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In The News

In The News - 2012

  News from 2013
December 24, 2012 UBS Gets Loan While Connecticut Economy Falters: Muni Credit - Bloomberg
December 20, 2012 Despite Low Yields and Less Supply, Players Still Optimistic About 2013 - The Bond Buyer
December 18, 2012 Record Low Yields Help Make 2012 Memorable - The Bond Buyer
December 14, 2012 Bond Buyer Indexes Reverse From Four-Decade Lows on Heavy Supply - The Bond Buyer
December 13, 2012 Long Island Power Bonds Underperform Peers in Post-Sandy Fallout - Dow Jones Newswires
November 30, 2012 Longest Winning Streak Since '05 Shows Tax-Rise Bet: Muni Credit - Bloomberg
November 14, 2012 New Jersey Readies Postponed $2.6B Deal - The Bond Buyer
September 28, 2012 Sustained Demand Pushes Most Muni Bond Indexes Lower - The Bond Buyer
September 27, 2012 Suffolk County Water Authority to Sell $80M - The Bond Buyer
September 19, 2012 Suffolk Fails to Score as Home of Hamptons Pays Up: Muni Credit - Bloomberg
September 12, 2012 After Fiscal Emergency, N.Y.'s Suffolk County Pays Higher Rates - Dow Jones Newswires
September 11, 2012 Cuomo Turning Table on Christie as N.Y. Beats N.J.: Muni Credit - Bloomberg
August 21, 2012 Recent Rise in Yields Stirs Retail - The Bond Buyer
August 17, 2012 New York State Helps Northeast Volume Surge in First Half - The Bond Buyer
August 8, 2012 Munis Holding Steady, Mirroring Treasurys - Dow Jones Newswires
August 6, 2012 N.Y.C. Agency Sells $1.2B in Week's Largest Deal - The Bond Buyer
August 1, 2012 Cook County Turns to Sales Tax Bonds and Snags a AAA - The Bond Buyer
July 31, 2012 California Luring Most Cash Defies Bankruptcy Wave: Muni Credit - Bloomberg
July 30, 2012 Munis Weaker, Catching Up to Treasurys - Dow Jones Newswires
July 26, 2012 New York Beats California in Sales for First Time: Muni Credit - Bloomberg
July 17, 2012 US Treasuries and the Safe Haven Flows Myth -
June 8, 2012 Week's Bigger Calendar and Weak Treasuries Push Muni Indexes Higher - The Bond Buyer
June 7, 2012 Illinois Warned by S&P as Pension Reform Stays Stalled - The Bond Buyer
May 21, 2012 S.F. Utility Sets $686M to Strengthen Water System - The Bond Buyer
May 14, 2012 Credit Quality Still a Key Attraction for Retail Buyers - The Bond Buyer
May 7, 2012 State-Local Governments Proving Market Doubts Wrong - Bloomberg
April 27, 2012 Illinois Expects Strong Demand for GOs - The Bond Buyer
April 27, 2012 Yields Seen Declining Based on 200-Year History - Bloomberg
April 25, 2012 Despite State Oversight, Nassau Sells $207 Million Muni Deal - Dow Jones Newswires
April 25, 2012 Munis Holding Steady Despite Lower Treasurys - Dow Jones Newswires
March 29, 2012 Local Debt Wins Biggest Over Treasuries Since 1989 - Bloomberg
March 23, 2012 Muni Market Steadies a Bit; Bond Buyer Indexes Increase - The Bond Buyer
March 19, 2012 Detroit consent agreement wouldn't constitute swap termination event - Debtwire
March 14, 2012 Biggest 30-Year Rally Jeopardized as Jobs Increase - Bloomberg
March 12, 2012 Rally Seen as Three-Month-High Yields Shrink Supply - Bloomberg
March 9, 2012 Biggest Illinois Rally Belies $9 Billion of Bills - Bloomberg
February 22, 2012 Univ. of California Sets $500M of Century Bonds - The Bond Buyer
February 22, 2012 Christie Bets on N.J. Economic Rebound to Fund Tax Cuts, Pension - Bloomberg
February 21, 2012 New York City Looks To Low Rates In $800 Million Bond Sale - Dow Jones Newswires
February 21, 2012 Treasuries Trounced Amid Biggest Inflows Since 2010 - Bloomberg
February 17, 2012 Strong Demand for New Issuance Lifts Munis This Week - The Bond Buyer
February 15, 2012 California's Credit Rating Outlook Is Raised to Positive by S&P - Bloomberg
February 2, 2012 Munis Steady Amid Sparse Supply - Dow Jones Newswires
January 26, 2012 Fed Move Creates Hunger For Fixed Income - Dow Jones Newswires
January 25, 2012 Where Will Muni Rates Go Next? - The Bond Buyer
January 23, 2012 Rally's End Seen as Low Yields Conspire With Supply: Muni Credit - Bloomberg
January 13, 2012 Troubled Vernon Issues With Ease - The Bond Buyer
January 12, 2012 Munis Continue To Rally - Dow Jones Newswires
January 11, 2012 Illinois Easily Sells $800 Million Muni Deal, Despite Downgrade - Dow Jones Newswires
January 9, 2012 Treasurys Rally Despite Positive Jobs Report - Dow Jones Newswires
  News from 2011
  News from 2010
  News from 2009
  News from 2008

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UBS Gets Loan While Connecticut Economy Falters: Muni Credit

Monday, December 24, 2012
By Michael McDonald
of Bloomberg

Dec. 24 (Bloomberg) -- Last year, UBS AG began exploring moving back to Manhattan from Stamford, Connecticut, where more than a decade ago the Zurich-based bank had consolidated U.S. operations and moved thousands of employees.

Connecticut Governor Dannel Malloy, the former mayor of Stamford, persuaded UBS to stay by giving it a $20 million loan that won't have to be repaid if the bank keeps at least 2,000 workers in Stamford until 2017. The deal represents the dilemma facing the Democratic governor, who in his first two years in office gave companies a record amount of tax incentives, only to see the economy stall and the state budget fall into deficit.

"Connecticut doesn't seem to be yet fully on top of what the competitive world looks like," said Fred Carstensen, director of the Connecticut Center for Economic Analysis at the University of Connecticut in Storrs. "Financial services is like manufacturing. It's not a sector that's going to be a job creator."

Connecticut, shaken by a mass shooting Dec. 14 that left 28 dead, faced a budget deficit even as it is among 25 states where tax revenue has either matched previous peaks or will do so by this fiscal year.

Deficit Challenge

Overspending on health care has contributed to a $365 million gap in its $20 billion spending plan less than halfway through the fiscal year that began July 1.

Malloy, 57, and the Democratic-controlled state Legislature, which last year passed the biggest tax increase in Connecticut history, on Dec. 19 agreed to use mostly spending cuts to close the gap. The largest reductions are aimed at those without health insurance and the Medicaid program for the poor.

The state economy that has one of the nation's highest jobless rates, at 8.8 percent in November, compared with the 7.7 percent U.S. average. It had 87,000 fewer jobs last month compared with the peak in 2008 after the 18-month recession began. According to the state Labