday initiated a global rush to safe havens.

The Fed's decision to redeem $400 billion of short-term Treasuries over the next nine months and exchange them for debt maturing between six and 30 years from now prompted a staggering rally in longer-term bonds.

The 30-year Treasury yield fell 57 basis points in the week to 2.79%, its lowest since the final week of 2008. The 10-year yield dropped 38 basis points to 1.71%, its lowest since the 1950s.

Dubbed Operation Twist in reference to a similar tactic in the 1960s, the Fed's move was attached to a pronouncement that there were "significant downside risks to the economic outlook." Coupled with weak data in Europe, that helped spark a global sell-off in equities — the Dow Jones industrial average shed 674 points in two days.

Muni buyers have been balking at low yields recently but the tax-exempt market had little choice but to follow Treasuries as relative valuations hit two-year highs.

The Bond Buyer's 20-bond general obligation index of 20-year GO yields rushed 22 basis points lower this week to 3.85%, just two basis points above the lowest level since mid-October. The 11-bond GO index of higher-grade 20-year GOs fell 22 basis points to a five-week low of 3.58%, just three basis points from its 43-year low.

The Bond Buyer's revenue bond index, which measures 30-year revenue bond yields, descended 15 basis points to 4.96%, a 45-week low.

Next to Treasuries, these moves aren't too big. But the underperformance is nothing to be embarrassed about, said Michael Pietronico, chief executive of Miller Tabak Asset Management.

"If anything, I'm surprised the market was able to generate this kind of gain in one day," he said, noting Municipal Market Data's 18 basis point drop among long-term yields. Big rallies can quickly reverse course as traders opt to lock in profits. But the market saw none of that.

"The one thing we see very little of is selling," Pietronico said. "That's indicative of a market that has come to grips with the idea that rates are going to remain low for a very long period of time. Replacing bonds may be difficult going forward."

Pietronico said traditional retail buyers like to keep within the five-year mark but will have to gravitate out to 10 years to retain any cash flow. Money managers will likely reach out to the 15-year spot. Mutual funds, assuming they see inflows, will be the nominal buyers in the long end.

"Taxable investors are going to take a serious look at the muni bond market," he said. "Absolute yields are so much higher than Treasuries, and there are very few opportunities overseas to get involved in without incurring a lot of credit risk."

Muni-Treasury ratios finished at 2011 highs on Wednesday, then rose again Thursday. The 30-year ratio jumped nine percentage points over two days to 122.9%, while the 10-year ratio climbed five points to 114.5%. Both are at their highest since April 2009.

"From a taxable investors' point of view, the muni market is actually an island of tranquility," Pietronico said. "It could be a destination for a lot of taxable investors — in particular, pensions might take a very serious look at state GO bonds that yield significant amount over Treasuries."

The weekly average yield to maturity on The Bond Buyer's 40-bond muni index, which is based on prices for 40 long-term muni issues, declined four basis points to 4.97%, a 46-week low. The one-year note index moved up a basis point to 0.29%.

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California GOs Snag Low Yields
Market Snaps Up $2.39B of Bonds

Friday, September 23, 2011
By Randall Jensen

SAN FRANCISCO — California plunged into a hungry market this week with its first general obligation bond sale of the year, grabbing yields far below its most recent sale last year.

Most observers attribute the successful multibillion foray to a municipal bond market at record low yields, with help from pent-up demand from investors with more confidence in the state's finances.

California this week finished selling $2.39 billion of GO bonds, with yields of 1.61% on five-year maturities, 3.17% on 10-year bonds and 4.80% on bonds maturing in 30 years.

Those yields were on average 93 basis points lower than last November's 2.66% for five-year maturities, 4.23% for 10-year bonds and 5.50% for 30-year debt.

The deal included a $1.109 billion refunding piece that saved the state $105 million in present-value terms.

"I don't think the metrics of California have changed significantly; the state still has significant problems. I think the lack of issuance we have seen over the last year just makes these new issues more desirable for institutional buyers," said Alexander Anderson, a portfolio manager at Envision Capital Management in Los Angeles. "Big institutions have a lot of money to spend and they are willing to buy at really low yields."

Retail took 27.7% of the offering, leaving the rest for institutions.

Since its previous GO sale almost 10 months ago, California's finances improved somewhat, which led Standard & Poor's to change its outlook on the state to stable from negative after it passed its first on-time budget in five years.

"While the state certainly isn't out of the woods, it seems that some investors are perceiving that they might have turned the corner," said Michael Pietronico, head of fixed-income research at Miller Tabak Asset Management.

Because of its low ratings, California provided some yield to investors in a market hovering around all-time lows.

The state's 10-year bond sold 105 basis points over the Municipal Market Data triple-A index on Tuesday, the final day of the deal.

The 10-year municipal bond yield sat Tuesday at 2.12%, according to MMD, or just five basis points up from its all-time low recorded last week.

California is still the lowest-rated state in the union, according to Standard & Poor's and Fitch Ratings, both of which assign an A-minus. The state carries a more positive A1 rating, two notches higher, from Moody's Investors Service.

Gabriel Petek, S&P's lead California analyst, said in the July report changing its outlook that the budget adopted at the end of June improved the state's fiscal structure and reduced chances of cash-flow problems.

However, the budget is still far from sound. The $86 billion spending plan passed in June, the first on-time budget since 2006, depended on cuts plus $4 billion of future revenue to fill a $9.6 billion hole. If the $4 billion evaporates, cuts to education and other services will be triggered to bring the budget back toward balance.

So far state revenues have come in below forecasts. California Controller John Chiang, the state's cash manager, said during a Bond Buyer conference last week that "everything must go right" for the triggers to be avoided.

But state Treasurer Bill Lockyer is still behind the budget.

"The market has taken notice of the budget and given California credit for improving its fiscal management — that's what this budget does," said Lockyer spokesman Tom Dresslar.

Petek said in an email Wednesday that the treasurer has consistently voiced caution about growth of the state's debt portfolio, and Gov. Jerry Brown seems to be on the same page.

Brown has attempted to reduce the state's "wall of debt."

The governor pointed out in his budget that more than $11 billion of cash from bond issues has accumulated in department accounts, costing taxpayers more than $700 million a year in debt service for projects that have yet to be completed.

Brown's push means the state will issue much less debt than in previous years. It already skipped its usual multibillion spring GO sale for the first time since at least 1988.

With only one GO offering on the table so far this year, the state has only taken up 4.2% of the market, compared to its $23 billion of GOs sold in 2009 that took up 41%. Last year, California sold $10.5 billion of GO debt for 18.7% of the market.

Looking ahead, Lockyer has said the state has preliminary plans to sell $15.5 billion of GO debt during this and next fiscal year: $10 billion of general obligation bonds and $5.5 billion of lease revenue bonds over the two-year period. But less debt in the market typically means better performance from existing debt and more demand for future deals.

"Given that they are only going to bring $15 billion over the next year, I think it is going to maintain demand for the name," said Kelly Wine, executive vice president of RH Investment Corp., a broker-dealer in Encino, Calif. The firm was a manager on this week's GO issue.

"I think it will keep things where they are right now — I don't think we will see the spreads widen out again for quite some time," Kelly said.

Lockyer said California will issue $450 million of lease revenue bonds in October and plans a smaller sale of around $300 million in November for various agencies. The state is also planning a refunding of its sales-tax-backed economic recovery bonds in November, for a yet-to-be determined amount.

Officials also expect to go to market next month with another GO sale but the figures have yet to be fixed as the Department of Finance is working out the needs of different agencies.

During a speech during The Bond Buyer California Public Finance Conference last week, Lockyer also presented a wide-ranging 10-year blueprint for future bond sales.

He said issuances could range anywhere from nothing to voters authorizing another $40 billion to pay for needs that include high-speed rail and more education spending.

The state has voter authorization for $37 billion of general obligation bonds and $12 billion of lease revenue debt for the 10-year period.

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New Deals, Not FOMC, Will Bring in Buyers

Thursday, September 22, 2011
By James Ramage

News from the Federal Open Market Committee may make tax-exempts more attractive compared to Treasuries, but by helping to lower muni yields on the long end, it won't bring in more investors.

The only thing that will is more paper, a trader in New York said.

"We could use some more new issuance; it all depends on that supply factor," the trader said. "Right now they're issuing deals, and because no one has any paper, they're getting soaked up. It's still rough out there."

The relative ease with which the market is absorbing the week's uptick in volume is signaling to investors that yields are about where they should be. If anything, they continue to fall. And on Wednesday, the FOMC poured more fuel on the low-yield bonfire.

The committee said it will extend the average maturity of its holdings of securities. It will achieve this by purchasing $400 billion of Treasuries with six to 30 years remaining to maturity by the end of June and selling an equal amount of maturities three years and shorter, according to an announcement after the FOMC meeting.

The move is expected to apply downward pressure on longer-term interest rates, the FOMC said in a statement, in addition to helping make broader financial conditions more accommodative.

As predicted, intermediate and long-term Treasury yields free-fell immediately following the statement. And while muni yields fell on the day, they did not keep pace, leading to rising ratios to Treasuries along the curve.

Muni-Treasury ratios at the 10-year mark rose to 112%. The 30-year rose to 119%, the cheapest munis have been to Treasuries since April 2009.

Muni yields were firmer across most of the curve on out Wednesday, according to the Municipal Market Data scale. The yield curve is steady from two to six years. Yields fell one basis point for maturities of one, seven, and eight years. Beyond that, yields were two or three basis points lower.

The 10-year muni yield Wednesday fell three basis points to 2.09%, up two basis points from the all-time low recorded early last week. The 30-year yield also dropped three basis points to 3.62%. The two-year yield stayed at 0.32% for a fifth straight session.

Treasury yields weakened on the short end, but firmed noticeably thereafter. The benchmark 10-year Treasury yield dropped eight basis points to 1.86%, its lowest yield in many decades.

The 30-year yield plunged below the 3.00% barrier, before settling just over it at 3.02%, 18 basis points lower on the day. The two-year yield jumped four basis points to 0.21%.

The market expected a substantial increase in volume this week to $8 billion, significantly larger than the $4.6 billion weekly average issued this year. Last week saw a revised $6.2 billion of issuance.

In the competitive market, Bank of America Merrill Lynch won the largest new deal of the week, $500 million of Massachusetts general obligation bonds. The bonds are rated Aa1 by Moody's Investors Service, and AA-plus by Standard & Poor's and Fitch Ratings.

Yields ranged from 0.69% with a 5.00% coupon in 2015 to 3.53% with a 4.00% coupon in 2028. Credits maturing from 2012 to 2014, 2017, 2022 to 2024, and 2026 were sold but not available.

The deal was priced aggressively, certainly at the short end of the curve. Yields were 10 basis points above MMD at the four-year mark, and 13 basis points above MMD at the seven-year mark.

"The Massachusetts deal went pretty well," the New York trader said. "Yields were right on target, and they had good flow."

The commonwealth's competitive GO issuance was priced aggressively and has seen decent activity, according to Mike Pietronico, chief executive officer of Miller Tabak Asset Management.

"There's going to be an investor base that will want to buy Massachusetts, based on the fact that it seems to be outperforming the vast amount of other states, in terms of its fiscal position," he said.

Also in the competitive arena, JPMorgan won $300 million of Ohio common schools GOs. The bonds are rated Aa1 by Moody's and AA-plus by Standard & Poor's and Fitch.

Yields ranged from 0.45% with a 3.00% coupon on 2013 to 4.06% with a 4.00% coupon on 2031. Bonds maturing in 2012 were offered in a sealed bid. Credits maturing from 2020 through 2022 were not formally re-offered.

In the negotiated market, JPMorgan priced $250 million of West Virginia University improvement revenue bonds in two series. The bonds were rated Aa3 by Moody's and A-plus by Standard & Poor's.

The deal was upsized from $224 million. At repricing, yields for the first series, $195.6 million of university improvement revenue bonds, ranged from 0.45% with a 3.00% coupon in 2012 to 4.30% with a 5.00% coupon in 2036. Yields were cut five basis points in the two-, five- and 10-year maturities, and cut 10 basis points in the 20-year.

Credits for the second series, $55 million of university improvement variable-rate revenue bonds, were priced to the SIFMA swap index plus 65 basis points in 2041. That's down from the earlier pricing, at the SIFMA swap index plus 70 basis points in 2041.

B of A Merrill priced $132 million of New York State Energy Research and Development Authority pollution control revenue bonds in three series. The bonds are rated Baa2 by Moody's, BBB-plus by Standard & Poor's, and A-minus by Fitch.

Yields on the first series, $60 million, were 2.125% priced at par in 2015. Yields on the second and third series, $30 million and $42 million, respectively, were 2.25% priced at par in 2015.

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Refunding Threatens Rally With Sales at 2011 High: Muni Credit

Friday, September 16, 2011
By Michelle Kaske and Freeman Klopott
of Bloomberg

Sept. 16 (Bloomberg) -- Municipal issuers taking advantage of record-low rates to refinance debt have boosted long-term debt sales to the highest level this year, threatening to push up yields.

Refunding deals of $8.6 billion since Aug. 1 are almost double that for the same period last year, according to data compiled by Bloomberg. States and municipalities plan to sell $12.6 billion of long-term debt during the next 30 days, the highest level for the year.

The 10-year index of top-rated municipals dropped to 2.05 percent on Sept. 12, the lowest level since January 2009, when Bloomberg's data for the securities begins. Yields on top-rated 30-year tax-exempts were 3.65 percent yesterday, after falling to 3.56 percent on Sept. 12, also the lowest yield since Bloomberg records began.

"The market may have seen its lows in yields and given that there's more supply, you probably could see somewhat of an uptick in rates," Michael Pietronico who manages $585 million as chief executive officer at Miller Tabak Asset Management, said in a telephone interview.

Interest rates on long-term municipal debt may need to rise by about 20 basis points in the fourth quarter to help draw investor interest, Pietronico said. Municipal issuance will increase to an average $25 billion a month, up from $20 billion a month so far this year, because of refinancing opportunities, said Alan Schankel, director of fixed income research for Philadelphia brokerage Janney Montgomery Scott LLC. A basis point is 0.01 percentage point.

Yields Forecast

Yields on 30-year debt will increase by 21 basis points while 10-year rates will rise by 38 basis points in the fourth quarter of this year, Peter DeGroot, head of municipal research at JPMorgan Chase & Co., wrote in a Sept. 9 report. Higher issuance, along with less debt maturing in October and November than in earlier months, may have an effect on the market.

"Supply may begin to weigh on the market in October, given the current and expected uptick in refundings, with average weekly volume in the $6 billion to $7 billion bond range, as reinvestment capital declines and low yields persist," DeGroot said.

The total from bondholders reinvesting proceeds of matured securities is expected to decrease to $55 billion in October and November from $61 billion in the previous two months, DeGroot said in an e-mail.

Refinancing deals this year total about $34 billion, compared with $30 billion sold during the same time in 2010, according to data compiled by Bloomberg. That amount doesn't include refundings in combination with new issues.

Tax-Break May End

Municipalities may also be advancing plans to borrow this year because President Barack Obama proposes lowering the tax break for municipal-bond interest to 28 percent from 35 percent for couples earning more than $250,000 a year.

"Issuers might move some deals forward to try and lock in lower rates before the market begins to consider the potential for any kind of longer-term tax reform," Miller Tabak's Pietronico said.

The South Carolina State Public Service Authority, the second-largest U.S. municipal electric utility system, on Sept. 14 refinanced $135.8 million of debt, saving $7.7 million, Mollie Gore, the agency's spokeswoman said in a telephone interview from Moncks Corner, South Carolina.

"It's foremost in our minds to keep our costs low and cut costs when we can so we get the best possible rate for our customers," Gore said. "And that includes looking at our debt when it makes sense to do that, and now is one of those times."

California Selling

California, the most-populous U.S. state, today will begin selling $2.5 billion in tax-exempt general obligations, including a $1.3 billion refinancing. The transaction is the state's first long-term general-obligation borrowing this year.

"We have been monitoring the situation in the markets and looking for refunding opportunities," Tom Dresslar, spokesman for California Treasurer Bill Lockyer, said in a telephone interview.

"Our schedule has just been too clogged with new money the last couple of years, that's not the case now," he said. "Market conditions are good and we're taking advantage of the opportunity."

Minnesota, which ended a 20-day government shutdown July 20, is set to issue $918 million of tax-exempt general-obligation debt as soon as Sept. 27, including $152.7 million of refunding bonds.

The total return on municipal debt including price changes and interest income is 8.46 percent this year, 41 basis points more than Treasuries and 236 basis points more than corporate bonds, according to Bank of America's Merrill Lynch Municipal Master Index.

Following is a description of a pending sale of municipal debt:

MASSACHUSETTS, which had its credit outlook upgraded to positive from stable by Standard & Poor's in February, is set to sell $475 million of tax-exempt general obligations through competitive bid as soon as Sept. 21. The proceeds will finance capital projects. The state is rated AA, S&P's third-highest grade. (Added Sept. 16)

--Editors: Walid El-Gabry, Mark Schoifet

To contact the reporters on this story:
Michelle Kaske in New York at +1-212-617-2626 or mkaske@bloomberg.net and Freeman Klopott in New York at 212-318-2000 or fklopott@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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Jobs Plan May Be Tough To Enact

Friday, September 9, 2011
Dow Jones Newswires

12:17 (Dow Jones) Miller Tabak Asset Management CEO Michael Pietronico doesn't expect munis to react much to President Obama's jobs proposal, because he doesn't think it's likely the plan -- which includes $85B in aid to state and local governments, a $10B infrastructure bank and $50B for transportation projects -- will pass muster as presented. "As politicians from both sides of the aisle in America watch with white knuckles what is occurring in Europe, most tax-free bond investors would have to expect any deficit spending proposals would be very difficult to enact," he says. Copyright (c) 2011 Dow Jones & Company, Inc.

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Tax-Backed N.Y. Sale Shows Bet on Wall Street Gains: Muni Credit

Friday, September 9, 2011
By Michelle Kaske
of Bloomberg

Sept. 9 (Bloomberg) -- The New York Thruway Authority's 21 percent cost saving on bonds backed by personal-income levies shows investors are betting Wall Street's home will buck forecasts of slowing U.S. state tax revenue amid flagging job growth.

The debt, with a top rating from Standard & Poor's, sold yesterday with a yield of 2.41 percent for 10-year tax-exempt securities. That's 21 percent less than what a New York State Dormitory Authority bond, also supported by personal-income taxes and with the same credit grade, received in July. Yields on AAA municipal bonds have fallen by the same amount during the past two months, according to BVAL bond data.

New York's 26 percent gain in personal-income levies last quarter surpassed the national average of 16.5 percent, according to the Nelson A. Rockefeller Institute of Government. While RBC Capital Markets said this week that a weakening job market may sap tax collections, New York may be in a better position than other states to withstand a potential economic slowdown.

"New York has a very diverse economy and should weather any economic downturn probably better than most states," said Michael Pietronico, chief executive officer of Miller Tabak Asset Management. He manages $585 million of municipal assets, including New York debt backed by personal-income taxes.

$22.5 Billion

The Thruway Authority, which oversees a 570-mile (917-kilometer) toll-road system, sold about $352 million of the tax-exempt securities to finance highways and bridges. It's the second-biggest offer of a week in which sales are set to total $3.7 billion, according to data compiled by Bloomberg.

Yields on 10-year top-rated municipal debt fell to 2.09 percent yesterday, the lowest since at least January 2009, when Bloomberg data on the maturity began. The yield has tumbled from 2.64 percent when the dormitory authority sold in July.

The Thruway agency is one of five New York authorities that have sold a total of about $22.5 billion of debt backed by personal-income levies, S&P said in a report. Few municipalities outside New York state and city sell such bonds, according to Evercore Wealth Management LLC.

New York's collection of personal-income taxes rose 4.2 percent last fiscal year, and the third-most populous state forecasts a 7.9 percent gain in fiscal 2012, according to S&P.

Investor Protection

The state gets about 15 percent of its tax revenue from Wall Street, according to Comptroller Thomas DiNapoli. Revenue of the six largest U.S. banks is projected to rise about 5 percent in 2012 relative to this year, according to Bloomberg data.

If levies on bankers' compensation should fall, investors are still protected because New York sets aside as much as $6 billion, or 25 percent, of personal-income tax collections in a fund to repay the bonds, S&P said.

"The income tax in New York is very heavily dependent on Wall Street and the jobs generated, and salaries and bonuses, so depending on how the market does this year, there could be some additional weakness" in the local economy, said Howard Cure, director of municipal-credit research in New York for Evercore, which manages $2.9 billion of municipal securities, including about $30 million of New York personal-income-tax debt. "But the coverage is very strong on these bonds."

U.S. job growth unexpectedly stalled in August. Payrolls were unchanged, the weakest reading since September 2010, and compared with the median forecast in a Bloomberg News survey for a gain of 68,000. The jobless rate held at 9.1 percent.

States' personal-income tax revenue may begin to slump if payroll remain as weak as in August, because growth in the collections is "highly correlated" with employment levels, RBC's Chris Mauro wrote in a report this week.

Still, the reserve fund for the securities is "a solid mechanism for these monies to be directed to pay off the bonds," Pietronico said. "One of the attractive elements of a deal like this is it cannot be politically altered moving forward should the state become lacking in cash."

Following is a description of a pending sale of municipal debt:

The New York City Municipal Water Finance Authority, which provides drinking water to the city's eight million residents, will sell through competitive bid as soon as Sept. 13 about $458 million of water and sewer-system revenue bonds to finance capital projects and refund debt. (Added Sept. 9)

--With assistance from Henry Goldman and Michael Moore in New York. Editors: Mark Tannenbaum, Mark Schoifet

To contact the reporter on this story:
Michelle Kaske in New York at +1-212-617-2626 or mkaske@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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Debt Delivers Yields With a Kick
Premium Bonds Offer Protection

Wednesday, August 31, 2011
By Patrick McGee

Every bond has its season. In the current environment of ultra-low rates and a steep municipal yield curve, the sun is shining on premium bonds.

Par bonds and discount bonds tend to be the retail muni buyer's product of choice, but analysts say yield-hungry investors who don't want to compromise on credit quality should examine the benefits of premium bonds and their protective role in a rising rate environment.

"When rates are stable and at a reasonable level, it's all about par bonds," said Chris Mier, head of analytical services at Loop Capital Markets. "But when rates are low, like they are now, and people are fearful of rates rising, premium bonds are a good strategy."

Of particular interest in this environment is what the market dubs "kicker" or "cushion" bonds — previously issued, high-coupon securities with a long maturity, which are priced to a shorter-term call date.

Kicker bonds play a defensive role in a stable or rising interest rate environment. They typically offer a higher current yield than comparable short-term assets, and they offer the possibility of even higher yields if the bonds are not called.

Their attraction stems from how callable bonds get priced in the secondary market as the call date approaches.

For instance, a bond with a 25-year maturity and a 10-year call option will be priced more like a 10-year bond because in a low-yield environment, the market will value the security at the yield-to-next call, or its yield-to-worst.

That's because when interest rates have declined since the bond was issued, the borrower is likely to call the bonds. But to compensate investors for the risk that principal might not be returned at the call date, the buyer gets a higher current yield than comparable, non-callable munis maturing near that call date.

A nimble investor can purchase kickers on the assumption that they get called and scoop up some extra yield.

If interest rates rise, the call becomes less likely. This creates a different opportunity, for when the call date passes, the market reprices the bond's yield to the new date, and the yield kicks up, hence the term "kicker bonds."

PLAIN VANILLA

Let's say you're in the market for an intermediate-term bond.

One muni you think of buying has a 3% coupon, is maturing in June 2024, and has a 10-year call in 2021. It's an essential-service bond, rated double-A, so it trades roughly 35 basis points off the Municipal Market Data triple-A yield curve, which is 2.80%. Priced to worst call, its yield is 3.15%, and its dollar price would be $98.43.

Compare that with a 5.5% coupon bond maturing in 2024, but with an earlier call date, in 2017. Its market yield is 3.05%, and its dollar price would be just under $113.

Retail investors tend to shy away from the second bond because it's trading at a premium. They don't like the idea of paying more for a bond than it will pay back at maturity. So they assume the first bond, offered at a discount and with a higher yield, is the better buy.

"But the second bond is trading at 3.05% to the call in 2017, so if the call isn't exercised, its yield kicks up," said Peter Delahunt, national sales manager in the muni group at Raymond James.

Its yield jumps because the market now assumes it will be called at a later date. If it's never called, its yield will eventually kick to its yield-to-maturity, which at the purchase price above is 4.19%.

So if interest rates are the same by the time 2017 rolls around, the buyer would be holding a seven-year bond with a yield in the range of 3.40%, whereas a comparable non-callable, seven-year bond would yield roughly half that.

In addition, the premium bond boasts protection against Accrued Market Discount tax. Discount bonds mature at par, and that capital appreciation is taxed as income rather than a capital gain. So premium bonds, which amortize towards par, have long been used by institutional investors to reduce exposure to AMD, as Citi reported in an Aug. 22 research note.

THE CUSHION EFFECT

Mier said kicker bonds are highly desirable these days because investors are assuming that interest rates eventually will have to go up from current record low levels.

Buyers oriented towards total return are therefore willing to pay an up-front price for bonds that offer better performance characteristics in a bear market.

"Buying 'kicker' or 'cushion' bonds is a good way to take advantage of the current interest rate environment and build in some protection for yourself," Mier said.

Mier showed the value of a kicker bond by hypothetically swapping a par-value bond for a premium kicker bond based on current market rates last Wednesday.

The swap involved selling $1,000 of par-value local school district bonds yielding 3%, and swapping them for $850 worth of premium Denver bonds yielding 2.88%. The investor can only buy $850 worth because the kicker bonds, in this instance, were priced at $116.20, rather than $100 for the par bonds.

Both bonds mature in 2024, but the school bonds have a call date in 2020, while the Denver bonds have a call date in 2019.

If interest rates remain unchanged over the coming 12 months, a simple calculation suggests the total return would be 3% on the par-value school bonds and 2.90% on the premium Denver bonds. Not much of a difference.

But if interest rates jump 100 basis points over the coming 12 months, the same calculation shows the total return on the school bonds would be negative 6.09%, whereas the Denver bonds would tumble by only 2.45%. Total return is the yield of the bond plus or minus depreciation or appreciation in price.

"That's the attraction," Mier said. "From an accounting standpoint, you're giving up 12 basis points, but from a total return standpoint, if rates rise like you expect them to, you're saving yourself three and a half points. So that's why this kind of trade is being done."

If an investor were certain that rates would jump higher, money market funds would be a better bet so you could take advantage of the higher rates, he said.

But nobody has certainty, so kickers "are a great way to stay in the game if you're a long-term investor."

IF RATES FALL

The risk is that should interest rates fall, kickers lag.

In financial jargon, kicker bonds feature lower effective duration, meaning they are less sensitive to a shift in interest rates. So they play a defensive role in a rising rate environment by losing value less quickly than a non-callable bond. (The jargon here is higher convexity).

This benefit comes at a cost: the yield-to-maturity on high coupon bonds priced to short call dates is typically less than a non-callable bond.

Moreover, if interest rates fall, kickers gain in value less quickly — lower convexity.

Mier, however, pointed out that an opportunity can exist for kicker bonds even in a falling rate environment.

When interest rates drop but outstanding debt isn't currently callable, issuers have an incentive to do an advanced refunding — that is, the issuer borrows new debt at the lower rates, and uses the proceeds to purchase Treasury bonds whose interest payments will pay off the old debt.

The bond is now considered a top-tier credit because it is backed by Treasury bonds in escrow and since it will be called with certainty at its pre-refund date.

Mier notes this is a trade that people often use when they sense a bear market in bonds.

RETAIL APPETITE

Because rates have fallen so much in recent months, virtually all outstanding munis are trading at a premium. Finding kickers can be as easy as picking out bonds with call dates.

"Almost any bond coming out in the secondary is a cushion bond because we're at some of the lowest rates we've ever been at," Delahunt said.

Even in the primary market, premium prices have become the norm thanks to the standard pricing structure preferred by buyers for new issues.

Peter Hayes, head of municipals at BlackRock, noted that retail investors generally prefer buying bonds at a dollar price in the range of $98 to $102, but with new pricings often structured with 5% coupons, buying at par isn't feasible.

For instance, last week's King County, Wash., deal underwritten by JPMorgan offered 5% coupons on serial bonds running from 2013 to 2031, even though actual yields ranged from 0.29% to 3.94%. The 10-year bond in the series sold at a dollar price of $121.

It has taken retail investors a while to understand why anyone would pay more for a bond than what will be delivered at maturity, but that perception is slowly changing because rates have been low for a few years now.

"You rarely see a coupon-structure adjust down to the same degree that the yields are," Hayes said. "That's not what investors want. Everyone always thinks interest rates are going to go up — that's just how investors predominantly think. So as rates come down, you don't see coupons come down so much."

As the market becomes more comfortable paying premiums, kickers should become a more familiar product to average investors.

But kickers can be tricky, so retail investors should rely on professionals to do the technical work, said Michael Pietronico, chief executive at Miller Tabak Asset Management.

"There are chances to overpay for these bonds if you don't do your homework, if you don't know what the non-callable bond is worth," he said.

One thing to keep in mind is the importance of having a significant cushion to play defense against rising rates, according to Delahunt.

"If you have a bony butt and you're sitting on a three-point cushion, you're still going to feel uncomfortable," Delahunt said, alluding to a premium bond at $103.

"What you want is a nice and fat 10-point cushion to sit on — a big old fluffy ­pillow."

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The Long and the Short on Premium "Kicker" Bonds

Wednesday, August 31, 2011
By Patrick McGee

Kicker bonds offer unique benefits depending on whether you are a short-term or a long-term buyer. But each strategy carries its own risks.

A real example using market prices from last week can help show these opportunity and costs.

New York City issued 5.25% coupon bonds in October 2003. The bonds mature in 2021 but are priced to the 10-year call date. At a dollar price of $110.1, their yield to maturity is 4.027%, but the market assumes they will be redeemed in October 2013, so they trade at their yield-to-next call, or yield-to-worst, which is 0.479%.

A short-term buyer expecting the call to be exercised can purchase the bond as a way of getting some extra yield. The attraction here is grabbing yield without sacrificing credit quality or explicitly extending out the curve.

As low as the 0.479% yield is, the two-year yield on Municipal Market Data's benchmark curve has plummeted more than 40 basis points in recent months to just 0.30%. MMD's two-year curve, which aligns with New York's double-A ratings, is just 0.39%.

Buyers sometimes call these "cushion bonds" because of the extra cushion of yield.

A longer-term investor who believes the interest rate environment is stable or that interest rates could rise might also purchase this bond. The bet there is that the call would not be exercised.

If these New York bonds aren't called in October 2013, the next call is October 2014, so the yield-to-worst kicks to 1.91% from 0.479%. Once that date passes, it kicks to 2.65%. A year later it increases to 3.11%, then to 3.41%, and so forth until its yield to maturity in 2021 is realized at 4.027%.

The current steep tax-exempt yield curve makes muni kickers more appealing.

The two-year to 10-year spread among triple-A munis has averaged 232 basis points so far this year, versus just 24 basis points during the same period in 2007, according to MMD. The steeper the slope, the greater the kick.

Michael Pietronico, chief executive at Miller Tabak Asset Management, said the steep curve coupled with tight credit spreads make kicker bonds "trade at a much higher price as you move through time because of the need for income on the short end of the curve."

The concern in buying kickers for the short term is "extension risk." In the New York example, if rates back up and the call option isn't favorable to the issuer, these bonds could extend out another eight years to 2021.

That's problematic if you're depending on the principal redemption, as you would be stuck with these bonds when better opportunities might exist. In that case, you might have been better off sticking with short maturities and rolling them into higher-yielding bonds once rates rose.

The upshot is that kickers play a protective role in a rising rate environment. Because they typically trade at a premium, rates have to rise quite a bit before their value dips below par.

But there are other risks. If rates do fall and the bond is called, the long-term investor receives his principal back precisely when he does not want it: a low-yield environment.

This is called reinvestment risk, and it can hurt the return on your overall portfolio.

Moreover, while the continuous kick in yield might look appealing, the chances of this happening might be slimmer than anticipated.

"The yield to call will definitely happen, but the yield to maturity may not," said Loop Capital's Chris Mier.

He said if you went looking for all the 30-year maturity bonds issued 20 years ago with a 10-year call, you wouldn't find much. That's because once the bond becomes currently callable, the only incentive an issuer needs to exercise that call is one sustained drop in yields.

"The people that give too much value to the kicker, to the yield-to-maturity," Mier said, "are fooling themselves if they think there is a high probability that they are actually going to get to maturity."

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"Budding Weakness" In Munis

Wednesday, August 24, 2011
By Kelly Nolan
Dow Jones Newswires

11:31 (Dow Jones) There's "budding weakness" in munis today, amid nervousness ahead of Ben Bernanke's speech in Jackson Hole on Friday, says Miller Tabak Asset Management CEO Michael Pietronico. There's also "some disdain" for low muni yield levels, which has kept demand "transient" the last few days, he says. Trading is also expected to become even thinner as the Labor Day holiday weekend approaches, and market participants take vacation. "This should penalize sellers who test the market," Pietronico says. (kelly.nolan@dowjones.com)

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Rhode Island's Offer Unfazed by City's Bankruptcy: Muni Credit

Wednesday, August 24, 2011
By Michelle Kaske
of Bloomberg

Aug. 24 (Bloomberg) -- Rhode Island, whose poorest city filed for Chapter 9 bankruptcy protection Aug. 1, began a $169 million general-obligation bond sale yesterday with yields priced below an AA+ index of tax-exempt debt, one step higher.

The state was able to shake off Central Falls's insolvency and offer individuals $6.75 million of AA rated bonds maturing in 2021 with a yield of 2.6 percent, according to pricing information from Janney Montgomery Scott LLC, a member of the deal's syndicate. That's 0.04 percentage point below an AA+ index of 10-year tax-exempt debt. About $11 million of the bonds maturing in 2031 priced at par with a 4 percent yield, or 0.15 point below an AA+ index of 20-year tax exempts.

Rhode Island isn't a frequent issuer, which may have enabled it to offer lower yields than otherwise, said Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York, who manages $585 million of munis.

"Given the issues on the local basis, it seems like fairly aggressive pricing," Pietronico said. "But the other side of the coin is that there just hasn't been a lot of debt at the state level coming out of Rhode Island, so there could be some investors who have interest in diversifying."

The deal generated more than $15 million of bids from individual investors as of 1 p.m. yesterday, Dara Chadwick, a spokeswoman for Rhode Island Treasurer Gina Raimondo, said in a telephone interview.

Yields on Offer

The transaction includes $4.8 million of bonds maturing August 2014 with a yield of 0.63 percent, or 31 basis points below an Aug. 12 trade of Rhode Island general obligations sold in 2010 and due October 2014. A basis point is 0.01 percentage point.

A tranche of five-year bonds sold yesterday yielded 1.2 percent, or 47 basis points below an Aug. 22 trade of Rhode Island debt sold in 2007 and maturing in August 2016.

Treasury yields have fallen faster than those on municipal debt. Tax-exempt yields represented about 100.93 percent of Treasuries yesterday, compared with an average of 91.75 percent in 2011, Bloomberg data show. Municipals and Treasuries became more expensive as investors sold equities after Standard & Poor's downgraded the U.S. to AA+ and reports of a slower economic recovery.

Proceeds from Rhode Island's sale will finance capital projects for transportation, education and open-space initiatives as well as to refinance debt, Chadwick said.

Weekly municipal issuance is set for $4.2 billion, according to data compiled by Bloomberg, which is down from last week's $6.4 billion of sales.

Light Calendar

The light calendar helped Rhode Island attract individual buyers and even with Central Falls's Chapter 9 filing, the state doesn't face major risks, said Dan Solender, who manages about $14 billion as head of municipal bonds at Lord Abbett & Co. in Jersey City, New Jersey.

"Rhode Island is still well into the AA range so the only risk would be a minor downgrade, but nothing more significant than that," he said.

While Rhode Island pursues its offering at competitive rates, local Alabama issuers in and around Jefferson County face higher borrowing costs because they are located in the same state as the county, which is debating whether to file for bankruptcy.

In December, statements by Meredith Whitney, the banking analyst, about a potential "spate" of defaults began to rattle the $2.93 trillion muni market.

Along with the headline risk related to Central Falls, Rhode Island's Treasury Department has been working with the Securities and Exchange Commission since early February regarding the state's bond documents after the SEC contacted Raimondo's department.

Greater Transparency

Offering documents now include additional information about the state's pension system, Chadwick said. The Treasury department also created an investor website that provides financial documents and the state has begun training programs for employees regarding bond disclosure practices, Chadwick said.

Investors probably won't ask for more yield because of the SEC's request, Miller Tabak's Pietronico said.

"I don't think that it's an issue that should affect this deal," he said. "As far as tax-free bond investors go, better disclosure is needed from all issuers on an ongoing basis and I wouldn't say Rhode Island is a particular problem at this point."

Following is a description of a pending sale of municipal debt:

COLORADO SPRINGS, Colorado's second-most populous city with 416,427 residents, will sell $167 million of utility revenue bonds as soon as today to refinance debt. The sale is rated AA, Standard & Poor's third-highest grade. JPMorgan Chase & Co. is the senior manager of the bond sale. (Added Aug. 24)

--Editors: Walid El-Gabry, Pete Young

To contact the reporter on this story:
Michelle Kaske in New York at +1-212-617-2626 or mkaske@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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Mostly Small Deals Selling In Muni Market

Thursday, August 11, 2011
By Kelly Nolan
Dow Jones Newswires

1:44 (Dow Jones) There's mostly smaller deals in the muni market Thursday. Among them is Florida's Dept of Environmental Protection competitively selling $135M in debt, with JPMorgan (JPM) placing the winning bid. The single-A deal was reoffered at lower yields compared with comparably-rated bonds, and the loan reflects "credit-spread tightening that has been a constant in short end and the belly of the curve these past few trading sessions," says Miller Tabak's Michael Pietronico. A lack of new bond sales overall and a reach for more income is playing a big role in that spread compression, he notes, adding, "The Fed planting a flag in the middle of 2013 for short rates is getting cash off the sidelines." (kelly.nolan@dowjones.com)

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Puerto Rico Prices as Tax-Exempt Yields Get Cheaper: Muni Credit

Wednesday, August 10, 2011
By Michelle Kaske and Sarah Frier
of Bloomberg

Aug. 10 (Bloomberg) -- Puerto Rico's building authority, which Moody's Investors Service downgraded this week to Baa1 from A3, began selling $225 million of revenue bonds yesterday to individuals as municipal debt reached the cheapest level relative to Treasuries this year.

About $48 million of the Puerto Rico Public Buildings Authority tax-exempt debt maturing in 2039, the largest portion offered to individual investors, priced to yield 5.78 percent, or 1 percentage point above a 30-year index of similarly rated general-obligation bonds, according to data compiled by Bloomberg.

The pricing took place as the ratio of 10-year tax-exempt yields to that of 10-year Treasuries reached 104.8 percent yesterday, a 2011 high. Meanwhile, the 30-year Treasury yield reached 3.64 percent, the lowest level since October 2010. Yields on top-rated 30-year tax-exempt debt fell to 3.95 percent, the lowest since September 2010.

"We're very cheap because we underperformed so dramatically," said Chris Mauro, head of U.S. municipal strategy at RBC Capital Markets in New York, in a telephone interview. "Even so, with absolute yields as low as they are and all of the volatility and the information that investors have had to deal with, the ratios aren't as enticing at this level as they normally would be."

Commonwealth Pledge

Even with the Aug. 8 credit downgrade, the Puerto Rico lease-revenue bond sale, which is backed by the commonwealth's general-obligation pledge, should receive interest today from institutions because of historically low yields and a dearth of supply, Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York, who manages $560 million of assets, said in a telephone interview.

"Certainly, the ability to get 5 percent-type yields is rather limited in this market," Pietronico said. "So there'll be some interest from yield buyers."

This week's $2.9 billion of municipal issuance is the lowest August week of sales since 2003, and tax-exempt yields have fallen as investors look to safer investments than the equity market. The Dow Jones Industrial Average gained 429.92 points yesterday after dropping 634.76 points the day before.

The lower yields followed Standard & Poor's downgrade of more than 11,000 municipal bonds tied to the federal government, including housing securities and debt backed by leases, after the company last week lowered the U.S. to AA+.

Higher Ratio

The higher ratio to sovereign debt is because of intermediate and long-term Treasuries selling "richer" than they should be, said Tom Spalding, who oversees $10.5 billion of municipal securities at Nuveen Investments Inc. in Chicago. He said he expects the ratio to adjust in the next month or so.

"If the worst is over on the equity side, the ratio should move closer to parity about a month from now, in mid-September," he said.

Moody's lowered by one level Puerto Rico's more than $9 billion of general obligations and the agency's lease-revenue bonds because Puerto Rico's largest pension fund is 8.5 percent funded. Increasing that funding level and lowering the commonwealth's total combined $25 billion unfunded retirement liability will be a challenge, Moody's said in a report.

The issue is rated BBB, Standard & Poor's second-lowest investment grade and BBB+ by Fitch Ratings, its third-lowest, according to the preliminary offering document.

The downgrade shouldn't have a big negative effect on the deal's pricing since the market has known for some time of Puerto Rico's financial challenges, Spalding said.

"I think it was already fairly well-priced into the secondary market," Spalding said in a telephone interview. "Even though it was A3, everybody knew that they were probably a BBB credit."

Following is a description of a pending sale of municipal debt:

EMORY UNIVERSITY, a private university in Atlanta serving 13,400 students, plans to borrow $218.8 million of revenue debt as soon as this week. Proceeds will refund existing bonds. The school is rated Aa2, the third-highest grade from Moody's. Private Colleges and Universities Authority of Georgia is the conduit issuer for the transaction. Barclays Capital will lead a syndicate of banks on the sale. (Added Aug. 8)

--Editors: Walid El-Gabry, Mark Schoifet

To contact the reporters on this story:
Michelle Kaske in New York at +1-212-617-2626 or mkaske@bloomberg.net.
Sarah Frier in New York at 212-617-3454 or sfrier1@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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Pros Wonder What U.S. Downgrade Means for Munis
Speculation on Impact Abounds

Tuesday, August 9, 2011
By Patrick McGee

Nobody knows exactly what the long-term impact of the United States losing its AAA rating from Standard & Poor's means for municipal bonds, but that didn't stop the experts from speculating.

The muni team at Janney Capital Markets noted that tax-exempts performed well last week and continued to strengthen Monday, but with supply at just $3.2 billion last week and maybe $2.2 billion this week, the market hasn't been tested.

"State and local government issuers as well as the essential services sector have remained impressively resilient to credit pressures post-recession," Janney strategist Alan Schankel wrote Monday, but "the coming week's new-issue calendar is again sparse, so munis are unlikely to face any real challenge in the short term outside of the specter of ratings downgrades."

Michael Pietronico, chief executive at Miller Tabak Asset Management, thinks the reaction to the downgrade could have been worse had it come earlier in the financial crisis when a federal bailout of states was a more plausible notion.

"Since it is widely believed that the federal government is not in any position to bail out states, most municipal participants recognized that the notion of the federal government as a backstop was unrealistic, and has largely been discounted," he wrote.

A bigger long-term threat, Pietronico added, is deep cuts to the federal budget.

"States that rely heavily on government spending — such as Virginia and Maryland, which are home to many federal employees and defense contracts — could suffer," he wrote.

Tom Dalpiaz, portfolio manager at Advisors Asset Management, said he didn't believe the sovereign credit downgrade would have any meaningful impact on borrowing costs for state and local governments.

"The municipal bonds likely to be affected are among the most highly rated in the municipal universe," Dalpiaz wrote.

Chris Mauro, head of muni research at RBC Capital Markets, focused on the potential for another knee-jerk sell-off. He said retail investors, who make up roughly two-thirds of the muni market's investor base, could be spooked by headlines pronouncing "thousands" of muni bond downgrades.

The muni market includes about 1.2 million individual CUSIP numbers that identify individual bond issues. That compares to 75,000 in the corporate world, Mauro pointed out. So even if muni downgrades are limited to credits directly linked to the sovereign credit — such as pre-refunded munis and housing bonds backed by Fannie Mae and Freddie Mac — the aggregate number of bonds impacted could be eye-popping.

Moody's Investors Service, for instance, last month listed 7,000 muni ratings that would be downgraded in lockstep with the sovereign credit.

The market may already have been given a preview of the impact last Thursday, when Lipper FMI reported $860 million of net muni bond outflows. Mauro called that figure — the biggest outpouring since mid-April — "uncomfortably reminiscent" of heavy redemptions seen from November 2010 to May.

Meantime, Standard & Poor's affirmed the AA-plus ratings on the two bond insurer platforms run by Assured Guaranty Ltd. but revised the outlook to negative from stable due to their holdings of Treasuries.

The move was made in conjunction with downgrading five top-rated insurance companies to AA-plus and giving four other AA-plus insurers a negative outlook.

"The rating actions reflect our view that the link between the ratings on these entities and the sovereign credit ratings on the U.S. could lead to a decline in the insurers' financial strength," Standard & Poor's said. "This is because these companies' businesses and assets are highly concentrated in the U.S."

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U.S. municipal debt may prove resilient despite S&P

Sunday, August 7, 2011
Reuters

NEW YORK (Reuters) - The U.S. municipal market could prove more resilient than feared in the face of Standard & Poor's historic downgrade of the U.S. credit rating, analysts said.

Two positive factors give the market a shot at hanging onto last week's sparkling gains, when yields on some top quality bonds tumbled as much as 40 basis points: the lack of supply and the safe-haven bid for Treasuries.

"It's so hard to predict, but I don't foresee this announcement by S&P as being a catalyst for selling," said Robert Nelson, managing analyst for Municipal Market Data, which is part of Thomson Reuters.

"The possibility of this downgrade was already known to this marketplace as it traded up so aggressively last week," he said.

Though the municipal market only partly shared the Treasury market's extraordinary rally, analysts say the tax-free market is getting some safe-haven buying from investors unnerved by the stock market's plunge last week.

On Monday, Standard & Poor's is expected to downgrade the ratings of pre-refunded municipal bonds, U.S. mortgage agencies and other credits tied tightly to the federal government. Late Friday, S&P cut the country's credit rating to "AA-plus" from "AAA" and gave a negative outlook to the long-term rating.

Perhaps the downgrading of the U.S. rating might have had more impact on municipals in previous years, when there was a bit of an expectation that the U.S. federal government might ride to the rescue of beleaguered states or cities.

"I think we've heard from a number of officials in the federal government, and I think that at the same time the federal government is not in any position to bail out states, so in the muni market I think most recognize that the notion of the federal government as a backstop has been pretty largely discounted," Nelson said.

The immediate market impact of the U.S. credit downgrade might be somewhat muted by the tax-free market's traditional strengths.

Many of the tens of thousands of tax-free issuers, from states to counties and schools, raise revenue from their own taxes and fees, independently of the federal government. The default rate historically has been under 1 percent.

"I don't see a tremendous flight out of municipals; you might see credit spreads widening for lower-rated issues, but we also think a lot will hold their ratings," said Evan Rourke, a portfolio manager with Eaton Vance in New York.

"Our feeling is that you can still have an AAA-rated credit ... you could have AAA-rated credits in an AA-plus-rated country," he said.

S&P still rates 13 U.S. states at AAA.

Michael Pietronico, chief investment officer for Miller Tabak Asset Management in New York, said: "If there is going to be any reaction to this downgrade, it's going to be in pre-refunded securities, because investors buy them for the federal backing."

S&P is expected to immediately downgrade so-called pre-refunded bonds. When municipal bonds are refunded, investors typically are repaid from Treasuries held in escrow.

Referring to pre-refunded bonds, Pietronico said: "It's still an excellent credit and it is just likely to be a little less liquid than usual."

Next on the list of the most at-risk municipal credits is the billions of dollars of debt issued by public housing authorities secured by federally guaranteed mortgages.

S&P is expected to downgrade Fannie Mae and Freddie Mac, the two main government-sponsored enterprises (GSEs) used by state or local public housing authorities. Any defeased bonds backed by U.S. agency securities would also be considered vulnerable.

Debt issued by AAA-rated universities and colleges with global reputations might rise in price, Rourke said, citing Harvard and Princeton universities as examples.

"They have global appeal and extensive pricing power; they might actually go up in price," he added.

Perhaps the biggest long-term threat to muni credits is the possibility that the federal budget will be cut more deeply.

"The anticipation is that the lawmakers in Congress will react to this downgrade by cutting more spending," said Miller Tabak's Pietronico

"If they fail to react to this downgrade by cutting spending, there should be very little impact on municipalities; this is going to take time to play out," he said.

States that rely heavily on government spending -- such as Virginia and Maryland, which are home to many federal employees and defense contractors -- could suffer, he said.

States, counties, cities, hospitals, schools and the like might have to borrow more to make up for cutbacks in federal programs, analysts say. But hospital credits could be weakened if the federal government slashes health-care programs.

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Philadelphia to Sell $214.8 Million of Transit Debt: Muni Credit

Thursday, August 4, 2011
By Michelle Kaske and Sarah Frier
of Bloomberg

Aug. 4 (Bloomberg) -- Philadelphia's public transportation system, which serves 1 million commuters each weekday, plans to sell $214.8 million of bonds today secured by federal grants.

The Southeastern Pennsylvania Transportation Authority is borrowing against gasoline-tax revenue it gets from the Federal Transit Administration. Such debt, called capital grant receipts bonds, may be at risk if Congress doesn't reauthorize money for the Highway Trust Fund, which faces insolvency because of declining fuel taxes. Standard & Poor's last month rated the debt A+, its fifth-highest grade.

Repayment won't be a risk, said Tom McFadden, assistant treasurer of the authority, because the amount of federal money received that's dedicated to the bonds is five times more than debt-service costs and the securities have a reserve fund.

"We've got the coverage ratio of over 5-to-1," McFadden said in a telephone interview. "Even if there is a cut going forward in transportation, we think that we have a substantial cushion there to cover anything."

The authority has reached its capacity to borrow using debt backed by state funds, which now totals $315 million outstanding. It doesn't borrow against fare revenue, so is turning to capital-grant bonds for new rail cars and rehabilitation projects.

"This is really the only source we have at this point for new acquisitions," McFadden said.

Chicago Bonds

Capital-grant bonds sold by the Chicago Transit Authority last year rated A and maturing in June 2028 yielded 4.93 percent at the most recent trade July 14, 133 basis points more than top-rated bonds of the same maturity, data compiled by Bloomberg show. The difference has narrowed since June 17, when it was 168 basis points. A basis point is 0.01 percentage point.

Investors said mass-transit systems are less at risk from funding cuts in Congress because they tend to provide essential services to metropolitan areas. The Federal Aviation Administration is losing $28.6 million in taxes each day after Congress failed to renew its funding because of disagreements over rural airports.

"Because this is a national program affecting large transportation districts, as opposed to the FAA debate over small regional airports, I think this carries a little more weight," said Howard Cure, director of municipal research for Evercore Wealth Management LLC, which has $2.8 billion in assets, referring to the Philadelphia transit offering.

The mass-transit deal comes as top-rated 10-year tax-exempt yields fell to the lowest of 2011 yesterday at 2.5 percent. U.S. 10-year Treasury yields hovered near their lowest since November of 2.6 percent on reports economic activity is slowing.

Looking for Yield

Investors said the Philadelphia transit debt would be well received because buyers are looking for more yield than top-rated bonds provide, and issuance is low at $125.2 billion year-to-date, about half that sold during the same period in 2010.

"The market's pretty thirsty right now for yield," Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York, who manages $560 million of assets, said in a telephone interview. "Should the deal stay uninsured and priced appropriately based on the credit strength, it could be very well received."

The authority will consider whether to insure the bonds when they are priced, McFadden said. The sale includes serial maturities from 2012 through 2029, according to the offering document.

Duane McAllister, who oversees more than $2 billion in tax-exempts as a portfolio manager at M&I Investment Management in Milwaukee, said early indications showed the bonds priced to yield about 90 basis points more than top-rated securities.

"It may be tighter than that in the early years -- plus 75 to 85 -- and then roughly plus 90 across the rest," he said.

Following is a description of pending sales of municipal debt:

PUERTO RICO PUBLIC BUILDINGS AUTHORITY will sell $225 million in government-facilities revenue bonds as soon as this week. The federally taxable bonds will repay a line of credit from the Government Development Bank, pay interest on other bonds and help with construction costs for various buildings. Ramirez & Co. Inc. will lead underwriters in the sale. (Added Aug. 4)

VIRGINIA COLLEGE BUILDING AUTHORITY, which sells debt for infrastructure projects at Virginia state universities, plans to issue $274.9 million of bonds as soon as today through competitive bid. The state-appropriation-backed credit is rated Aa1, the second-highest grade from Moody's Investors Service, and one grade below Virginia's Aaa rating. The authority is on review for downgrade as Moody's placed the state on review July 19. (Added Aug. 1)

--Editors: Jerry Hart, Ted Bunker

To contact the reporters on this story:
Michelle Kaske in New York at +1-212-617-2626 or mkaske@bloomberg.net.
Sarah Frier in New York at 212-617-3454 or sfrier1@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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Munis Rally As Key Ratio Attractive

Tuesday, August 2, 2011
By Kelly Nolan
Dow Jones Newswires

11:12 (Dow Jones) Munis are "en fuego," says Miller Tabak Asset Management CEO Michael Pietronico. Muni yields as a percentage of Treasurys -- a ratio closely watched by professional buyers -- looks attractive, Pietronico says. "Now that it appears that the outline of a [US] debt deal has been approved... munis should show outperformance as the ratios are not only at one of the highest points this year but well past the peaks," seen in March, Thomson Reuters Municipal Market Data's Dan Berger says. Prices of top rated munis up as much as six basis points so far, MMD's benchmark scale shows. (kelly.nolan@dowjones.com)

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Munis A Bit Weaker Ahead Of Maryland Bond Sale

Wednesday, July 27, 2011
By Kelly Nolan
Dow Jones Newswires

10:39 (Dow Jones) Prices of top-rated munis flat to slightly weaker across the maturity spectrum, according to initial read from Thomson Reuters Municipal Market Data. Softness comes as Treasurys also hurt from impasse on US debt ceiling talks, and Maryland-- a state Moody's warned could lose its triple-A rating if it downgrades the US-- has a roughly $400M competitive bond sale that prices later this morning. "People are concerned about the reception of Maryland," says Miller Tabak Asset Management's Michael Pietronico. "We'll get more clarity later in the day." (kelly.nolan@dowjones.com)

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Maryland Cuts Sale $206 Million as Debt Talks Stall: Muni Credit

Tuesday, July 26, 2011
By Michelle Kaske and Sarah Frier
of Bloomberg

July 26 (Bloomberg) -- Maryland, one of 15 states with the top credit rating of Moody's Investors Service, cut $206 million from this week's largest sale as stalled talks over the federal debt ceiling intensified speculation of a U.S. default.

"There's just too many moving pieces," Patti Konrad, director of debt management, said in a telephone interview yesterday.

The state will still sell $512 million of new-money general-obligation securities to fund school construction and state-building renovations, she said. It postponed the portion intended to refinance older debt because the state faced risks placing proceeds in U.S. Treasuries, Konrad said.

"We would need to invest the escrow in open-market securities, and there's just too much uncertainty right now," she said. "We're focusing on our new-money transaction."

Treasury yields rose yesterday as congressional leaders and President Barack Obama remained deadlocked over spending cuts, taxes and outlays in talks on raising the U.S. debt ceiling by Aug. 2. Moody's said last week that Maryland and four other states with its top rating may be downgraded if the U.S. is also lowered for failing to deal with its debt and deficit.

The threat of a potential downgrade to the state's AAA rating "may result in some sort of a yield penalty in the Maryland deal," Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York, who manages $550 million, said in a telephone interview.

Individual Investors

Maryland sold $70 million of bonds to individual buyers yesterday out of an intended $100 million, Konrad said. It will open competitive bidding to institutional investors tomorrow.

The state's relative borrowing costs are cheaper now than four months ago. It sold 10-year bonds yesterday to yield 2.68 percent, according to preliminary pricing from M&T Securities Inc. That's one basis point more than an index of similar debt, according to data compiled by Bloomberg, down from 13 basis points in Maryland's last such sale March 9. A basis point is one-hundredth percentage point.

"Maryland is often a sought-after credit," said John Hallacy, head of municipal research at Bank of America Merrill Lynch in New York. "The question is how seriously people take the warnings. How they price will really depend on what the news is that morning."

State officials had postponed the retail pricing last week after Moody's said July 19 that Maryland's above-average number of federal workers and contracts made it vulnerable to any deterioration of U.S. credit quality. Standard & Poor's also said it may downgrade states and municipalities if the U.S. government cuts their funding to help shrink its deficit.

'Quality State'

"We see the value of the rating agencies," said Neil Klein, who oversees $900 million in fixed-income assets at Carret Asset Management LLP in New York. "In certain instances, their decisions don't affect the market. Maryland in our opinion is a very, very good quality state."

Konrad said the state decided to go ahead with the new-money bonds to take advantage of low rates. Yields on top-rated 10-year debt are hovering near the year's low of 2.6 percent set June 9.

"These rates are pretty low right now and we're going to take advantage of what we think is an opportunity," Konrad said. "Who knows, rates might go higher."

About $4.2 billion of municipal sales are scheduled this week, less than half the $8.5 billion of last week, the largest amount this year, according to data compiled by Bloomberg. Issuance in 2011 through the week ended July 22 was about $121 billion, compared with $216.6 billion in the period last year.

State Finances

Potential cuts in U.S. government spending as part of a debt-ceiling agreement may affect Maryland's finances, Moody's said. The percentage of federal employees in Maryland is above the average of other states, as is the amount of federal contracts as a percentage of gross state product.

"Most of the rest of the time, those are positives for Maryland," Marcia Van Wagner, an analyst at Moody's, said in a telephone interview. "It's just because of the pressure on the U.S. it does become a negative."

Following is a description of a pending sale of municipal debt:

MAINE HEALTH AND HIGHER EDUCATIONAL FACILITIES AUTHORITY, which issues debt on behalf of hospitals and colleges in the state, plans to sell $354.9 million of revenue bonds as soon as today to help finance a 580,000 square-foot replacement hospital in Augusta. The facility is part of the MaineGeneral Health system. The transaction is rated BBB-, the lowest investment grade of Fitch Ratings. Bank of America Merrill Lynch will head underwriters in the sale. (Added July 26)

--Editors: Jerry Hart, Mark Schoifet

To contact the reporters on this story:
Michelle Kaske in New York at +1-212-617-2626 or mkaske@bloomberg.net.
Sarah Frier in New York at 212-617-3454 or sfrier1@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 Mostly Fall, Highlighting Muni Market's Return to Health

Friday, July 22, 2011
By Patrick McGee

Anyone not convinced the municipal market has returned to a state of health need look no further than The Bond Buyer's weekly indexes.

While the market absorbed a record level of issuance — the latest estimates suggest more than $8.5 billion hit the primary this week — yields mostly fell, suggesting investors were pleased to take on new paper.

"The municipal market has been actually starved for a large calendar and there seems to be plenty of cash around to absorb the first wave of deals," said Michael Pietronico, chief executive at Miller Tabak Asset Management.

The Bond Buyer 20-bond index of 20-year general obligation fell five basis points this week to 4.46%, following a 14 basis point drop the week before. This matches its calendar-year low, last seen on June 23.

The 11-bond GO index of higher-grade 20-year GO yields declined six basis points to 4.18%, following a 13 basis point decline one week before. The index is now at its lowest since Nov. 10, 2010.

The revenue bond index, which measures 30-year revenue bond yields, rose two basis points to 5.32%. The hiccup follows a sixbasis-point drop in the previous week to what was its lowest level since early December 2010.

"You would think demand would have suffered with the rating agencies warning of possible downgrades owing to the debt ceiling deadline, but it hasn't," said Jason Hannon, senior trader at Arbor Research & Trading.

Hannon characterized demand for high-grade paper as strong and suggested there is further room for muni outperformance given that the 10-year muni-Treasury ratio finished Thursday at 89.3%, versus a long-term average of less than 84%.

He noted the pickup in activity hasn't quite translated into the secondary market, which remains relatively inactive.

One explanation, Hannon said, could be that much of the reinvestment money appears to be going straight into the primary market.

A flood of money into new-issues helps the primary market to perform and set benchmark yields lower.

The stability in munis was all the more impressive next to Treasuries, where yields rose as the European debt crisis moved closer to resolution and prompted the risk trade to turn back on.

The 10-year Treasury yield moved six points higher in the week after plummeting 20 basis points a week before. The 30-year Treasury yield picked up seven basis points to 4.32%, compared to a 13 basis point plunge the week before.

The weekly average yield to maturity on The Bond Buyer's 40-bond muni bond index, which is based on 40 long-term muni prices, rose two basis points this week to 5.22%.

Pietronico said it would take several more weeks of heavy supply to "really knock the muni market down significantly" because of cash ready to be deployed from the sidelines.

"There's a fair amount of cash out there," he said. "Professional managers have been chronically short their duration benchmarks because there has been such little to supply to work with in the previous few months."

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Market Post: Munis Charting Their Own Firm Path

Wednesday, July 13, 2011
By James Ramage

NEW YORK — The muni market has largely ignored the message and tone of the first of two days of congressional testimony from Federal Reserve Chairman Ben Bernanke. The Fed chairman told the House Financial Services Committee that the Fed is prepared to act, to either tighten or loosen monetary policy, if necessary. In response, Treasury yields have risen throughout the day, but not dramatically.

But Bernanke's remarks have given risk assets a little boost, with the prospect that he might be considering a third round of quantitative easing, said Mike Pietronico, chief executive of Miller Tabak Asset Management.

"From the perspective of the municipal market, it generally is not going to have a direct influence unless it brings Treasury rates much higher," he said. "And it doesn't look to be doing that to any great degree. So, from the muni market's perspective, it's a non-story today. It's more of an equity-market and commodity-market story."

As though on cue, the major equities indexes have responded. They've all risen at least 1.05% by early afternoon.

Muni yields reacted, as well. But instead of rising, they were firmer along much of the curve heading into Wednesday afternoon, according to the Municipal Market Data scale. They were steady for maturities in 2019 through 2021 and at the long end of the curve.

Yields for maturities between 2015 and 2018 were flat to three basis points lower. Munis maturing from 2022 through 2035 were flat to one basis point lower.

The benchmark 10-year muni yield fell four basis points Tuesday to 2.66%, 11 basis points over the past three sessions. It sits 32 basis points beneath its average for 2011.

The 30-year yield also lost four basis points, falling to 4.30%, or 32 basis points under its average for the year.

The two-year yield ticked down two basis points to 0.40%, after 20 straight sessions at 0.42%, and another 17 at 0.44%. It stands at its nadir for the year and 20 basis points below its average for 2011.

Treasury yields ventured into the afternoon mostly weaker, though not in any pronounced way, following Bernanke's testimony. The 10-year yield rose six basis points to 2.95%, though still below 3.00%.

The 30-year yield also increased six basis points to 4.24%. The two-year yield remained unchanged at 0.37%.

In the competitive market Wednesday, Bank of America Merrill Lynch won $224 million of Florida State Board of Education public education capital outlay refunding bonds. The bonds were rated Aa1 by Moody's Investors Service, and triple-A by Standard & Poor's and Fitch Ratings.

Yields range from 2.50% with a 5.00% coupon in 2019 to 4.10% with a 4.00% coupon in 2028. Credits maturing from 2013 to 2018, from 2020 to 2022, and in 2029 were sold, but not available.

Bank of America Merrill Lynch also won $167 million of Charleston County, S.C., general obligation capital improvement transportation sales tax bonds. The bonds are rated triple-A by Moody's and Standard & Poor's.

Yields range from 2.30% with a 5.00% coupon in 2019 to 3.90% with a 4.00% coupon in 2029. Bonds maturing from 2012 to 2018, as well as 2023 and 2024 were sold, but not available.

The secondary market has mostly been quiet. The day's large new competitive issues have seen firm bidding, according to MMD analyst Randy Smolik.

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N.Y.C. to Bid $300M Of Bonds

Monday, June 20, 2011
By Michelle Kaske

The New York City Transitional Finance Authority Wednesday will competitively bid $300 million of building aid revenue bonds, including $100 million of taxable qualified school construction bonds.

Officials opted to sell the debt competitively after downsizing the transaction to $300 million from $600 million.

Original plans included structuring the borrowing as a negotiated issue.

Because the city only needs about $300 million of funding for school construction projects for the remainder of fiscal 2011, it cut the deal in half to better mirror its spending needs, according to Mark Kim, the city's assistant comptroller for public finance.

The city's fiscal year ends June 30.

"Given that the size of our borrowing needs was actually reduced to the $300 million level, we felt that we could more efficiently sell this deal competitively," Kim said. "We felt we could get better rates and that the smaller size would allow a better bid."

The transaction includes $200 million of Series 2011 S-2A building aid revenue bonds, with debt maturing annually from 2027 through 2040, according to the preliminary official statement. Another $100 million of Series 2011 S-2B QSCBs will mature as a term bond in 2026.

Fulbright & Jaworski LLP is bond counsel. Public Resources Advisory Group and A.C. Advisory Inc., are financial advisers.

The TFA has $4.4 billion of outstanding debt, according to Moody's Investors Service.

Fitch Ratings assigns its AA-minus rating to the Series 2011 S-2 bonds with a positive outlook. Standard & Poor's and Moody's also rate the transaction double-A minus, both with stable outlooks.

The bonds are secured by payments the city receives from the state to fund the construction of new public-school buildings along with renovations and expansions of existing facilities.

The annual state aid payments are subject to state appropriation, and the rating agencies view the credit as tied to New York's double-A general obligation rating.

The rating analyts believe the risk of the state Legislature failing to allocate building aid is minimal given that education is an essential service. In addition, New York's constitution mandates that the state fund public education.

"Although there have been declines in [total] education aid paid by the state to the city and delays in the timing of education-aid payments in the recession, reflecting the state's strained budgetary and cash position, building aid has continued to increase and been paid on schedule," according to a Fitch report.

Once the state approves which New York City school construction projects will receive aid, it creates a 30-year amortization schedule for the project.

Confirmed building aid payments from 2012 through 2040 exceed annual debt-service payments, including the projected principal and interest costs for the Series 2011 S-2 bonds, according to the POS.

Debt service coverage ranges from 3.53 times in fiscal 2012 to 1.13 times in 2040 and will strengthen over time in the later years as the state approves additional funding.

"As New York City continues to add capital projects for education in the future, incremental associated building aid will be added, increasing coverage and providing more debt capacity," according to a Moody's report.

Officials anticipate the transaction will attract retail and institutional investors, with pension funds and insurance companies, along with other taxable funds, as potential buyers of the QSCBs.

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said compared to some other states, New York is working on getting its long-term expenses under control and New York City is outperforming other large metropolitan areas.

"The perception in the market has been of late that New York has its fiscal affairs in better shape than a fair amount of the rest of the country," Pietronico said. "New York paper has traded near and dear of late because of that. We do have a bit of an uptick in New York supply, however it's been met with reasonably good demand, so far, and our expectation in the near term is that will continue."

Since the beginning of the year, yields on New York State GO 30-year debt have dropped by has much as 95 basis points, according to Thomson Reuters data. Yields on New York 30-year debt have ranged from a high 5.41% on Jan. 14 to a low 4.46% on June 16, a difference of 95 basis points.

While a double-A New York credit stands out amid the municipal market's light issuance during the past few months, the TFA revenue bond transaction could benefit at market from the state's strengthened fiscal position.

"I think a fair portion of that tightening is just the overall scarcity of municipal bonds so far this year, but I think from our view there is a perception that the New York credits — and this one in particular — might be performing better on the fiscal side than others," Pietronico said.

Standard & Poor's last week released a report stating that New York is moving towards long-term structural balance by implementing budget cuts and passing its operating budget on time.

"We view the enacted gap-closing actions as largely recurring budget solutions that will likely significantly lower out-year budget gaps," the report said.

The TFA has total building aid revenue bond borrowing capacity of $9.4 billion. New York City's QSCB allocation is $1.36 billion and after this week's sale it will have sold about $500 million of QSCBs, Kim said.

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Credit Markets: Activity Limited As Greek Hope Does Little To Inspire

Friday, June 17, 2011
By Kellie Geressy-Nilsen
Dow Jones Newswires

NEW YORK (Dow Jones) An improved tone was seen across credit markets earlier in Friday's session as a possible resolution to Greece's debt crisis became a clearer possibility. That news did little to inspire fixed income activity, however, and most momentum was lost as Moody's warned later in the session it might downgrade Italy.

Investment-Grade Corporates

American Express Credit Corp. sold $600 million in three-year senior unsecured floating-rate notes via active bookrunners Bank of America Merrill Lynch and UBS Securities.

The deal was priced with a risk premium of 85 basis points over the three-month London Interbank Offered Rate, slightly narrower than its launch level and earlier preliminary pricing guidance suggestions, indicating good demand.

Proceeds will be used for general corporate purposes, which could include the repayment of outstanding debt securities.

The deal has been rated A2 by Moody's Investors Service and BBB+ by Standard & Poor's.

Investment-grade corporate bond issuance fell to its slowest pace of the year this week and the junk-bond market had its worst week in more than nine months as investors grow increasingly wary of risk.

Just $4.17 billion of investment-grade new issues were sold in the U.S. in the last five days, according to data provider Dealogic; only $803.6 million were sold in the speculative-grade, or junk bond, market.

"Investors are hesitant to accept new issues and banks are hesitant to underwrite them when risk aversion is growing rapidly," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott.

Junk Bonds

The high-yield market rebounded Friday, with the Markit CDX high-yield index gaining 0.3% to 99.7, according to index administrator Markit. The new issue market was quiet.

On Thursday, Thomson Reuters unit Lipper FMI reported a massive $1.6 billion net outflow from mutual funds focusing on high yield bonds in the past week. That's the biggest outflow since May 12 last year, which saw $1.7 billion leave high yield funds.

As of late Thursday, high-yield bonds in the Merrill Lynch High Yield Master II Index were trading at an average price of 102.2 cents on the dollar, with an average yield of 7.31%, with an average risk premium of 565 basis points over comparable Treasury bonds.

Municipal Bonds

Prices of municipal bonds held firm amid light trading typical of a summer Friday.

The market generally absorbed this week's $5 billion in supply well, said Michael Pietronico, chief executive of Miller Tabak Asset Management.

"There's two camps right now," in the muni market, he said. The first thinks yield-levels have gotten so low they "aren't that attractive," but others believe that the market can't rally much more in price and that supply, at roughly half last year's levels, is still so low that "professional money managers have to put money to work."

In sum, "this market is like going to the dentist," Pietronico said. "You have to do it but no one really wants to." Next week's new issue calendar is lighter than this week's, but there's still "ample" supply, Thomson Reuters Municipal Market Data senior analyst Randy Smolik said.

There's about $3.7 billion in negotiated sales, the largest of which is a $500 million revenue anticipation note deal from Idaho, according to Ipreo LLC.

On the competitive side, triple-A rated Georgia is expected to sell $997 million of general obligation bonds in seven parts Tuesday.

While supply in the muni market has been extremely light so far this year, the amount of deals sold in the last two weeks has been heavier. The June 5 week was the largest supply week so far this year, with $7.7 billion in deals, according to Thomson Reuters. This week, through Thursday, has seen $5.1 billion in issuance. Average weekly issuance is now $4.1 billion, up from closer to $3 billion earlier this year.

Treasurys

The unfolding Greek-debt drama has stoked a powerful safe-haven bid for U.S. government bonds, but investors may be ready to seize on signs of a bailout package as a cue to push yields higher.

Fueled by fears of euro-zone debt contagion and a slowdown in U.S. growth, a hefty volume of bids has poured into safe-haven Treasurys. Benchmark 10-year yields briefly touched a fresh 2011 low of 2.879% on Thursday, while two-year yields tested an all-time low.

But as authorities hunker down to etch out a Greece gameplan--however provisional--investors may be ready to venture outside the shelter of U.S. government bonds.

"We're seeing some real resistance in Treasurys. The market has factored in the uncertainties and risks associated with Greece," said Jim Sarni, managing principal at Payden & Rygel. "It's now not a matter of just economics and finance, but politics as well — more of this stuff is just a lot of noise and not a market mover."

-By Kellie Geressy-Nilsen, Dow Jones Newswires; 212 416 2225; kellie.geressy@dowjones.com.

--Michael Aneiro, Kelly Nolan and Cynthia Lin contributed to this article.

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Yields Slide on Intermediate and Long Ends

Friday, June 17, 2011
By James Ramage

Diverging demand among investor classes set the tone for municipal bond yields Thursday, which continued to decline on the intermediate and long ends of the curve.

Retail investors shied away from high-grade deals while institutions, flush with cash from redemptions, showed some appetite for the day's moderate supply. More sophisticated individual investors showed interest in the lower-credit bonds, according to a trader in New York.

"It's the only place to get some type of yield," he said.

Tax-exempt yields have fallen across most of the curve Thursday, reaching or matching calendar lows. They held steady at the short end, according to the Municipal Market Data triple-A scale. Yields for maturities in the belly of the curve were one to three basis points lower. Longer-term yields fell three to four basis points.

The 10-year benchmark yield ended Thursday one basis point lower at 2.63%, the MMD scale showed. The 30-year yield dropped three basis points to 4.23%, its low since Nov. 12.

The two-year yield was unchanged at 0.42% for the fourth day in a row, its lowest level since Sept. 7, according to MMD numbers. Before that, it had held at 0.44% for 17 consecutive trading sessions.

The Bond Buyer's one-year note index also reached a record low of 0.34% this week.

Short-term yields appear to have just about reached their tether, said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "The short end has basically run out of room to rally, because yields are so low," he said. "Generally speaking, if the market rallies or even sells off, it probably should be led by the intermediate and long end in both directions."

Treasury yields were mixed Thursday after a dramatic week where they increased sharply on Tuesday and fell steeply Wednesday. The 10-year yield fell four basis points to 2.93%.

The two-year yield rose one basis point to 0.39%. The 30-year yield fell two basis points to 4.17%.

The markets have been in risk-aversion mode for the past couple of days. Muni investors, in particular, have been cautious, traders said. Gloomy economic news coupled with negative headlines in Greece painted a dark picture through the middle of the week.

While Treasury yields fell and rose, equities performed in reverse. The major stock market indexes all vaulted at least 1% on Tuesday, but plummeted on Wednesday by at least 1.48%. On Thursday, the equities market indexes were steadier, mostly mixed, with only modest gains or losses.

Taxables led the way Thursday and provided some follow-up from munis, according to MMD analyst Randy Smolik. But longer serials and the dollar-bond sectors showed the most gains on the day.

New deals, which were expected to total $5.22 billion this week, received a mixed reception. Still, it marked the first time this calendar year that at least $5 billion in new issuance hit the market in consecutive weeks.

JPMorgan was busy with the day's largest new issues. The firm priced $119.7 million of Missouri Health and Educational Facilities Authority revenue bonds for Washington University. The bonds were issued in two series, both rated triple-A by Moody's Investors Service and Standard & Poor's.

The first series of $23.1 million has a 5% coupon and yields 4.37% in 2041. The second series has a $39.2 million 2030 maturity that yields 3.95%, with a 5% coupon, and a $57.4 million 2037 maturity with a 5% coupon that yields 4.34%.

JPMorgan also priced $101.08 million of Puerto Rico Industrial Tourist Educational Medical Environment Authority hospital revenue and refunding revenue bonds. They are rated A-minus by Standard & Poor's.

Yields range from 3.48% in 2015 to 6.25% in 2033. The debt also offers coupons at 5% in bonds that mature in 2015 through 2021, 6.25% for bonds that mature in 2026, and 6.125% for bonds that mature in 2033.

The day's deals found some investors with appetite, Pietronico said. By midday, he told clients that the new issue market was doing very well.

Economic indicator data released Thursday projected a thin beacon of hope for the U.S. economy, particularly after following the gloomy numbers published earlier in the week. Housing starts, for one, shined a somewhat brighter hue by beating analysts' projections.

The Department of Commerce reported that privately owned housing starts in May were at a seasonally adjusted annual rate of 560,000, a 3.5% rise from the revised April estimate of 541,000. But the number falls 3.4% below the May 2010 rate of 580,000. Single-family housing starts in May clocked in at a rate of 419,000. This is 3.7% above the revised April figure of 404,000.

Unemployment claims tagged along. The Department of Labor reported lower claims for weekly unemployment insurance.

In the week ending June 11, the advance figure for seasonally adjusted initial claims was 414,000 — down 16,000 from the previous week's revised figure of 430,000.

The advance seasonally adjusted insured-unemployment rate was 2.9% for the week ending June 4, which stands unchanged from the previous week's unrevised rate.

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Munis Stay Put Despite Treasury Rally, Stock Drop

Monday, June 13, 2011
By Patrick McGee

The muni market failed to post any gains Friday despite a broad rally in Treasuries and a sixth week of plummeting equity prices.

Tax-exempt yields were unchanged throughout Municipal Market Data's triple-A scale, leaving the two-year and 30-year yields at calendar-year lows of 0.44% and 4.25%, respectively, while the benchmark 10-year yield stayed at 2.61%, just two basis points higher than its 2011 low.

The flat tone marked a contrast to Treasuries, where the 10-year yield declined as much as six basis points in intraday trading before finishing at 2.97%, or two basis points lower. The two-year yield fell two basis points at 0.40% and the 30-year yield dropped two basis points to 4.18%.

Muni traders attributed the lack of movement to rising supply expectations as the market prepares to digest another week of issuance above the $5 billion threshold — a first for 2011.

"People are waiting to see what happens," said a trader in New York. "They need more direction."

This week's calendar adds up to $5.2 billion, following $5.8 billion of new issues last week.

Monday revisions might show last week's issuance to be the most for 2011; the current high, from mid-February, is $6.17 billion.

"The supply should be manageable," said MMD analyst Randy Smolik. He noted that demand outweighs supply given the reinvestment dynamics of June and July.

About $77 billion of munis should mature in the two months, not including coupon reinvestment, Municipal Market Advisors estimated in May.

Recent coupon payments and principal redemptions were already a major factor in the latest Lipper FMI numbers, according to Chris Mauro, director of muni bond research at RBC Capital Markets.

Lipper reported Thursday that 29 weeks of net outflows among muni mutual funds had finally ended.

Coupled with a perceived decrease in headline risk and an increasingly volatile equity market, the municipal asset class is looking increasingly attractive for mutual fund investors, Mauro said.

Michael Pietronico, chief executive at Miller Tabak Asset Management, said the inflows shouldn't be too widely heralded.

In an environment where it is widely believed the U.S. economy is slowing, "it should not be unexpected that investors allocate more of their investment monies to fixed-income securities," he said.

Pietronico expects muni rates to be contained in a fairly narrow range and "frustrate those investors who are either underweight their duration targets or that have large amounts of uninvested cash."

A weekly survey from MMD reached the same conclusion: not a single trader was bearish on next week's outlook, while 89% were neutral and 11% were bulls.

Over the next one to two months, however, the survey showed 11% were bears and the rest were neutral.

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Scarcity Value Gives BABs a Boost
Bonds Appreciate And Outperform

Wednesday, June 8, 2011
By James Ramage

When the Build America Bond program ended there were two schools of thought. One argued that BABs would become an orphan class, with prices in the secondary market suffering from illiquidity. Another group thought there would be some scarcity value to the product and they would appreciate in value.

The scarcity camp won, according to Mike Pietronico, chief executive officer at Miller Tabak Asset Management. Scarcity has kept demand for BABs high and played a role in pushing yields lower.

"The bonds have been appreciating and outperforming," Pietronico said. "To the extent that they're offered for sale by clients or customers who own them, there will be a continued good demand for the securities just because of the scarcity value."

BAB yields have indeed fallen. Since the program ended, a Wells Fargo index tracking BAB yields reached a high of 6.49% on Feb. 8. But the index's yields have plunged 101 basis points to 5.48% as of June 1.

Over the same period, yields for 30-year Treasuries have tightened 61 basis points from their high of 4.76% on Feb. 10 to a calendar low of 4.15% on June 1, according to Municipal Market Data. And 30-year triple-A muni yields have plummeted 82 basis points from their high of 5.08% on Jan. 14 to 4.26% on June 1.

Demand for BABs, predominantly a long-term product, varies along the curve. As there is scant supply inside 20 years, those bonds trade fairly aggressively, said Robert Novembre, a managing director at Arbor Research and Trading.

As one moves further out the curve, there is still value to be found against comparable corporate debt. But some accounts have become wary about chasing BAB prices higher, according to Novembre.

"There's some hesitation there," he said. "An indication that the market is getting a little bit toppy is that we've seen a couple index-eligible BAB positions, which typically fly off the shelves, get a little stale."

A Short History

The BAB program traces its roots to the American Recovery and Reinvestment Act in February 2009, which authorized municipalities to sell taxable bonds and collect a federal subsidy equal to 35% of the interest cost. The program expired in less than two years. Still, it generated 2,354 issues and $181.5 billion of debt before it ended, according to Thomson Reuters data.

What's more, it changed the municipal market on the long end. By granting easier access to the taxable market, BABs and their federal subsidy gave municipalities a way to significantly lower their borrowing cost for long-term debt. Subsequently, a large amount of municipal debt issuance shifted from the tax-exempt market to the taxable market.

As the sun started to set on the program, state and local governments pumped up the supply by selling a whopping $133.6 billion of bonds, much of them BABs, in the fourth quarter, leading to a record $433.1 billion in total municipal bond issuance for 2010.

The combination at the long end of massive supply and uncertainty about the future level of demand pushed yields higher. The 30-year triple-A yield rose 42 basis points in November and another 40 basis points in December.

Coming into 2011, the thinking went that yields would be higher this year and issuance would be lower. By the end of February, the 30-year yield was about 50 basis points higher than it was at the end of February 2010.

Rates had been pushed higher by several factors. The expiration of the BAB program forced issuers to sell mainly tax-exempt bonds, raising concerns about the market's ability to absorb the debt as Treasury rates backed up and headline risk dogged munis.

The end of BAB issuance stands as a large reason behind the decline in BAB yields over the year. But it isn't the entire reason, according to Bedford Lydon, a senior fixed income analyst in the research department at McDonnell Investment Management. Long-term muni bonds, particularly 30-year, triple-A general obligations, have also seen a substantial decline in yields.

"Part of the decline could be tied to muni yields, in general, and part of it could be the BABs" expiration, he said. "I think it's a bit of both."

Buyers of BABs in the secondary market have been encouraged by the product's scarcity bid. The buyers vary, from small to large investors.

Miller Tabak's Pietronico said buyers include institutions that currently own some BABs and are looking to add to their holdings in the sector whenever there's any secondary market float.

Dan Loughran, who heads the Oppenheimer Rochester municipal investment team as a senior portfolio manager of OppenheimerFunds Inc., agreed. From what he hears from the Street, buyers comprise the same long-term investors that were interested in the BAB program in the first place, because of their relative value compared with other taxable fixed-income alternatives.

Early BAB investors have gotten a good deal thus far.

When the Metropolitan Transportation Authority of New York issued $750 million of BABs on April 23, 2009, the bonds came at par and offered a yield of 7.34%, a spread of 354 basis points above Treasuries, according to Thomson Reuters data. The deal was rated AA by Standard & Poor's.

On June 3 this year, the bonds were trading in the area of 124 and the yield was down to 5.64%. The spread to Treasuries had tightened to 133 basis points.

Will They Return?

Before the Build America Bond program ended on Dec. 31, there was a drive to extend it, but that didn't happen. Today, conversations on Capitol Hill revolve around new programs that would be similar to BABs, but with smaller government subsidies.

Rep. John Tierney, D-Mass., said he would introduce a bill requiring all new munis to be taxable direct-pay bonds with a 25% federal subsidy rate.

Issuers and underwriters have longed for the reinstatement of the BAB program since Congress let it expire. But several market participants say Tierney's proposal takes the wrong approach: a 25% subsidy rate and the abolition of tax-exempt bonds would unsettle a market that's already battling negative headlines and paltry issuance.

There have been at least four bills that have been introduced in the House to renew BABs. They are all sponsored by Democrats and include subsidy rates of between 28% and 32% in the first year. None of the bills seeks to eliminate the tax-exempt status for new municipal debt.

A six-year transportation reauthorization bill being drafted by Rep. John Mica, R-Fla., might contain a version of BABs to be used exclusively for transportation.

In the Senate, Ron Wyden, D-Ore., introduced tax-reform legislation that would require new munis to be tax-credit bonds instead of tax-exempts. Wyden also is considering tax-credit bonds for transportation projects.

As tax reform will be a key component of whatever deficit-reduction package is ultimately agreed to on Capitol Hill, it will also play a role in any possible return of the BAB program, according to Chris Mauro, a research analyst at RBC Capital Markets.

"We expect that there's going to be some impact on the municipal market, whether that means you get something like a Tierney proposal, or whether you get some restrictions on issuance and a narrowing of the definition of what an allowable purpose for tax-exempt financing is," he said of Washington's tax reform plans.

"Our view is the latter: we'll get more restrictions on what we can do if tax reform is enacted."

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Florida Issuers Borrow $1 Billion as Outflows Slow: Muni Credit

Tuesday May 17, 2011
By Brendan A. McGrail
of Bloomberg

May 17 (Bloomberg) -- Florida issuers from Orlando to Miami are set to borrow as much a $997 million in debt this week, the most in 10 months, as outflows from U.S. municipal-bond mutual funds fall to the lowest since November.

"This is a great time-period for issuers, with the demand factor greater than the supply factor," said Ron Schwartz, who oversees the $877 million RidgeWorth Investment Grade Tax-Exempt Bond Fund in Orlando. "People will be looking at Florida credits who may not have been looking at them when supply was available."

This week's offerings are the most from Florida issuers since $1.2 billion of sales in the week ended July 23, according to data compiled by Bloomberg. They follow investors pulling about $94.6 million from funds in the week ended May 11, the lowest since withdrawals began in the week beginning Nov. 10, Lipper US Fund Flows said.

Rates on top-rated tax-exempts due in 10 years have dropped 65 basis points since April 8 to 2.64 percent, the lowest since Nov. 15, according to a Bloomberg Valuation index. The falling yields are likely pushing more investors toward mutual funds, lowering net outflows, said Mike Pietronico, who oversees $455 million as chief executive officer at Miller Tabak Asset Management in New York.

"We need to watch for a few more weeks, but the story is that yield is disappearing," he said. "Retail can't find the yields they want in the secondary market. Funds have higher stated yields than what's available."

Orlando-Orange County

The Orlando-Orange County Expressway Authority, which operates 100 miles (161 kilometers) of toll roads in the region, is selling $290 million in tax-exempt revenue debt. The agency is anticipating a "good reception in the market, which has had a nice tone for the last couple of weeks," Lindsay Hodges, a spokeswoman for the authority, said in an e-mail.

The offering, which carries fifth-highest ratings from Moody's, will probably draw investors will to take on more risk to gain income, according to Schwartz.

"The deal will be well-received," Schwartz said. "It's going to be priced like an A rated piece of paper, but people have been looking for some added yield."

Miami-Dade County, Florida's largest municipal borrower, is selling about $351 million in tax-exempts, in the week's largest deal, to fund capital projects and refinance existing debt. The securities, backed by the full faith and credit of the county, are rated Aa2 by Moody's Investors Service, third-highest, and AA- by Standard & Poor's, fourth-highest.

Broward County

Other offerings this week include a $175 million certificate of participation borrowing by the Broward County School Board.

Some borrowers may have to price their bonds aggressively to attract national interest because of a lack of in-state demand, Pietronico said. Florida has no individual state income tax.

"There are no captive buyers, so their yields need to be appropriate for a national level," said Pietronico. As such, Florida borrowers tend to do better when supply is lower, he said.

States and municipalities are slated to sell about $5.4 billion this week, the second-highest total this year, Bloomberg data show. While the calendar is building, the supply is still getting overwhelmed by demand, with about $50 billion in coupon and interest payments set for reinvestment in June and July, Schwartz said.

"Individual investors are getting much more comfortable with muni credits, and I think that will continue," Schwartz said.

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

AMERICAN MUNICIPAL POWER INC., a Columbus, Ohio-based supplier to public electric systems, tomorrow plans to remarket $300 million in taxable Build America Bonds previously issued in December. The bonds, which are due February 2050, were sold with a tender option on May 23, 2011. Wells Fargo & Co. will underwrite the remarketing, the process of reselling securities to the public that have been tendered for purchase by the previous owners. The debt was rated A by Standard & Poor's, fifth-lowest of 10 investment grades. (Updated May 17)

--Editors: Walid El-Gabry, Jerry Hart

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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Virginia $600M Deal Pushes Muni Prices

Wednesday, May 11, 2011
By Stan Rosenberg
Dow Jones Newswires

11:59 (Dow Jones) Pricing today of a competitive $600M Virginia Transportation Board revenue bond (Aa1/AA+/AA+) was extraordinarily aggressive and so will lend support to smaller negotiated deals in the market, said Miller Tabak's Michael Pietronico. Wells Fargo purchased the bonds and priced its 10-yr maturity at 2.76%. Stack that up against a 3.68% 10-yr return on a recent $327M NYS Dormitory Auth deal, "and I'd buy the Dorms all day" at a premium of about 90 bps for the spread between a double-A and a single-A, Pietronico said. Secondary munis seeing good bids but no bonds to be had, and market overall remains unchanged from yesterday's levels.

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

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Data Overload for Retail Investors

Tuesday, May 10, 2011
By Christine Albano

These days there seems to be a lot of information available to nervous retail investors about the municipal bond market. Maybe even too much.

Ever since Wall Street analyst Meredith Whitney spooked the market with her December 2010 prediction of up to 100 municipal defaults and bankruptcies in 2011 the media have been following the story. There has been a flood of data, research, analysis, and commentary — some of it valuable and some of it plain wrong, according to experts.

Efforts by financial firms have run the gamut from creating blogs, newsletters and discussions to posts on social networking sites like LinkedIn and Twitter. One has even introduced monthly transparency reports designed exclusively for retail investors.

But how much information is too much information? Is the retail crowd being bombarded with data overload?

Municipal experts say the flow of information is useful to investors as long as they can decipher it and use it properly.

"I think more information is generally always better," said Chris Mier, chief municipal analyst at Loop Capital Markets in Chicago. "The problem is the accuracy of the information being given, and what kind of interpretation is being provided with it."

Mier said it's difficult for the retail investor to discern the difference between those that are qualified to render opinions and those that are not.

That challenge is compounded by the flurry of data posted on the Internet, sources said.

Obtaining the investment information from valid sources and separating fact from fiction is the key to understanding and utilizing the bulk of research available on the web.

"Information is always a good thing, but it's a matter of organizing that information," noted Bill Mason, senior vice president of municipal trading and underwriting at David Lerner & Associates in Syosset, N.Y.

"With the Internet today, it's like a graffiti wall — whether it's the truth or not the truth, an individual is going to have a hard time sorting through the information because they have no control over what goes on the Internet," he explained.

Mier agreed, saying, "In the age of the Internet, anyone with an opinion can find an audience."

Good information is crucial for mom-and-pop investors who are making critical investment decisions about muni investing in light of a nearly month-long rally that has pulled tax-exempt yields lower amid lingering fiscal stress at the state and local level.

"I don't think you can ever have too much information, but you have to develop the skills and techniques for analyzing that information," Mason said.

Experts agreed that a professional financial adviser can minimize some of the confusion, and help distinguish between the good, the bad, and the ugly.

"Ongoing due diligence relating to issues of financial disclosure by municipalities is both time-consuming and not readily understood by those less versed in the opaque dealings of the tax-free bond market," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management in New York City.

Mason of David Lerner added that information about munis was always available from different avenues in the industry but has further proliferated since Whitney's prediction.

"She came out with something negative, but because of her high profile, people tried to validate it or find out if it wasn't true," he said. "She strayed into an area that she wasn't that comfortable with, and is not a muni bond analyst."

Pietronico said there have been benefits from the increased dialogue about munis in the financial media.

"This can only be deemed as positive in the long run as investors should be educated on the events surrounding the market they are deploying capital to," he said. "Certainly the more sources of information an investor can access, the better investment decision one can make."

Mier said there is a fine line between giving the investor enough information and forecasting the future.

"The retail investor should be provided as much information as they want and should not be shielded from information," he said, but also shouldn't be offered "crystal ball" forecasts.

"The client should be encouraged to make their own decisions," Mier said.

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With Two Virginia Offerings, Volume Picks Up a Tick

Monday, May 9, 2011
By Taylor Riggs

New issuance remains sparse with a light calendar this week on the heels of last week's slim pickings.

According to Ipreo LLC and The Bond Buyer, an estimated $4.4 billion of new volume is expected to be priced this week. That compares to a slightly more paltry $4 billion revised from last week. While volume is slightly higher than last week, it still does not match the roughly $8 billion weekly average for 2010.

"The rally over the last several weeks in municipals has brought levels down to where issuers who need to come to market with transactions should be enticed," John Hallacy, municipal research strategist at Bank of America Merrill Lynch, wrote in his weekly column.

The 18-session rally in the muni market took a breather Friday as April's nonfarm payroll report posted better than expected numbers, inducing investors to consider riskier assets.

Mike Pietronico, chief executive at Miller Tabak Asset Management, said he senses a pause in the muni rally, rather than a reversal. But if yields keep falling, buyers could turn away from individual bonds and into tax-exempt mutual funds in a search for yield.

"Once the muni [fund] flows turn positive, the rally is over — that would be a very good contrarian sign," Pietronico said Friday, noting that municipal mutual funds have seen net outflows for 25 weeks now.

"Once retail comes in and buys mutual funds, it's generally an indication that they can't find yield in the secondary market," he added.

Last week's biggest deal was a $600 million issue from the New Jersey Transportation Trust Fund Authority. The Series 2011A bonds are rated A1 by Moody's Investors Service, A-plus by Standard and Poor's, and AA-minus by Fitch Ratings. Given extremely low supply, investors ate up the bonds. Institutional pricing was moved up a day to Tuesday, the same day as the retail order period.

Bonds maturing between 2024 and 2041 were repriced, lowered anywhere from five to 16 basis points, according to Thomson Reuters.

In a statement, New Jersey Treasurer Andrew Sidamon-Eristoff said the TTFA was able to sell $217.8 million of 30-year bonds at a yield of 5.47%, saving the authority roughly $20 million.

"Demand was overwhelming, allowing the state and its banks to sell all our bonds in one day rather than the two days usually required for a sale to retail and institutional investors," he said. "In addition, state bonds were sold at yields far better than their underlying ratings, which is extremely good news for taxpayers."

On Friday, the 30-year triple-A muni bond closed at 4.45%, according to Municipal Market Data.

If investors remain hungry, new issuance this week could play out well for borrowers too. An estimated $1.3 billion in competitive offerings are expected this week, compared to a revised $604 million last week. Also slated for this week are $3.1 billion in negotiated deals, compared to a revised $3.4 billion last week.

This week's activity is led by offerings from the Virginia Commonwealth Transportation Board and the Fairfax County Economic Development Authority.

The Virginia Transportation Board plans to issue $600 million of serial bonds in a competitive bidding, with maturities ranging from one to 25 years. According to bond documents, maturities can be combined into term bonds by the successful bidder. They are rated Aa1 by Moody's and AA-plus by Standard and Poor's and Fitch.

"I think it's going to be a good week for everyone," said the board's chief financial officer, John Lawson, adding that he expects to see demand for the high-quality bonds.

The financial adviser is Public Resources Advisory Group and McGuireWoods LLP is providing bond counsel.

The Fairfax County EDA will issue $206.3 million of transportation district improvement revenue bonds with a negotiated pricing. The bonds will be priced by JPMorgan and are rated Aa2 by Moody's and AA by Standard & Poor's and Fitch. The serial bonds have maturities ranging from one to 20 years with a $62.7 million term bond maturing in 2036.

Other underwriters include Citi, Edward Jones, Morgan Keegan & Co., Morgan Stanley, and Piper Jaffray & Co. Hunton & Williams LLP is providing counsel to the underwriters. Public Financial Management is the financial adviser and Sidley Austin LLP is the bond counsel.

Also coming to market this week is a $286 million general obligation bond issue from Wisconsin. Set to be priced by Citi, the serial bonds are expected to have maturities ranging from one to 10 years. The bonds are rated Aa2 by Moody's and AA by Standard & Poor's and Fitch.

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N.J. TTFA Selling $600M After Appropriation Debt Downgrade

Tuesday, May 3, 2011
By Michelle Kaske

The New Jersey Transportation Trust Fund Authority Wednesday will issue $600 million of state appropriation-backed debt after Moody's Investors Service downgraded such bonds last week to A1 from Aa3.

Moody's last week lowered New Jersey's general obligation credit to Aa3 from Aa2 and downgraded its appropriation debt to A1 from Aa3 due to the state's weakened financial position, slow economic recovery, and no plan to replenish the state's fund balances.

Moody's revised the GO and appropriation-credit's outlook to stable from negative.

Market participants do not anticipate the one-notch drop in the credit ratings will hurt the TTFA bond deal as investors already were bidding the trust's bonds at the lower level.

"From our perspective, the market had this credit downgraded for quite a few months," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "And if anything, it's probably a relief that the bonds have actually been downgraded and can make it an easier job to market for underwriters — being that there's a stable environment to the rating now."

New Jersey had $2.6 billion of outstanding GO debt as of June 30, according to the state Treasury Department. Its combined outstanding appropriation and moral debt is $32.9 billion, Moody's said in its report.

Alan Schankel, director of fixed-income research at Janney Montgomery Scott, said investors have already been demanding more yield for New Jersey debt.

The credit downgrade "has largely been anticipated and discounted," he said. "New Jersey GO spreads have been wider than comparably rated states for quite a while."

Standard & Poor's and Fitch Ratings rate the TTFA A-plus and AA-minus, respectively.

Both Pietronico and Schankel expect the lack of supply in the municipal market will help the transaction garner investor interest.

Bond issuance from January though April was down 53% compared to the same period in 2010, according to data from Thomson Reuters.

In addition, the deal includes short, mid-term, and long-term debt. The Series 2011A bonds include serial maturities from 2013 through 2031, according to the preliminary official statement. The deal also offers two term bonds, with $107.4 million and $217.6 million of debt maturing in 2035 and 2041, respectively.

"The maturity structure works in the deal's favor," Pietronico said. "There's a little bit there for everybody." JPMorgan will price the fixed-rate revenue bonds on Wednesday following a one-day retail order period. McCarter & English, LLP is bond counsel.

New Jersey Treasury Department spokesman Andrew Pratt said officials anticipate a wide variety of buyers will participate in the sale.

"We expect a broad range of retail and institutional investors," Pratt wrote in an e-mail. "We expect no problems selling our debt at acceptable rates."

This is the TTFA's final borrowing under its current financing plan. Dedicated revenues come from the state's 10.5-cent gas tax, and taxes on petroleum products and automobile sales, according to Moody's.

After this transaction, all of the trust's $895 million annual allocation will be needed to pay principal and interest costs on existing debt.

To support future TTFA borrowing, Gov. Chris Christie proposes directing an additional $140 million of gas, motor fuel, and new vehicle sales taxes to the trust. Those revenues currently flow into the general fund.

"The $140 million of additional dedicated revenues are currently supporting general fund operations, therefore, while this transfer will provide necessary transportation funding, it will also further pressure the general fund," Moody's said.

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A bad economy and negative news bruise municipal bonds' image

Wednesday, April 27, 2011
By Robert Barkin

Supply and demand

Pietronico has a considerably different take on what is happening in the municipal bond market. For government issuers with good credit ratings, he says the "markets are open, and borrowing rates are attractive." But, he notes, that "the window is very small and very selective. It's not open to everyone at the moment."

Rather than attributing the market volatility to politicians and analysts, Pietronico believes that the number of bond issues outnumber the limited pool of buyers. "There's too much supply in the near term," he says.

Behind the lack of demand, he says, is an economy that is just now emerging from a very difficult recession, with lingering high unemployment. "It's too soon after the financial crisis to turn on a dime," he says. "If the unemployment rate turns to normal levels, it will be a better backdrop to borrow for issues that are economically sensitive."

Pietronico attributes the large withdrawals from municipal bond funds to investor concerns about a potential increase in the rate of inflation. Rising prices, he says, would prompt the U.S. Federal Reserve Bank, which sets short-term interest rates, to raise rates and slow the economy.

"It was solely caused by inflation fears," he says. "With the economy and inflation picking up, there's the possibility of negative performance if the Federal Reserve raises rates."

Despite the difficult terrain of the government security market, communities are still issuing bonds and hoping for the best. Dallas Center, Iowa, with a population of 1,800 residents, issued a $1.455 million 20-year bond with an interest rate of 3.654 percent that will be used for street improvements, says Cindy Riesselman, city clerk. "We were just trying to meet our budget deadline," she explains. "We were hoping that the rates would stay low. We were pleasantly surprised."

However, Salt Lake City was able to lock in a rate of 3.192 percent for its 20-year $25 million bond issue in a private placement with a bank, which had the added benefit of fewer documents and legal fees. "We were told that if we had waited a day or two more it would have been 20 basis points higher," says Dan Mulι, city treasurer. (The extra basis points would have raised the rate to 3.392 percent.) "It's a volatile time. Fortunately we went in and locked a rate on a good day. It doesn't always work out that way."

Mulι says that the city's pristine Triple-A credit rating helped Salt Lake City land the best rates, which keep its expenses to a minimum. "Our advisers say that our name is valued when we come to the market," he says, noting that the lack of supply of bonds works to his city's favor. "It's a good time to borrow."

Still, the volatility is enough to give pause to even the best of issuers. "The market is precarious," he says.

Robert Barkin is a Bethesda, Md.-based freelance writer.

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Moody's cuts New Jersey rating a notch on finances

Wednesday, April 27, 2011
By Edith Honan
of Reuters

NEW YORK (Reuters) - Moody's Investors Service on Wednesday cut New Jersey's credit rating a notch, citing the state's weakening financial position.

Moody's said the state's economy is unlikely to recover any time soon and is threatened by rapidly rising fixed expenses, a slow economic recovery and a lack of specific plans to rebuild its depleted reserves.

The rating agency, which cut New Jersey by one notch to Aa3 from Aa2, also cited the Garden State's $31 billion public pension shortfall -- an issue that forced downgrades across the country in recent months.

Investors in the $2.9 trillion U.S. municipal bond market have worried for a year that the recession would prompt numerous downgrades and even defaults, though historically they have been rare.

Republican Governor Chris Christie has made national headlines for his fiscally conservative policies, though he also has been criticized for skipping last year's pension fund contribution. Christie's spokesperson was not immediately available to comment.

David Manges, a municipal trading manager at BNY Mellon Capital Markets in Pittsburgh, said the credit downgrade might prove useful for Christie, who is pushing the Democratic-led Legislature for additional cost savings.

"My sense is it will give him (Christie) ammunition to reinforce his idea of fiscal discipline; this will be a club with which he can beat his opponents," Manges said, adding: "You've got to have adult supervision to say 'You know, you want another ice cream cone but you just can't have one ... There's no money'."

Several states have been downgraded in the past year and a half. So far in 2011, Moody's has lowered the ratings of Nevada and Kentucky.

"We take rating actions when we have information that we think materially affects the ratings," said Bob Kurtter, a managing director at Moody's. "We aren't party to the budget negotiations, we're not looking to influence them, we're not looking to be influenced by them. We're looking at the overall fundamentals of the credit and its direction."

Pressure on New Jersey's financial position could continue for three to five years, while reform measures of the state's pension system will not show a material positive impact for seven years, said Baye Larsen, a senior analyst at Moody's.

"Pension and other post-employment benefit liabilities will continue to grow rapidly, further pressuring the already high-debt state," Moody's said.

New Jersey's credit outlook was cut to negative from stable on Wednesday by Fitch Ratings, which cited "mounting budgetary pressure" and a significant unfunded pension liability. Fitch currently rates New Jersey GOs AA.

Standard & Poor's rates New Jersey debt AA-minus.

New Jersey's bonds did not trade after the Moody's downgrade, mainly because traders had anticipated the action, according to Municipal Market Data, a part of Thomson Reuters.

"New Jersey being downgraded is completely factored in to the market and based on the stable outlook that you see, there's perhaps some upside to the trading value of the bonds," said Michael Pietronico, chief investment officer of Miller Tabak Asset Management in New York.

Whether New Jersey's debt commands higher prices in coming days depends partly on its borrowing plans. "That remains to be seen but a lot of (any rise in prices) will be driven by supply," Pietronico said.

However, Pietronico's optimism was not universal.

John Loffredo, a senior managing director at MacKay Municipal Managers, said the spreads on New Jersey bonds over MMD's benchmark triple-A scale were still too narrow "given the obstacles the state still faces."

"New Jersey is not one of our favorite states," he said. "The spreads are not wide enough."

About $12.1 billion of general obligation debt was affected by the downgrade. Issuers prize high credit ratings because they allow them to borrow money more cheaply.

Moody's also downgraded the ratings on the state's $32.9 billion of annual appropriation and moral-obligation-backed bonds payable from the general fund to A1 from Aa3 as well as on the enhanced ratings assigned to the state's intercept programs. The outlook was revised to stable from negative.

(Additional reporting by Joan Gralla in New York and Karen Pierog in Chicago; Editing by James Dalgleish)

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Credit Markets: Deals From BB&T, Univision Awaken Primary Market

Monday, April 25, 2011
By Michael Aneiro
of Dow Jones Newswires

NEW YORK (Dow Jones)--Credit markets were firm Monday as primary market activity picked up, particularly on the high-yield side, from the unusually slow pace seen last week.

Investment-Grade Corporates

Debt syndicate managers expect between $7 billion and $15 billion of high-grade issuance this week, compared to $8.7 billion the week after Easter last year and $14.1 billion in the same week of 2009.

One high-grade deal hit the primary market Monday. BB&T Corp. (BBT) launched a $1 billion bond offering comprised of $700 million in three-year fixed rate debt and $300 million in floating-rate debt, according to people familiar with the transaction.

The Winston-Salem, N.C.-based bank was met with $1.7 billion of orders on the deal. Last week, it reported $225 million of net income for the first quarter, up 19.7% from the same period in 2010, or 32 cents per diluted common share, compared with 27 cents in the year-earlier period.

The fixed-rate tranche was launched at 0.95 percentage point higher than comparable government debt, while the floating-rate piece was launched around 0.70 percentage point over the three-month London interbank offered rate, or Libor.

Earlier price guidance had been in the range of 0.95 to 1 percentage point over Treasurys on the fixed tranche and 0.75 percentage points over Libor on the floating tranche, the person familiar added.

Deutsche Bank Securities and BB&T Capital Markets are leading the sale, proceeds from which are expected to be used for general corporate purposes including acquisitions, share buybacks, refinancing existing debt, or funding subsidiaries.

A few corporates are lining up deals for later in the week, but whether these come out will depend on the reaction to Wednesday's Fed policy statement and other market dynamics. Until Treasury yields start to move higher, issuers generally aren't rushing to take advantage of current rates and most are bringing regular, post-earnings deals, said one syndicate official.

In secondary trade, Archer Daniels Midland Co. 5.765% bonds due 2041 were most active, followed by J.P. Morgan Chase bonds due 2016 and 2020.

Junk Bonds

Univision Communications Inc. (UVN) plans to sell $600 million in senior secured eight-year notes, with price guidance in the 6.875% area, according to a person familiar with the deal, and pricing expected later Monday via underwriters led by Deutsche Bank.

Proceeds will go toward redeeming outstanding debt. Univision on Monday disclosed a tender offer for all of its $545 million outstanding 12.0% senior secured notes due 2014, along with a solicitation for consents to amend the indenture governing the notes.

Cumulus Media Inc. (CMLS) is in the market with $610 million of senior notes due 2019 as a part of refinancing transactions in connection with its pending acquisitions of Citadel Broadcasting Corp. (CDELA). Proceeds from the notes will repay all outstanding amounts under its term loan facility. The notes are expected to price later this week via underwriters led by J.P. Morgan.

Standard & Poor's on Monday raised its corporate credit rating on Cumulus Media by one notch to B from B- and assigned its proposed senior unsecured notes a preliminary CCC+. S&P said Cumulus's credit metrics have improved over the past year and could improve further if it successfully merges with Citadel.

Lee Enterprises Inc. (LEE) on Monday revised the terms of a previously announced note offering and now will offer $680 million of first-lien senior secured notes due 2017 and $375 million of second-lien senior secured notes due 2018.

Price guidance has the $680 million of notes due 2017 in the 11% area, according to a person familiar with the deal, and the $375 million of notes due 2018 in the 15% area. Books are due to close Tuesday afternoon and pricing is expected sometime thereafter via underwriters led by Credit Suisse.

Lee said it will use net proceeds to refinance all of its existing debt, which comes due in April 2012 and consists of $878.8 million under its revolving credit agreement and $147 million in notes.

Municipal Bonds

The municipal bond rally continued for the ninth straight day Monday, aided by light new bond supply.

Prices of top-rated, tax-exempt municipal bonds rose as much as three basis points, with the most strength in bonds maturing in 2019 through 2028, according to a benchmark scale from Thomson Reuters Municipal Market Data. Only the prices of shortest bonds, maturing in 2012 through 2015, were unchanged.

"Light supply is definitely most helping" the market, said MMD analyst Randy Smolik. "Dealers will keep pushing yields lower until they find significant selling. We aren't there yet."

Meanwhile, market participants are awaiting the pricing of a $1 billion O'Hare International Airport deal, expected to sell Tuesday and Wednesday. The deal makes up the bulk of this week's $2.8 billion tax-exempt calendar, according to MMD.

"It should be an interesting pricing in a market starved for yield," said Michael Pietronico, chief executive of Miller Tabak Asset Management. The O'Hare deal promises heftier yields because it is an issuer in fiscally troubled Illinois, and it is an "airport deal in a time of $111 oil," he said.

The bonds are being sold to help fund the second phase of an expansion project at O'Hare. Citigroup is the lead book runner on the issue.

The longest bond in the offering, in 2041, could yield around 6.10% to 6.20%, or about 1.4 to 1.5 percentage points over comparable triple-A rated tax-free debt, said Richard Saperstein, managing director and principal of Treasury Partners, a unit of financial-advisory firm HighTower in New York.

Treasurys

Treasurys edged higher early Monday as light activity in New York followed almost nonexistent trading overseas.

Many major markets closed were for Easter, and New York volumes started at 10% of normal, according to David Ader of CRT Capital Group.

Market participants have their minds focused on Wednesday, when Fed Chairman Ben Bernanke will hold his first-ever post-policy meeting press conference following a two-day Federal Open Market Committee meeting.

The benchmark 10-year note was 4/32 higher to yield 3.383%, holding well within the range seen since the start of the year. The 30-year note was up 1/32 to yield 4.471%.

-By Michael Aneiro, Dow Jones Newswires; 212-416-2203; michael.aneiro@dowjones.com

(Katy Burne, Kelly Nolan and Cynthia Lin contributed to this report.)

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New York Sells $2.6 Billion for World Trade Center: Muni Credit

Thursday, April 21, 2011
By Brendan A. McGrail
of Bloomberg

April 21 (Bloomberg) -- New York Liberty Development Corp. is selling about $2.6 billion in short-term debt, a remarketing of its 2009 bonds for rebuilding the World Trade Center site in Manhattan, with rates at the lowest this year.

Yields on top-rated tax-exempt debt due in one year fell to 0.29 percent yesterday, the lowest in 2011, according to a Bloomberg Valuation index. A weekly Bond Buyer index of one-year notes was 0.44 percent on April 14, the least since Sept. 10.

"It's a good time to bring this deal," said Matt Dalton, who oversees $650 million in munis as chief executive officer of Belle Haven Investments Inc. in White Plains, New York. "Better to do it now than wait until there's growth in the new-issue calendar."

About $2.4 billion in fixed-rate, longer-term debt is being sold this week, with the U.S. bond market closed after 2 p.m. today and all of tomorrow for the Good Friday holiday. That's the slowest issuance since the first week of the year, according to data compiled by Bloomberg.

Liberty, an arm of New York's Empire State Development Corp., was created to finance rebuilding of the World Trade Center site after the Sept. 11, 2001, terrorist attacks. It is issuing the debt on behalf of Silverstein Properties Inc., the site's primary developer.

The bonds will have a mandatory tender date of Feb. 1, 2012, according to preliminary offering documents. Proceeds from the issue will be placed in escrow and invested in U.S. Treasuries, rather than being used immediately for construction.

Freedom Tower

The World Trade Center redevelopment plan includes five office towers, a Sept. 11 memorial, a transit center and a museum. The office buildings include the 1,776-foot 1 World Trade Center, formerly called the Freedom Tower, which is being developed by the Port Authority of New York and New Jersey, which owns the property. The projected opening is in 2013.

Goldman Sachs Group Inc. is underwriting this week's remarketing, which is the process of reselling securities to the public that have been tendered for purchase by the previous owners, the documents show. The tender date for the 2009 bonds, which had been issued for Towers 2, 3 and 4, is April 28.

Michael DuVally, a spokesman for Goldman Sachs, didn't immediately respond to telephone and e-mail requests for comment.

Inflation Concerns

The remarketing may be drawing investors who speculate that inflation will accelerate, said Mike Pietronico, who oversees $425 million as chief executive officer of Miller Tabak Asset Management in New York.

A gauge of inflation expectations that the Federal Reserve uses to help determine monetary policy -- the five-year, five-year forward break-even rate -- was at 3.13 percentage points this week, compared with 3.28 percentage points on Dec. 15. That's a 10-month high. The five-year average is 2.78 percentage points.

"When the deal prices, it will be already sold," Pietronico said. "As I understand it, it's been pre-marketed pretty heavily."

Last week, a $900 million tax-exempt bond issue for the 1.8 million-square-foot (167,220-square-meter) Tower 4 was postponed, in part because of concerns among some Port Authority bondholders that the new issue may erode the value of their holdings. The debt is backed by payments from the authority and fixed rents from a 15-year lease with New York City.

Muni Outflows

Investors have pulled about $31.6 billion from U.S. municipal-bond mutual funds since Nov. 10, making 22 straight weeks of net withdrawals, Lipper US Fund Flows said April 14. Investors withdrew a record $4 billion in the week ended Jan. 19, according to the Denver-based research company.

The funds included in the weekly number hold at least 75 percent in municipal bonds, said Devin McCune, head of U.S. flows and marketplace at Lipper.

The withdrawals were sparked in part by Meredith Whitney. The banking analyst and head of Meredith Whitney Advisory Group LLC in New York predicted "hundreds of billions" of dollars of defaults may occur this year as state and local governments grapple with budget deficits and tax collections that haven't returned to pre-recession levels.

"The fear hasn't gone away," Dalton of Belle Haven said. "Everyone wants to be short; everyone wants to be in cash. But when was the last time the herd was right about anything?"

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

MUNICIPAL ELECTRIC AUTHORITY OF GEORGIA, which sold securities last year to help build two of the first new U.S. atomic generators in 30 years, plans to sell $175 million in tax-exempt debt and $3 million in taxable subordinated bonds as soon as next week to finance capital improvements and refinance debt. Moody's Investors Service and Standard & Poor's rate them at the fifth-lowest investment grade while Fitch Ratings ranks them one level higher at A+. Banks led by Morgan Stanley will underwrite the debt. (Updated April 19)

THE BROAD INSTITUTE INC., a Cambridge, Massachusetts-based genomic medicine research center, plans to sell about $270 million in tax-exempt debt and $84 million in taxables as early as next week to help finance the construction of a 12-story laboratory building. The bonds, which are being issued through the Massachusetts Development Finance Agency, are rated AA- by S&P, fourth-highest, and A1 by Moody's, one level lower. Banks led by Morgan Stanley will market the securities to investors. (Added April 21)

--With assistance from Susanne Walker, David M. Levitt and Henry Goldman in New York, and Chris Condon in Boston.

--Editors: Mark Schoifet, Christine Maurus, 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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Philly Eyes Retail in GO Deal
Revamps $272M Sale's Marketing

Monday, April 4, 2011
By Michelle Kaske
The Bond Buyer

With a revamped marketing push to attract investor interest, Philadelphia this week will sell $272.2 million of tax-exempt general obligation debt to finance ongoing capital projects and refund earlier bonds for debt-service savings.

JPMorgan will begin institutional pricing on Wednesday after holding a one-day retail order period Tuesday.

City officials crafted the deal with the retail market in mind.

A selling group of more than 50 investment banks will help place the bonds and the city made sure to release the preliminary official statement more than a week before pricing to give the firms more time to market the debt.

In addition, the structure of the sale includes a lot of bonds maturing up front, said Philadelphia Treasurer Nancy Winkler.

"We're trying to have a very deliberate and thoughtful marketing period to try to maximize the retail participation," she said.

The Series 2011 GO bonds will offer $196.9 million of serial bonds maturing 2011 through 2031, according to the POS. A pair of term bonds sized at $31.8 million and $43.4 million are set to mature in 2036 and 2041, respectively.

This is Winkler's first bond transaction for the city. She joined Mayor Michael Nutter's administration at the end of January after more than 28 years at Public Financial Management Inc., where she advised Northeast issuers, particularly in New York and Maryland, on financial matters and debt issuance.

To help attract interest in the GO deal, Winkler and other city officials updated the treasurer's investor website to offer a one-stop shop for information on Philadelphia's operations, included more data on the city's finances in the POS than in previous bond documents, and recorded an investor presentation for interested buyers.

The city also plans to run a newspaper advertisement and is conducting small-group discussions with institutional investors to address their questions and concerns.

City officials are hoping that those initiatives, along with a recent Standard & Poor's outlook change to positive from stable, will help break through any lack of investor confidence in municipal bonds. Demand for tax-exempt debt has waned as muni mutual funds experience outflows and municipal credits fight the stigma of some cities and towns teetering on the brink of insolvency.

"We recognize the market is where it is right now and we follow the market," Winkler said. "We feel good about where we are, especially with the positive outlook from S&P and the strong financial leadership that the city has — beginning with Mayor Nutter."

Standard & Poor's rates the Series 2011 bonds BBB. Fitch Ratings and Moody's Investors Service rate the transaction A-minus and A2, respectively.

Standard & Poor's describes the administration's financial management as strong and proactive in rebalancing the city's budget during the past two years when officials closed deficits totaling $2 billion. Fitch notes Philadelphia's "prudent budget balancing measures in recent years."

Nutter, who took office in January 2008, worked as an investment banker before serving on the City Council and earned his BA from the Wharton School of Business in 1979. In addition, his chief of staff, Clarence Armbrister, was a director at UBS Financial Services Municipal Securities Group, a former partner at Saul Ewing LLP, served as Philadelphia's treasurer, and was chief operating officer at Temple University.

"The mayor's really focused on having a strong leadership team in the management of the city's finances, starting with him," Winkler said.

Philadelphia had $4.29 billion of outstanding debt that's paid from the city's general fund, including $1.24 billion of GO debt, as of Feb. 28, according to the POS. The $4.29 billion also includes $533.9 million of Pennsylvania Intergovernmental Cooperation Authority bonds that are paid from a dedicated 1.5% wage tax and another $2.51 billion of bonds are obligations the city repays through lease payments. Winkler stressed that these are contractual payments that the city must incorporate into its annual budget and not debt subject to appropriation.

"It's not like a normal lease obligation where each year it's optional for council to appropriate or not," she said. "Council has already bound future councils to pay these bonds. And it's explicitly authorized in the city charter."

While the city anticipates ending fiscal 2011 with a positive fund balance of $13.5 million, according to Standard & Poor's, it will face higher pension payments in fiscal 2013 and 2014 due to previous deferred payments.

Philadelphia's January unemployment rate is 10.8%, according to the Bureau of Labor Statistics, and nearly 25% of its citizens live below the poverty line, according to Fitch.

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said the Philadelphia GO deal comes as the market anticipates volume to increase somewhat, which benefits buyers but could force issuers to pay more when borrowing. He expects the bonds will price on the cheaper side.

"We're big believers in the fact that as yields rise, demand will rise from direct retail," Pietronico said. "But what that means for a loan like this is really in question because from a credit perspective, it's probably not high enough up the credit ladder for a lot of individual investors."

Recent census data shows that Philadelphia is now the fifth-largest city in the U.S., up from its sixth-place position. That's a credit positive for the city, Pietronico noted, but its structural challenges and relatively high cost of doing business are credit concerns, he said.

"If you want to create a map of large cities, I would say Philadelphia might be smack right in the middle between Detroit and New York City in terms of their finances," Pietronico said. "Not nearly as bad as Detroit, but certainly not up to the caliber of New York City."

Philadelphia's unfunded pension liability was $4.93 billion as of July 1, 2010, and its funding level is 47%. The city's other post-employment benefits obligation was $1.1 billion as of July 1, 2009.

Of the $272.2 million deal, about $139.1 million will help finance infrastructure needs throughout the city, including an ongoing $90 million renovation of City Hall's exterior, upgrades to numerous recreational centers, a new fire station, street resurfacing, and improvements at the Philadelphia Museum of Art, among other projects.

Another $133 million will refund GO debt sold in 1998 and 2001, with officials anticipating net-present-value savings of nearly 6%, according to Winkler.

She said any potential bond insurance for the transaction will depend upon demand at the time of pricing.

Winkler's goals are to help the administration grow the city's fund balance and develop a strong dialogue with investors. In addition, she will be working on renewals for $1 billion of letters of credit that will expire this year. Those LOCs help support GO debt as well as the city's airport bonds, water bonds, and gas bonds.

"Another major goal is to build strong relationships with letter of credit providers" Winkler said.

The city's underwriting pools for its GO credit and other revenue credits will expire at the end of the year and she anticipates releasing a request for proposals to revamp those underwriting groups in the fall or early winter.

The treasurer position allows Winkler to work on a variety of different credits — GO, gas, water, and airport — and she also manages $2 billion of operating and bond-fund investments and the city's commercial banking needs.

"I always imagined myself towards the end of my career going into the public sector, but I always wanted to work for someone that I felt would value the contribution I could make," she said. "And I think it was clear that I'd be joining an already very strong team and that I would get that support. So it lets me do something I always wanted to do."

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Howard University Issues to Help End Goldman Swap: Muni Credit

Monday, April 4, 2011
By Brendan A. McGrail and Matt Robinson
of Bloomberg

April 4 (Bloomberg) -- Howard University, a historically black college in Washington, is borrowing $289 million, including $4 million to end a losing interest-rate bet it made with Goldman Sachs Group Inc.

Howard has a 20-year interest-rate swap agreement with Goldman Sachs that began in 2006, in which the school would pay a fixed-rate of 3.5 percent payment on $42.7 million in muni debt in exchange for a floating rate-payment based on 67 percent of the 30-day London interbank offered rate, according to preliminary offering documents.

"A lot of issuers are willing to refinance their debt even if it means a loss, because of the termination payment, just to get out from under the deal," said Howard Cure, director of municipal research for Evercore Wealth Management LLC in New York, with about $2.6 billion under management. Issuers "just don't want whatever risks and lack of flexibility comes with having a swap," he said.

In an interest-rate swap, two parties exchange payments on an agreed amount of principal. Most of the swaps Wall Street sold in the municipal market required borrowers to issue long-term securities with interest rates that changed every week or month. The borrowers would then exchange payments, leaving them paying a fixed-rate to a bank or insurance company and receiving a variable-rate payment in return. Sometimes borrowers got lump sums for entering agreements.

The swaps were popular because governments and nonprofits could pay a rate that was lower than what they would otherwise face had they sold conventional fixed-rate securities. The agreements backfired because of the credit crisis. With interest rates lower, Wall Street payments plunged.

'Getting Out'

Howard lost a total of $4.6 million on two swaps as of Dec. 31, according to offering documents. The college is exiting one of the contracts. Goldman Sachs declined to comment.

"We're getting out from everything in order to get the entire debt structure under one indenture," said Robert M. Tarola, chief financial officer for the university.

Along with the termination fee, the proceeds from the offering will refinance debt and pay for capital improvements, including the construction of new research facilities and the redevelopment of its hospital, according to the offering statement.

The university's debt was lowered one level to A-, fourth-lowest investment grade, on March 23 by Standard & Poor's.

"The lowered rating is based on our view of the university's issuance of $100 million of new debt, significant additional capital plans, and additional debt expected in several years," said Susan Carlson, an S&P analyst, in the report.

Negative Outlook

The university's credit outlook was revised to negative by Moody's Investors Service, reflecting a potential federal government shutdown and a need for possible investment in the college's hospital, according to a March 18 report. More than half the college's operating revenue comes from the government and its hospital.

Schools that have large endowments, especially Ivy League universities, have had "good reception" when they came to market this year, said Mike Pietronico, who oversees $400 million as chief executive officer of Miller Tabak Asset Management in New York. Howard's endowment investments had a market value of about $442 million as of Dec. 31, offering documents show.

The university may have to boost yields on its offering as "there seems to be a fairly deep drop-off in terms of demand on anything else," Pietronico said in a telephone interview.

Columbia University

A top-rated 30-year bond backed by Columbia University, the New York City Ivy League school with the nation's eighth-largest endowment, at $6.5 billion, was trading at 4.75 percent on March 23, in line with a Bloomberg index of top-rated tax exempts.

A bond maturing in October 2031 from Howard University, rated seventh-highest, traded at a rate of 4.09 percent Oct. 18. That same bond traded at a yield of 5.37 percent on March 10, according to Municipal Securities Rulemaking Board data.

The issuance is being offered through the District of Columbia, with underwriters led by Bank of America Merrill Lynch and including Goldman Sachs.

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

PHILADELPHIA, whose unemployment rate was 10.3 percent in January, plans to sell $272 million in tax-exempt general obligations this week to refinance debt. The bonds are rated A2 by Moody's, sixth-highest, and one level lower at A- by Fitch Ratings, and BBB from S&P, second-lowest investment grade. Banks led by JPMorgan Chase & Co. will underwrite the securities. (Updated April 4)

NEW YORK CITY TRANSITIONAL FINANCE AUTHORITY, which helps fund capital projects in the most-populous U.S. city, plans to sell $500 million in tax exempts this week to refinance debt. The bonds, backed by personal-income taxes, are top rated from S&P and Fitch, and graded second-highest by Moody's. Banks led by Wells Fargo & Co. will underwrite the offering. (Updated April 4)

--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
Matthew Robinson in New York at +1-212-617-5409 or mrobinson55@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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Households Boost Debt Ownership to $1.095 Trillion

Wednesday, March 30, 2011
By Christine Albano
The Bond Buyer

Households surpassed their previous record and hit a 20-year high as they hoarded $1.095 trillion of the nearly $3 trillion of outstanding municipal bond debt issued by states and local governments as of 2010, according to data recently released by the Federal Reserve.

Holders of Municipal Debt

Ownership by households grew by 4.9% in the fourth quarter of 2010 and by 8.5% throughout 2010, despite the blood-letting that was unfolding simultaneously in the municipal bond mutual fund industry.

"Households have rightfully chosen direct ownership of municipal bonds versus traditional open-ended mutual funds, which can suffer significant declines in their [net asset value] price should interest rates rise," said Michael Pietronico, chief executive officer of Miller Tabak Asset Management.

"Those investors who own their own bonds have the advantage of riding out the rise in rates by holding bonds to maturity," he added.

"Individual investors, identified in the Fed data as households, remain by far the largest group of muni owners," Alan Schankel, Guy LeBas, and Tom Kozlik, analysts at Janney Montgomery Scott, noted in a recent report.

The wave of mutual fund selling began in November when managers scrambled to raise cash to meet massive redemptions.

It continued in December following nationally televised comments by Wall Street analyst Meredith Whitney, who predicted "hundreds of billions" of dollars in defaults by 50 to 100 municipalities in 2011 and triggered widespread panic among many muni fund investors.

"While mutual fund investors sold their muni funds late in 2010 and into 2011, the rise in interest rates that accompanied the mutual fund redemptions created attractive purchase opportunities for investors who could handle more risk," said Chris Mier, chief investment strategist at Loop Capital Markets LLC.

"It is the difference in risk aversion that explains how one distribution channel is shrinking while a different channel for the same product is growing," he said.

Municipals returned negative 7% from the end of the third quarter through the first two weeks of January 2011, according to a Standard & Poor's index tracking the sector.

The investor panic reached a plateau when shareholders withdrew a record $4 billion from municipal funds in the week ending Jan. 19, according to Lipper FMI.

"Some of the outflows that have occurred from the mutual fund space have been a result of inflation concerns, and as such we are not surprised by the data from the Federal Reserve," Pietronico said.

Through the fourth quarter of last year, mutual funds held $525.9 billion of debt, having declined $6.8 billion, or 1.3%, from the $532.8 billion they held through the end of the third quarter, which was the highest ever.

But some believe the presence of buyers other than traditional retail individual investors that were lumped into the household sector contributed to the substantial rise in the fourth quarter.

"This divergence in direct buying and mutual fund flows in Q4 2010 is likely driven by direct muni bond buying from non-traditional investors, which do not have a separate category under the flow of funds, and are included in the 'household' sector," one market observer said.

"Hedge funds and nonprofit organizations, such as endowment funds, are classified under the 'household' sector," yet they deserve their own category, he said.

At the same time, however, mutual funds managed to remain the second-largest holder of muni debt last year.

The $525.9 billion held by funds through the fourth quarter of 2010 represents an increase of $45.8 billion, or 9.5%, from the $480.2 billion through the end of 2009.

"Although holdings by mutual funds — and closed-end funds — tapered off in the fourth quarter, they nevertheless finished higher year over year," the Janney analysts' report said.

Back in the household sector, investors added $51.1 billion in municipal securities to their portfolios in the fourth quarter alone, more than half the $85.4 billion added in 2010.

Commercial banks, savings institutions, and life insurance companies were the other categories whose ownership of munis in 2010 showed the next largest growth, though modest compared to the little or no growth among other holders overall.

"Larger institutional investors such as commercial banks, savings institutions, and insurance companies will be more negatively affected by the negative credit headlines and as such may remain marginal buyers until the economy as a whole turns more notably upward," Pietronico said.

"We look for significant gains in employment as a possible catalyst for more participation from this investor base" going forward, he added.

Commercial banks' ownership rose by $27.5 billion — or 12.6% — to $246.1 billion through the end of 2010, compared with $218.6 billion in 2009. Ownership increased by $16.9 billion — or 7.7% — in the fourth quarter. Savings institutions, meanwhile, saw a 19.9% increase, or $1.8 billion, to $11.1 billion in 2010, up from $9.2 billion in 2009. In the fourth quarter, holdings only grew by $900 million.

Ownership by other muni holders only increased modestly over three and 12 months. Life insurance companies — the third largest holder of munis last year — grew by $4.4 billion, or 6%, to $77.5 billion through the fourth quarter, up from $73.1 billion in 2009.

Broker-dealers, on the other hand, held $40 billion through the end of 2010 — a 12.9% increase from to the $35.4 billion they owned through 2009.

"Banks and insurance companies also grew their holdings, but they still have a market share below 25% compared to households' 37%," Janney analysts said.

Money market funds, meanwhile, decreased ownership of municipal bonds by a whopping $66.9 billion in 2010, ending with $334.4 billion, a 16.7% decline from $401.3 billion through 2009.

Ownership by money market funds peaked in 2008 when they held $494.6 million, according to the historical data.

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Boston Sets $181.5 Million Sale

Monday, March 14, 2011
By Michelle Kaske
The Bond Buyer

Boston Wednesday will sell $181.5 million of new-money and refunding general obligation debt via competitive bid, including $41.6 million of taxable qualified school construction bonds.

Boston tends to hold its annual competitive bond sale in February or March. This week's transaction includes $86.3 million of Series 2011A new-money bonds that will help finance infrastructure projects.

Another $38.9 million of Series 2011B bonds will advance refund outstanding special obligation convention center debt and turn those bonds into GOs.

The deal also includes $41.6 million of Series 2011C QSCBs and $14.6 million of Series 2011D bonds that will current refund outstanding GO debt for present-value savings.

Officials do not anticipate using term bonds in the transaction. The Series 2011A new-money bonds offer serial maturities from 2012 through 2031, according to the preliminary official statement. The Series 2011B refunding bonds will have serial maturities from 2012 through 2027. The QSCBs will mature annually from 2017 through 2026 and the Series 2011D refunding bonds will offer serial maturities from 2013 through 2016, the POS said.

Last year, the city received 12 bids on its $155.9 million new-money and refunding sale that priced in March 2010, according to Vivian Leo, Boston's temporary collector-treasurer.

The transaction included taxable Build America Bonds and recovery zone economic development bonds.

Nearly $40 million of Series 2010A tax-exempt bonds priced with yields ranging from 0.38% with a 2% coupon in 2011 to a 3.88% yield with a 3.75% coupon in 2030, according to the official statement.

Boston carries a triple-A rating from Moody's Investors Service and AA-plus ratings from Standard & Poor's and Fitch Ratings.

Market participants said the sale should perform well, as the overall volume of new-money issuance is light and the city has a strong credit.

"I think the city is timing it well and they should see a sizeable amount of demand," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

While Boston is set to issue on Wednesday, New York State decided to postpone its plan to take bids for $804 million of new-money and refunding GO bonds this week until the week of March 21.

Boston's new-money proceeds will help finance a new police station in the Roxbury neighborhood, upgrades of the city's 38 community centers, public pool rehabilitations, renovation of the East Boston Stadium, road and sidewalk upgrades, and other capital projects.

The Series 2011B refunding bonds will help refinance a portion of the city's $93.5 million of outstanding special obligation convention center bonds into GO debt. The special obligation bonds are paid off with hotel room taxes. Officials will use existing hotel tax revenue to pay down the remaining bonds.

Leo and her team anticipate the city will receive $5.9 million of savings from the advance refunding, with a net present-value savings of 6.3%.

Fitch rates the convention center bonds AA-minus. Moody's and Standard & Poor's rate the special obligation bonds Aa3 and A-plus, respectively.

The Series 2011D bonds will current refund outstanding GO debt. Officials anticipate that refinancing will generate $1.2 million of savings with a net present-value of 8.3%.

Boston had $891.9 million of outstanding GO debt as of March 1, 2011, according to the POS. It has no variable-rate debt and no derivatives.

"We considered variable-rate debt a few years ago, but interest rates have been so low, so it really has not been beneficial for us to do that," Leo said. "If you look at the last six to seven years, the interest rates that we've received are very low."

Officials do not anticipate returning to the market again this year. They anticipate spending $1.5 billion during the next five years for infrastructure needs.

Borrowing will increase slightly, with the city issuing $100 million to $120 million of new-money bonds annually, according to Meredith Weenick, Boston's acting director of administration and finance.

"We look at what our operating costs are and try to balance all the needs of the city into a debt service that we can afford," Weenick said. "So our budget in recent years has not grown tremendously and we have to live within our means."

Rating analysts and market participants point to the city's strong fiscal management during the recession as a credit strength, along with its conservative debt portfolio.

Fiscal challenges include a $1.3 billion unfunded pension liability and $4.7 billion of unfunded other post-employment benefits obligations.

Weenick said the OPEB liability was $1 billion larger last year before the City Council implemented a plan to require retirees that are Medicare eligible to enroll in that program.

Boston has two funds that total a combined $100 million to help pay down its OPEB obligation.

In addition, the city last year adopted a schedule that would fully fund its pension fund by 2025.

Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, said that while investors look at a municipality's long-term obligations to its employees, Boston's prudent financial history will help it in the market.

"I think it is significant with Boston since they do have a higher pension and OPEB expense than many other large cities, even," LeBas said. "At the same time, if you take a look at the experience of the last several years, they've had very conservative management through a fairly severe downturn. And I think that success over the last several years trumps the long-term risk."

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Munis Survive Supply Test

Friday, March 11, 2011
By Dan Seymour
The Bond Buyer

It says something about how thin demand for municipal bonds is right now that even a light batch of top-quality paper in the midst of a supply drought gives the Street a minor hiccup.

State and local governments came into the week slated to sell just $3.5 billion of debt, the bulk of it high grade.

For all the talk of scarcity, some triple-A deals were left with unsold balances and market sources say the supply put a little pressure on the long end of the curve.

"There's been a lot of higher-grade issuance, so people are pushing the scales a little bit," said a trader in Memphis.

The two biggish triple-A deals that priced on Wednesday — Maryland's $485 million general obligation sale and the Georgia Road and Tollway Authority's $354.9 refunding deal — were all it took to nudge the yield curve a bit steeper.

"It might be some sticker-shock, if you will, on the triple-A names," said Michael Pietronico, chief executive officer of Miller Tabak Asset Management.

The average weekly yield to maturity of The Bond Buyer 40-bond municipal bond index, which is based on 40 long-term bond prices, rose six basis points this week to 5.67%. None of this showed up in the Municipal Market Data scale, which closed Thursday yet again unchanged with the exception of some strengthening among short maturities.

The 10-year triple-A yield has closed at 3% and the 30-year yield at 4.78% every day this week.

A commonly espoused hypothesis lately is that the only reason the long end hasn't cheapened is that there isn't enough activity. Without substantial supply forcing dealers to move bonds, they're sitting on inventory rather than selling into a market with little depth.

"There's a bit of a standoff," Pietronico said. "There's nobody coming in to buy large amounts of it, and the dealers don't want to cut the price."

The theory that the yields reported by MMD would be higher if only there were more trading has been validated by no less a source than MMD itself. Thomson Reuters analyst Domenic Vonella acknowledged he saw a couple of trades suggesting a drift-up in yields earlier in the day, but couldn't justify moving a scale for the entire market based on two trades.

Vonella noted some balances that remain unsold, and said the bid side will have to develop more depth in order for the market to absorb any heavier-than-expected supply.

One trader in New Jersey adamantly agreed with the "standoff" hypothesis. The municipal market, particularly the long end, wants to cheapen, this trader said. The lack of trades communicating this cheapness does not mean it isn't there.

"If there was any kind of supply in this market, we'd be getting hit," the trader said. "If they had to test this market with any kind of size, the long end is going to get whacked. You've got this great fear that you're not going to be able to find buyers of long-term paper out there."

Without the supply to force the issue, the trader said yields are "begrudgingly grinding higher."

The Half-Full Glass

If the glass is half full, it's for two reasons.

One is that the latest mini-hump of supply is now behind the market. A solitary $9.2 million deal is scheduled to price Friday, and next week's calendar is even smaller than this week's. The Bond Buyer 30-day visible supply, which measures the stock of municipal debt slated for sale over the next 30 days, is less than $7.3 billion. One source we spoke with said the talk now is any supply wave might not come until late April.

Two is that, for what it's worth, triple-A rated municipalities are able to find buyers for their debt.

The same may or may not be said for lower-rated governments. The truth is we don't know, because lower-rated issuers have been mostly absent from the market this year.

According to the Bloomberg LP municipal database, which appears to exclude this year's $3.7 billion taxable deal from Illinois, more than 88% of municipal bond issuance so far this year has been from governments rated Aa or better by Moody's Investors Service. The 12% share of subdouble-A issuance compares with a nearly 30% share last year.

Pietronico believes fatter credit spreads are discouraging bond sales by lower-rated issuers. A Baa-rated municipality pays on average 170 basis points more than a triple-A rated issuer for 20-year borrowing, according to the MMD scale.

The disinclination among lower-rated issuers to borrow has kept supply light, which leaves open the question of just how hearty demand is for their debt.

"There's definitely some concerns out there — if we really got a heavy calendar we might have digestion issues," the Memphis trader said.

No test of lower-grade supply came on Thursday because once again the biggest deal — Portland, Ore. — was rated triple-A by Moody's.

The $82.8 million first-lien water system revenue deal nevertheless provided an interesting study of the yield curve's desire to steepen. About 30% of the issue's par value matures in more than 20 years, a threatening area of the curve because of a paucity of demand for that kind of duration.

The 10-year maturity on the bonds was reoffered to the public at a yield of 3.08%, within eight basis points of the MMD triple-A scale.

Longer maturities did not fare as well. The 20-year maturity was reoffered at 4.55%, or 25 basis points in excess of the triple-A scale. The longest maturity, which was 25 years, was left unsold.

Wells Fargo Securities was the winning bidder in the competitive market.

The slight weakening in the municipal indexes this week came against the backdrop of strength in Treasuries. The yield on the Treasury's 30-year bond dropped 12 basis points this week to 4.52%, which is the lowest it has been in eight weeks. The yield on the 10-year dropped 20 basis points to 3.37%, also the lowest in eight weeks.

The Bond Buyer's 20-bond index of 20-year general obligation yields rose one basis point this week to 4.91%, while the 11-bond index of higher-grade 20-year GO yields jumped two basis points to 4.65%.

The Bond Buyer revenue bond index, which measures 30-year revenue bond yields, fell four basis point this week to 5.52%. It is now at its lowest level since Jan. 6, when it was 5.44%.

The Bond Buyer's one-year note index was unchanged for the second consecutive week, at 0.51%.

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Tax-Exempts' Three-Week Rally Stalls as Sales Jump: Muni Credit

Friday, March 11, 2011
By Brendan A. McGrail and Matt Robinson
of Bloomberg

March 11 (Bloomberg) -- The highest weekly municipal-bond sales volume in about three months helped stall a rally in tax-exempts as investors hesitated to buy at yields close to the lowest level since Dec. 9.

Municipalities are selling about $5.8 billion in debt this week, the most since mid-December, according to data compiled by Bloomberg. That's still about 50 percent less than the same week last year, when the federally subsidized Build America Bonds program was in full swing.

Yields on top-rated tax-exempts maturing in 10 years have risen 1.3 basis points this week to halt a three-week rally, according to a Bloomberg Valuation index. Yields are still down about 40 basis points, or 0.40 percentage point, since Feb. 10.

Investors may hesitate to buy with yields so low, said Mikhail Foux, a New York-based credit strategist at Citigroup Inc., the third-biggest U.S. lender.

"They don't want to over-commit to this rally because the levels are less attractive," Foux said. "We're sort of in no- man's land."

The limited increase in yields this week suggests the amount of supply didn't overwhelm investor demand, said Mike Pietronico, who oversees $400 million as chief executive officer of Miller Tabak Asset Management in New York.

‘Sticker Shock'

"There might be some sticker shock on the low yields on some higher-quality bonds," Pietronico said. "The market was still able to absorb even a slightly elevated level of issuance."

Following the Dec. 31 end of the Build America program, sales of municipal debt are headed for the slowest quarter since at least February 2003, according to Bloomberg data. States and local governments are slated to sell about $6.5 billion in the next 30 days, according to the Bloomberg 30-day visible supply index. The gauge, which has averaged $10.6 billion in the last year, was $14 billion a year ago.

"We had a very nice rally," Foux said. "The big question becomes when supply picks up, if we will be able to withstand the pressure."

About $1.8 billion is slated for next week, which would be the lowest total for a five-day trading period since Dec. 19, 2008, Bloomberg data show.

Puerto Rico

Issuers this week included New York City, the Georgia State Road & Tollway Authority and Puerto Rico, which had the largest tax-exempt issue. The island added three series of insured bonds after a credit-rating upgrade from Standard & Poor's, boosting its sale 77 percent to $442 million, Bloomberg data show.

Issuance has slowed as municipalities brought forward first-quarter debt sales to December so they could take advantage of the expiring Build America subsidies. About $129 billion in fixed-rated debt was sold in the fourth quarter of 2010, the biggest three-month period since at least 2003, Bloomberg data show.

Investors withdrew about $528 million from U.S. municipal-bond mutual funds in the week ended March 9, the 17th-straight period of withdrawals, according to Lipper US Fund Flows. Redemptions have totaled about $28 billion since Nov. 10.

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

CONNECTICUT, the state with the third-highest tax burden, plans to sell $200 million in tax-exempt revenue bonds through a negotiated sale as early as next week to refinance debt. The debt, secured by the state's "revolving fund," is top-rated by Fitch Ratings and Moody's Investors Service. Banks led by Samuel A. Ramirez & Co. Inc. will underwrite the debt. (Added March 10)

BOSTON, the largest city in New England, plans to sell $140 million in tax-exempt general obligation bonds and $42 million in taxable debt through a competitive sale as early as next week. Proceeds from the issuance will refund debt and finance capital projects. The city is rated second-highest by Standard & Poor's. (Added March 11)

WAKE COUNTY, home of the North Carolina state capital of Raleigh, plans to issue $116.8 million of tax-exempt general obligations as soon as next week to finance capital improvements. The county plans to take interest-cost bids from banks interested in underwriting the debt, which has a top grade by the three major credit-rating companies, on March 15. (Added March 11)

--Editors: Mark Schoifet, Mark Tannenbaum

To contact the reporters on this story:
Brendan A. McGrail in New York at +1-212-617-6818 or bmcgrail@bloomberg.net
Matthew Robinson in New York at +1-212-617-5409 or mrobinson55@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 Set to Kick Off First GO Sale of 2011 for Debt Savings

Monday, March 7, 2011
By Michelle Kaske
The Bond Buyer

New York City this week will issue its first general obligation bond deal of 2011 with a $641 million refinancing to generate debt-service savings.

The fiscal 2011 Series I GO transaction includes $400 million of tax-exempt Series I-1 bonds that will refund fixed-rate debt for present-value savings. Another $241.4 million of taxable Series I-2 and I-3 bonds will refinance variable-rate debt.

The bonds will remain in floating-rate mode but the refinancing will cut the maturity schedule by three years.

The overall transaction offers serial maturities from 2011 through 2023 and two term bonds, according to the preliminary official statement.

Within that framework, $56.4 million of taxable Series I-2 bonds will mature on Aug. 1 and $185 million of taxable Series I-3 bonds will mature annually from 2012 through 2016.

In addition, the city will convert $50 million of tax-exempt fiscal 1994 Series H-4 bonds into fixed-rate mode from a variable weekly-rate mode. The bonds mature in 2014 and 2015.

The conversion will allow the city to use a letter-of-credit facility attached to the variable-rate debt on future new-money, floating-rate issuance rather than keeping that liquidity enhancement on the 1994H-4 bonds.

Bank of America Merrill Lynch began a two-day retail pricing period Friday for the tax-exempt bonds.

The bonds mature in 2011 and from 2014 through 2020, with yields ranging from 1.60% with a 2% coupon in 2014 to 3.35% with a 5% coupon in 2020.

Pricing will open up to institutional investors on Tuesday.

New York City will issue the taxable portion via competitive bid, also set for Tuesday.

Sidley Austin LLP is bond counsel. Public Resources Advisory Group and A.C. Advisory Inc. are financial advisers on the offering.

City officials are looking to take advantage of a quieter borrowing period to help grab investor interest.

"I think the biggest factor that we've seen is that supply has been very low and the forward calendar is not big, and I think that's helped the market firm up," said Carol Kostik, deputy comptroller for public finance. "We also haven't done a GO deal yet this year and we have a good following for those bonds. So we hope that folks will be attracted into our transaction."

Deputy budget director Alan Anders said the city does not anticipate holding an investor conference call because Mayor Michael Bloomberg last month released his fiscal 2012 budget proposal, which includes the city's most up-to-date revenue forecasts and spending plans.

Anders expects the refinancing will attract a mix of municipal bond investors.

"We usually a get broad cross-section, but I don't have any particular expectations on this deal that are different from others," he said.

Fitch Ratings and Standard & Poor's rate the fiscal 2011 Series I bonds AA, while Moody's Investors Service rates the bonds an equivalent Aa2. New York City had $41.56 billion of outstanding GO debt as of June 30.

Investors noted that Wall Street's recovery since 2008 helps the city's coffers and is a credit-positive.

"I would think that relative to the rest of the market this deal should do very well," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "There's been a dearth of New York supply overall and the city is seeing its spreads hold up very well in the secondary market."

While the city has a broad and diverse economic base and is an international commercial center, there is an "above-average reliance" on the financial services industry for personal income and city tax revenue, according to Standard & Poor's.

The rating agencies point to the city's strong budget management that has addressed deficits quickly and incorporates conservative revenue estimates.

The city also has high debt levels. Long-term obligations include pension and other post-employment benefit liabilities of $625.4 million and $75 billion, respectively, as of June 30, according to the POS.

The city implemented a trust to help address its growing OPEB liability, which has a fund balance of about $2 billion.

In addition, city officials are working on pension-reform measures that could generate $1 billion of savings by fiscal 2019, according to Fitch.

"Pension expenses have increased significantly and are expected to place an even larger demand on the budget in coming years," the agency said in a Fitch report.

John Mousseau, portfolio manager at Cumberland Advisors, said that he looks at state and municipal pension and OPEB obligations, including New York City's, but noted that issuers are taking steps to deal with those growing liabilities.

"Like anything else your concern is some of the longer-term obligations like pensions and OPEBs," he said. "Like state levels elsewhere, those are concerns that are getting addressed and those are long-term concerns as opposed to current deficit concerns."

For this refinancing, city officials decided to pick a senior manager for the deal by competitive selection rather than rotating the assignment.

The city invited all 14 investment firms that are qualified to serve as senior manager on New York City debt to submit proposals for the refinancing.

Officials also used a competitive solicitation process in a GO refunding sale that priced last year.

Kostik said that Bank of America Merrill's strategy offered the greatest budget savings and present-value savings.

"I don't think this is how we will be doing all of our refundings going forward by any means, but it's been a chance to give people a reward who have invested in the infrastructure and know-how to run New York City deals," she said.

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Tax-Frees Top Treasury, Corporate Debt in February: Muni Credit

Monday, February 28, 2011
By Brendan A. McGrail and Matt Robinson
of Bloomberg

Feb. 28 (Bloomberg) -- Tax-exempt municipal bonds outperformed corporate debt and U.S. Treasuries in February, offering investors a positive return for the first time in six months as record-low supply helped drive up prices.

Tax-exempts have returned 1.59 percent through Feb. 25 after five straight months of losses, according to the Bank of America Merrill Lynch Municipal Master index, which accounts for price changes and interest income. That compares with a 0.48 percent return on company debt, and a loss of 0.23 percent in Treasuries, Merrill indexes show.

"On our way to a bear market, something happened; supply just didn't show up," said Mike Pietronico, who oversees $390 million as chief executive officer of Miller Tabak Asset Management in New York. "That's caught some people off guard and prices have responded accordingly."

Issuance this month is headed for about $13.4 billion, 50 percent less than February 2010, according to data compiled by Bloomberg. States and municipalities sold about $5.8 billion in debt last week, about 27 percent less than the same week last year, Bloomberg data show.

Overall issuance has been down this year, with about $11.9 billion in fixed-rate debt sold in January, the smallest monthly amount since at least February 2003, Bloomberg data show.

"As long as we stay in this low-supply environment we should continue to do well," said Doug Gaylor, who manages about $2.8 billion in municipal-bond investments for Principal Global Investors LLC. "We've had a substantial slowdown in outflows."

Tax-Exempt Yields

Yields on top-rated tax-exempt debt maturing in 10 years have fallen 34 basis points, or 0.34 percentage point, this month, according to a Bloomberg Valuation index. The 2.98 percent rate on Feb. 25 is the lowest since Dec. 10. Yields move inversely to prices.

Investors withdrew about $610 million from U.S. municipal-bond mutual funds in the week ended Feb. 16, the 15th-straight period of withdrawals, according to Lipper US Fund Flows data. The redemptions were the least that investors made since the week ended Dec. 8.

States and local governments sold about $129 billion in fixed-rated municipal debt in the fourth quarter of 2010, the most in a three-month period since at least 2003, Bloomberg data show. The flurry was caused partly because of the expiration of the Build America Bonds program, which provided a 35 percent federal subsidy on interest costs and ended Dec. 31.

Issuers across the U.S. moved up sales to beat the deadline. More than $187 billion in Build Americas were sold since the program was created by President Barack Obama's 2009 stimulus.

Default Projections

In December, projections by Meredith Whitney, the banking analyst, about a potential "spate" of defaults began to rattle the $2.86 trillion municipal-debt market.

"The economic picture as it relates to municipals securities is a lot clearer now and a lot more fact-based," said Neil Klein, who oversees $900 million in fixed-income assets at New York-based Carret Asset Management.

The iShares Standard & Poor's National AMT-Free Bond Fund, an exchange-traded fund that tracks the S&P municipal-bond index, touched $101.47 Feb. 11, the highest in more than two months. The fund closed at $100.67 Feb. 25, up about 2 percent since Jan. 31.

By contrast, the S&P 500 Index has climbed 3 percent in the same period, closing at 1,319.88 Feb. 25 after touching a high of 1,344.07 on Feb. 18.

"We've rallied considerably over the month of February, but it's been on very low supply," Gaylor said. "The question is: when supply picks up, will demand be there?"

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

LOUISIANA, which projects a $1.6 billion budget gap in fiscal 2012, plans to sell $300 million in tax-exempt debt this week to finance capital projects. The debt, backed by the full faith and credit of the state, is rated Aa2 by Moody's Investors Service and AA by Fitch, both third-highest, and AA- by S&P, one level lower. The state will seek interest-cost bids on the competitive offering from investment banks tomorrow. (Updated Feb. 28)

PENNSYLVANIA HOUSING FINANCE AGENCY, which helps low- to moderate-income families purchase homes, plans to sell about $159 million in tax-exempt debt as soon as this week to finance mortgage loans. The debt is backed by revenue and the full faith and credit of the agency, which is rated Aa2 by Moody's, third-highest. Bank of America Merrill Lynch will lead banks marketing the securities to investors (Added Feb. 28)

--Editors: Walid El-Gabry, Jerry Hart

To contact the reporters on this story:
Brendan A. McGrail in New York at +1-212-617-6818 or bmcgrail@bloomberg.net
Matthew Robinson in New York at +1-212-617-5409 or mrobinson55@bloomberg.net.

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

Top Of Page 


Big Borrowing Plan Roils Illinois - The Wall Street Journal
Governor Faces Stiff Resistance to Proposed $8.75 Billion Bond Issue, Increased Spending in Budget

Thursday, February 17, 2011
By Amy Merrick

Democratic Illinois Gov. Pat Quinn proposed a budget Wednesday that would boost general-fund spending by $1.7 billion and borrow heavily to pay overdue state bills, a plan opposed by Republican legislators.

[Manufacturing PMI]

Illinois Gov. Pat Quinn, right, with Comptroller Judy Baar Topinka, and Treasurer Dan Rutherford before presenting his budget on Wednesday.

Mr. Quinn said he wanted to issue $8.75 billion in bonds—backed by revenue from higher income taxes passed last month—to help pay down what the state owes to schools, social-service agencies, health-care providers and others. The tax increase, which partly addresses a deficit that once reached $15 billion, is expected to bring the state about $7 billion in new revenue for the fiscal year beginning July 1.

Illinois requires a three-fifths majority vote to approve borrowing, so the governor would need some Republican legislators to join Democratic majorities to pass the measure.

"It's the proverbial kicking the can down the road," Republican House Minority Leader Tom Cross said. "He doesn't seem to want to face the reality of the budget situation."

The Civic Federation, a Chicago budget watchdog group, also opposed the planned borrowing, saying it would cost the state about $3.4 billion in added interest costs.

Anticipating the objections, Mr. Quinn said in his speech to lawmakers, "If you don't agree with our debt-restructuring plan, tell us which programs you would eliminate to pay $8.7 billion in overdue bills today."

Reaction to Mr. Quinn's budget proposal in the municipal-bond market was muted. "We suspect on the margin there will be some disappointment with this speech, in terms of addressing the spending side of the budget problem," said Michael Pietronico, chief executive of Miller Tabak Asset Management in New York. "We would look at this proposal as an 'opening shot' in what will most certainly be a highly contested budget debate."

The proposal to increase net general-fund spending by $1.7 billion—in areas such as financial aid for community-college students—reflects cuts of $1 billion in other programs. These cuts include reducing Medicaid reimbursements to hospitals and nursing homes by $552 million and eliminating a program started by Democratic former Gov. Rod Blagojevich that helps senior citizens pay for prescription medicines, saving the state $107 million.

Illinois House Speaker Michael J. Madigan, a Democrat, indicated after Mr. Quinn's speech that lawmakers may seek further cuts. "When we raised the Illinois income tax, we committed to live under spending controls," he said.

Mr. Madigan, who will be a key player in the budget process, said he believed many retired state workers who don't currently pay premiums for their health care could afford to do so.

Lawmakers from both parties praised the governor for identifying specific programs he would cut. "He deserves credit for that, and we would like to help him expand that list," said Republican Senate Minority Leader Christine Radogno.

Mr. Quinn didn't discuss the state's significant pension problems in his speech Wednesday. More than 50% of Illinois's long-term pension liabilities are unfunded, the worst ratio of any U.S. state.

On Monday, the state delayed a planned offering of $3.7 billion in bonds to cover this year's pension payments, to give potential investors time to examine the budget proposal.

The governor's plan does briefly acknowledge the pension shortfall, saying Illinois must choose between "additional pension reforms, refinancing the liability and seeking a federal guarantee of the debt, or increasing the annual required state contributions."

—Kelly Nolan contributed to this article.

Write to Amy Merrick at amy.merrick@wsj.com

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Long Yields Up; Light Supply Tempers Losses

Friday, February 11, 2011
By Michael Scarchilli
The Bond Buyer

The Bond Buyer's long-term weekly yield indexes increased this week, reflecting losses in the Treasury market.

The losses were muted, however, due to continued light supply in the primary market.

"It seems as if we're settling in with a lot more stability than perhaps we had in the early part of January, but it still seems the market is bleeding a little bit lower as a trend," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

"Early in the week, the market was pressured by consecutive days of losses in the Treasury market," noted Matthew Posner of Municipal Market Advisors. "By Wednesday, however, dealer sponsorship in the competitive market helped to stabilize levels, which led to a relatively lightly changed market for the second half of the week."

The Bond Buyer 20-bond index of 20-year general obligation yields increased four basis points this week to 5.29%. That is the highest level for the index since Jan. 20, when it was 5.41%.

The 11-bond GO index of higher-grade 20-year GO yields also gained four basis points this week, to 5.04%, which is the highest it has been since Jan. 20, when it was 5.16%.

The revenue bond index, which measures 30-year revenue bond yields, rose four basis points this week as well, to 5.67%. It is now at its highest level since Aug. 6, 2009, when it was 5.68%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, declined five basis points this week to 0.51% — its lowest level since Nov. 10, 2010, when it was 0.46%.

The yield on the 10-year Treasury note increased 14 basis points this week to 3.70%. That is the highest the yield has been since April 29, 2010, when it was 3.74%.

The yield on the 30-year Treasury bond gained 13 basis points this week to 4.80%, which is the highest it has been since Oct. 11, 2007 — nearly three and a half years ago — when it was 4.87%.

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 5.80%, up six basis points from last week's 5.74%.

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S&P Drops New Jersey GOs to AA-Minus Over Pension Woes, High Debt

Thursday, February 10, 2011
By Michelle Kaske
The Bond Buyer

Standard & Poor's Wednesday downgraded New Jersey's general obligation credit rating to AA-minus from AA due to its unfunded pension liability and high debt levels.

The outlook is stable. The rating change also drops to A-plus from AA-minus $27.8 billion of debt backed by state appropriation. New Jersey has $2.6 billion of outstanding GO debt.

In addition, Standard & Poor's downgraded to A-minus from A $296 million of outstanding South Jersey Port Corp. bonds, which carry the state's moral obligation pledge.

"Our concern is that the pension liability has grown and the funding for the pension system has been skipped for the last two years and is expected to continue to be less than 100% over the next several years," Standard & Poor's analyst Jeffrey Panger said in an interview. "The state has addressed its falling revenues by skipping these payments. This puts some stress on future budgets because what you don't pay today you have to pay extra tomorrow, and so that is our concern."

Standard & Poor's recently launched new rating criteria for U.S. states, which more transparently incorporates debt, pension, and other post-employment benefit liabilities in the rating evaluation.

New Jersey's unfunded pension obligation is $37.1 billion, and it has a funding ratio of 56%. Republican Gov. Chris Christie did not include a $3 billion pension fund payment in the fiscal 2011 budget, his first spending plan. The state has a history of avoiding allocations to its pension fund to balance annual budgets. Unfunded OPEB liabilities for the state and its municipalities total $66.8 billion.

Like many states, New Jersey is struggling to meet long-term retirement obligations while addressing structural deficits. Christie is set to release his fiscal 2012 budget proposal on Feb. 22. Officials peg the fiscal 2012 deficit at nearly $11 billion. The fiscal year begins July 1.

The state must begin phasing in pension payments starting in fiscal 2012, with those allocations reaching a full contribution by fiscal 2018.

Standard & Poor's will monitor how New Jersey addresses its long-term liabilities while the state balances recurring revenues with recurring expenses. "Meaningful progress" on both issues could raise the rating, Standard & Poor's said in a report. Additional increases to its unfunded pension and OPEB liabilities or larger budget shortfalls could place downward pressure on the rating.

Democratic and Republican lawmakers recently filed legislation to change the state's retirement system, including boosting the retirement age, increasing employee contributions, and other initiatives. The administration believes its pension reform measures would give the state's pension system a funding ratio of 91% by 2041.

"They are apparently taking some steps to address the pension issue," Panger said. "However, we believe that that will take many years to adequately address."

Christie and Treasurer Andrew Sidamon-Eristoff stressed that New Jersey must move forward with pension reform.

"While New Jersey's bonds remain sound and respected investments, this downgrade highlights the real danger of failing to act swiftly on critical pension, health benefit, and fiscal reforms," Sidamon-Eristoff said in a statement.

Fitch Ratings rates New Jersey AA with a stable outlook. Moody's Investors Service assigns a Aa2 with a negative outlook.

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said the lower credit rating reflects his firm's evaluation of New Jersey and the market's view of the credit, as well.

"From our perspective, the state GO rating, based on our internal credit research, is an A1 equivalent," Pietronico said. "And the rating agencies are only moving a little bit closer to where we see the rating and ultimately where the market does because the bonds have been trading more in the A-rated camp for some time."

New Jersey's credit strengths include a diverse economic base, high wealth and income levels, and continued efforts in balancing yearly budgets during periods of declining revenue.

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New Issues, S&P New Jersey Downgrade Mark Muni Market Developments - The Wall Street Journal

Wednesday, February 9, 2011
By Stan Rosenberg

NEW YORK (Dow Jones)--The appearance of a few midsize new issues that fared well, and a Standard & Poor's downgrading of various New Jersey bonds, topped developments Wednesday in an unchanged tax-exempt bond market.

Trading was quiet throughout the day as overall market supply looked like it would continue light until March. That led to aggressive new-issue pricings and to a lack of bond blocks in the secondary market.

Puerto Rico sold $325 million of debt in a negotiated sale of triple tax-exempt bonds through a Barclays Capital group. South Carolina offered $324 million of short-maturity high-grades (Aaa/AA-plus/AAA)via J.P. Morgan in a competitively bid sale. Some of Puerto Rico's bonds were insured by Assured Guaranty with ratings of AA3 negative and AA-plus stable from Moody's Investors Service and S&P, respectively.

The South Carolinas, with the longest maturity of 2018, were reoffered pretty much along one data provider's generic triple-A scale, encouraging the market because it may have set at least a temporary level for gilt-edged munis. Shorter-term securities had been off as much as three basis points before that bidding but corrected quickly afterwards.

A successful auction of Treasury 10-year bonds, that propped Treasury prices, also kept munis from sliding, although Investment Company Institute data for the week ended Feb. 2 showed continued--but ebbing--outflows of $1.2 billion from long-term municipal bond mutual funds. The redemptions were down from $2.7 billion the previous week and $5.7 billion the week before that.

The New Jersey one-notch downgrade of the state's general obligation bonds to "AA-minus" with a stable outlook was shrugged off by traders and portfolio managers, many of whom felt the Garden State's bonds remain overrated. Moody's rates the state's GO's "AA2" negative, and Fitch Ratings puts them at ""AA" stable.

"In fact, our internal rating on that credit is an A1, so we think it's still somewhat over-valued in that respect," said Miller Tabak's Michael Pietronico. "The rating agencies could still be too high."

Moody's rates the state's GO's "AA2" negative, and Fitch Ratings puts them at ""AA" stable. S&P's downgrade put New Jersey's debt at the bottom of the group designated high-credit quality, although it still is the fourth of 10 investment-grade ratings.

Municipal traders also kept an eye peeled for developments at Wednesday's hearings by a House subcommittee that's probing whether there really is a crisis in municipal bonds. They were encouraged by the panel's chairman, Patrick McHenry (R., N.C.), ruling out any federal government bailout for states, although prices weren't impacted.

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

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Assured Blasts S&P's New Rating Criteria; CDS Tell the Tale

Wednesday, January 26, 2011
By Patrick McGee
The Bond Buyer

Standard & Poor's is considering whether Assured Guaranty Ltd.'s credit is really AA-plus. The credit-default swap market made that decision a while ago and its verdict is no.

The agency issued a 39-page report Monday seeking comments on proposed new criteria for rating bond insurers. The new method could result in downgrading investment-grade insurers "by one or more rating categories unless those insurers raise additional capital or reduce risk."

The insurer on Tuesday said it was "astonished" by the proposed new criteria. Assured "has consistently reported positive operating earnings throughout the financial crisis and has achieved record operating earnings through the first nine months of 2010," the company said in an e-mailed statement.

Assured, the only company still actively writing policies to wrap municipal bonds, lost its sole triple-A rating in October when Standard & Poor's downgraded it to AA-plus.

The proposed methodology looks at financial and business risk profiles as determined by evaluating nine categories of criteria, including industry risk, competitive position, financial flexibility, and management strategy. Standard & Poor's is seeking commentary on the proposal until March 25, and will hold a conference call Feb. 2.

Assured called the proposal an example of why federal regulation is needed to assure consistent credit rating principles and processes are applied transparently.

By some measures, however, Standard & Poor's is behind the curve.

Moody's Investors Service stripped Assured Guaranty Municipal Corp., formerly Financial Security Assurance, of its Aaa in May 2009. It took away Assured Guaranty Corp.'s Aaa rating in November 2008. Both insurer platforms were last rated Aa3 — two notches lower than Standard & Poor's current rating.

Spreads for credit-default swaps seem to be suggesting that the ratings remain too high.

The CDS market — where investors trade a type of protection that offers insurance against default — demands a much higher premium for insurance on Assured Guaranty versus similarly rated companies.

Among five-year CDS contracts, for instance, a buyer must pay $753 per year to protect $10,000 of Assured debt against default. A comparable contract for triple-A rated Microsoft demands just $24, according to Bloomberg LP.

A five-year contract on Berkshire Hathaway, which carries the same rating as Assured, costs less than $101 per year.

In fact, five-year protection on Assured costs more than any of the 125 companies within the Markit CDX North American Investment Grade Index, where the average price on five-year CDS is $81.80 per year.

"Clearly, in Assured's case, the business model is in question," said Mike Pietronico, chief executive at New York-based Miller Tabak Asset Management. "There are people making bets that perhaps the business model is going away."

Assured has struggled to expand its public finance operations in recent years. Perception in the muni market turned negative when its competitors were left in shambles due to heavy exposure in the mortgage-backed market. In 2010, Assured's two platforms wrapped $26.8 billion of munis — 24% less than in the prior year. That amounted to a fraction of the overall insured penetration rate before the 2008 crisis, according to Thomson Reuters.

Pietronico said trading of CDS can be thin, so it's possible the wide spreads reflect an exaggerated bet by a hedge fund or some other sophisticated players.

"You have to keep in perspective the size of the CDS market," he said. "There could be some outsize-looking bets. In reality, the volume behind them may not be nearly as onerous."

Assured said in an e-mailed statement that "movements in CDS levels for AGM and AGC continue to be significantly affected by technical factors, such as supply/demand imbalance and light trading volume."

Oddly enough, the higher spreads actually help Assured's quarterly statements because they allow the insurer to record gains on the derivatives that it is counterparty on. Thanks to this accounting quirk, a higher CDS spread implies Assured could default on a given derivative. Therefore, the derivative is less valuable, giving Assured a lower liability.

For instance, Assured's CDS contracts have a fair value of negative $5.43 billion, based on their exposure. Giving weight to the fact that Assured is itself a default risk, the value drops to $1.71 billion. If CDS against Assured were to become risk-free overnight, its liabilities would jump $3.7 billion.

Standard & Poor's new criteria would be another hurdle for the industry's recovery as the proposal clearly requires bond insurers to put up more capital.

"The amount of capital needed to achieve high investment-grade ratings will increase significantly under the proposed criteria," agency said.

The rating agency attributes the increase to the higher capital charges used in scoring capital adequacy, as well as a new leverage test which will serve "as an independent constraint on the amount of exposure a bond insurer can have relative to its capital."

Kevin Brown, a spokesman for MBIA Inc., which hopes to one day write public finance policies again, pending legal setbacks, said he was encouraged by Standard & Poor's efforts to provide greater transparency.

"However, certain aspects of the proposed criteria appear unduly punitive even in the context of industry losses over the past few years," he said. "While reconsideration of the capital required to support the insurance of structured products is entirely appropriate, we can see no justification for what appears to be a substantial increase in capital requirements for a public finance portfolio."

For start-up insurers, the new criteria could be a boon, according to John Pizzarelli, former head of global public finance at bond insurers MBIA Insurance Corp. and CIFG.

"If you have a clean slate, you can control the leverage," he said. "Legacy companies which already have exposure in their portfolios will have to meet the new criteria, versus another company that can manage the criteria from out of the box."

Shares of both Assured and MBIA Inc. were weaker yesterday after reports about Standard & Poor's proposed new criteria.

Ironically, the detailed methodology may in fact be a direct response to Assured's repeated requests for increased clarity from the rating agencies.

In Assured's most recent conference call for the third-quarter, chief executive Dominic Frederico blamed rating agencies for a lack of transparency in rating bond insurers.

"There are no controls," he said. "There are no checks and balances — there are no clear regulations so that you would know the rules by which you'd have to play by."

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Yields Rise as Even Good Credits Have Hard Time

Friday, January 14, 2011
By Michael Scarchilli
The Bond Buyer

The Bond Buyer's long-term weekly yield indexes rose this week as media reports about the possibility of a string of municipal bankruptcies weighed on investors.

"Municipals have succumbed to headline risk, and it seems as if retail is taking their ball and going home," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

"Mutual funds are the dominant players right now, unloading bonds at a rapid pace. There is scattered interest, but structurally, the muni market will have difficulty absorbing large blocks, without an institutional presence on a day-to-day basis."

Pietronico said this week's losses call into question the market's ability to take on a heavier new-issue calendar.

Amid the rising rates and market uncertainty, Bank of America Merrill Lynch priced $967.7 billion of school construction bonds for the New Jersey Economic Development Authority Thursday in a deal downsized from an originally scheduled $1.9 billion. Yields were raised about 18 basis points from retail levels to complete the issuance.

"That deal shows that even a reasonably good credit is having a hard time," Pietronico said. "With BABs gone, the long end has basically lost its training wheels, and now it has to learn how to ride a bike all over again. That means higher yields."

The Bond Buyer 20-bond index of 20-year general obligation yields rose 31 basis points this week to 5.39%. This is the highest level for the index since Dec. 18, 2008, when it was 5.46%.

The 11-bond GO index of higher-grade 20-year GO yields increased 30 basis points this week to 5.14%, which is its highest level since Dec. 18, 2008, when it was 5.25%.

The revenue bond index, which measures 30-year revenue bond yields, gained 16 basis points this week to 5.60%. This is its highest level since Aug. 20, 2009, when it was 5.62%.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, declined two basis points this week to 0.55%, but remained above its 0.53% level from two weeks ago.

The yield on the 10-year Treasury note dropped 11 basis points this week to 3.31%, which is its lowest level since Dec. 9, 2010, when it was 3.22%.

The yield on the 30-year Treasury bond fell four basis points this week to 4.50%, 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 5.70%, up 16 basis points from last week's 5.54%.

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New Jersey Cuts Bond Sale After Christie's 'Bankrupt' Comments

Thursday, January 13, 2011
By Brendan A. McGrail
of Bloomberg

Jan. 13 (Bloomberg) -- New Jersey Governor Chris Christie has learned that talking about state insolvency may have a cost.

About 20 minutes after Christie, 48, told a town-hall meeting in Paramus today that health-care costs "will bankrupt" the state, the New Jersey Economic Development Authority cut its tax-exempt school-related bond offering by more than half to $712.3 million.

"It doesn't help to try and sell a $1 billion deal on the same day the governor is talking about the state going bankrupt due to health-care costs," said Mike Pietronico, who oversees $360 million as chief executive officer of Miller Tabak Asset Management in New York.

Health-care spending "will bankrupt" the state unless it requires workers to pay more for medical coverage, Christie said. New Jersey will spend $4.3 billion on health insurance this year, and that cost will rise 40 percent within four years, Christie, a first-term Republican, said at the town-hall meeting.

"Mr. Christie made a rookie mistake," Pietronico said. "The market is very sensitive to the word 'bankrupt.'"

The authority also cut its taxable offering 51 percent to $119.9 million, with four-year bonds priced to yield 125 basis points, or 1.25 percentage points, above a U.S. Treasury due in December 2015, the person said. The issue included $211.3 million in floating-rate notes.

The governor's office referred inquiries to the Treasury Department.

'Unwise and Imprudent'

"Given market conditions, it would have been unwise and imprudent to put the substantial benefits achieved with this sale at risk by trying to sell more bonds at higher rates," Andrew Pratt, a spokesman for Treasurer Andrew Sidamon-Eristoff, said in an e-mail.

The state priced securities maturing in September 2020 to yield 4.64 percent, according to a person with direct knowledge of the sale. That's 148 basis points above top-rated nine-year debt, according to a Bloomberg Valuation index.

When New Jersey priced its last series of school construction bonds, a $716.3 million deal in April, the so-called spread of tax-exempt bonds maturing in nine years was 91 basis points more than top-rated tax-exempts of the same maturity, the BVAL index shows.

"The state will return to the market to obtain further savings and risk reduction if and when market conditions turn favorable to taxpayers," Pratt said.

The Wall Street Journal reported earlier today that the offering was slashed because of low demand.

--With assistance from Terrence Dopp in Trenton, New Jersey and Martin Z. Braun in New York.

--Editors: Walid el-Gabry, Mark Schoifet

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:
William Glasgall at +1-212-617-3023 or wglasgall@bloomberg.net.

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Muni Watch: Puerto Rico's $1.4B Bond Sale Stokes The Market

Tuesday, January 11, 2011
By Stan Rosenberg
Dow Jones Newswires

NEW YORK (Dow Jones)--If wishing could make it so, then California Governor Jerry Brown will have achieved a major credit positive for his state by refusing to have it sell any general obligation bonds until the fall of this year.

But the plan, made public in a hard-hitting, no-frills budget address Monday, remains a proposal for now, and participants in the $2.9 trillion municipal bond market are hoping it doesn't become another item to be stored until the title of "Governor Moonbeam."

Until the 72-year-old governor's wish comes true, however, the market hasn't responded in terms of California or general bond prices, although it certainly has taken notice of his intention to save $248.1 million by skipping a sale that has become a tradition in the first half of every year since 1988.

Ironically, the moratorium on sales comes at a time when interest rates are around all-time lows, meaning the saving would be skimpy for now, but Brown has chosen to take the bird in hand rather than wait for the two in the bush. The state will sell $5.76 billion of general obligation bonds in the autumn, according to a spokesman for State Treasurer Bill Lockyer.

Holding off on the first-half sale is "a strange thing to do, but they are definitely saving on costs," said Daniel Solender, director of municipal management at Lord Abbett & Co. in Jersey City, N.J. "It would mean lower supply, which would help performance."

There's a big "if" in that statement--if the proposal is approved by the state legislature, which is never an easy task in California gubernatorial-legislative relations.

Solender said he hadn't seen much trading in California debt Tuesday, and David Madigan, chief investment officer at Boston-based Breckenridge Capital Advisors agreed. Ten-year California bonds continued to trade at a yield differential of 125 basis points, or 1.25 percentage points, over comparable-maturity U.S. Treasury securities Madigan said. He said he hadn't seen any of the state's bonds offered for sale.

The state's annual spring borrowing, however, is "very significant," said Howard Cure, municipal research director at New York City-based Evercore Wealth Management. The borrowing is usually a few billion dollars that tends to drive the market with rates spiking up. "If you don't have that kind of paper that needs to be sold, you can have lower rates," Cure said.

Even more meaningful to both California and the market will be the elections Brown has proposed to extend previously authorized increases in the state's sales and income taxes, Cure said. "If those fail, even without debt being issued in the spring, that will really drive up rates," he said. The extensions would account for about $12 billion, or half of the state's proposed budget balancing.

California, the world's eighth-largest economy on its own and the municipal bond market's largest borrower, sold a record $19.8 billion of general obligation bonds in 2009 and another $10.4 billion in 2010. Brown's budget would limit such sales to $5.76 billion this calendar year, which would give the market a breather.

Most of the bonds sold in previous years funded infrastructure projects that are now underway, but Lockyer said Monday the proposed delays could put off the start of some new projects.

The market isn't going to move in anticipation of the spring borrowing being delayed, said Michael Pietronico, CEO of Miller Tabak Asset Management in New York City.

"You won't see the market trading on this information and bidding up California paper until it actually occurs," he said. If it does, then the shortfall would be addressed on a structural basis, and the shortage of supply in the first half would also be a positive, he added. "But you have to wait until the legislature actually acts on the proposal."

(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.)

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

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Issuers Offer $1.6 Billion Amid Months of Losses: Muni Credit

Monday, January 3, 2011
By Ashley Lutz
of Bloomberg

Jan. 3 (Bloomberg) -- Issuers led by Massachusetts Development Finance Agency, the city of Upland, California and Maine Municipal Bond Bank will borrow $1.59 billion this week amid the longest streak of monthly tax-free losses in 11 years.

Municipal securities lost 4.5 percent this past quarter as yields surged amid a U.S. Treasury selloff and the looming expiration of the Build America Bonds program, according to the Bank of America Merrill Lynch Municipal Master Index. The flood of munis in the market is likely to force issuers to price more aggressively, helping drive up yields, said Bud Byrnes, chief executive officer at Encino, California-based RH Investment Corp.

"Rates will be pumped up because you'll have a lot of supply and January is one of the biggest months of redemption," said Byrnes, who expects a rally in prices.

Investors are trying to unload holdings at the fastest pace in at least 14 years, prompting mutual funds to increase sales, according to data compiled by Bloomberg. Investors withdrew from municipal bond funds for the seventh-straight week through Dec. 29, according to data compiled by Lipper FMI, a Denver-based research company.

U.S. debt securities also fell in December as the government completed $2.2 trillion of note and bond auctions this year, surpassing the $2.1 trillion record set in 2009. Treasuries were still headed for 5.5 percent annual returns in 2010 after losing 3.7 percent in the previous year, according to a Bank of America Merrill Lynch index as of last week.

Individual Investors

Build Americas' popularity reduced tax-exempt issuance, and that trend is set to reverse this year, the Securities Industry and Financial Markets Association said in its annual municipal-issuance report Dec. 15. As an extension of the Build America program became less likely, yields on 30-year tax-exempts climbed about 96 basis points to 4.72 percent this quarter. Higher yields will probably entice individual investors back, Pietronico said.

"Retail should be somewhat stronger as absolute yields are high enough to generate some interest," Mike Pietronico, CEO of New York-based Miller Tabak Asset Management, who manages $360 million, said in a telephone interview.

Massachusetts Development Finance Agency will issue $271 million in tax-exempts for Partners HealthCare System Inc., which includes Harvard University teaching hospitals, according to offering documents. The bonds are ranked third-highest by all three ratings firms. Maine Municipal Bond Bank will offer $77.4 million of top-rated debt. The proceeds will be used to lend money to the state's school districts, counties and cities.

Upland, California, which is about 40 miles (64 kilometers) east of Los Angeles, will sell $135 million this week in certificates of participation to buy property from a local hospital. The securities are rated A, Standard & Poor's sixth-highest investment grade.

Record Issuance

State and local governments offered a record of at least $400 billion of fixed-rate bonds in 2010, according to data compiled by Bloomberg since 2004. Overall issuance, which includes variable-rate debt, climbed to $453.7 billion, up from $443.6 billion in 2009, Bloomberg data show.

The Build America program, which included a 35 percent federal subsidy on interest costs, expired last week. Issuers across the U.S. moved up planned sales to December to beat the deadline, making the last three months of 2010 the biggest quarter for the bonds since their April 2009 inception, Bloomberg data show.

The securities were created under President Barack Obama's stimulus legislation as a means of driving down borrowing costs for localities and funneling money to job-creating construction projects. More than $187 billion of them have been sold.

Municipal bonds returned 2.3 percent for 2010, the worst performance since 2008, according to Merrill's Municipal Master Index, which has averaged an annual 9 percent return since 1989.

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. The offering will need to be re-authorized this month, 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 Jan. 3)

--With assistance from Brendan A. McGrail in New York.

--Editors: Walid el-Gabry, Ted Bunker

To contact the reporter on this story:
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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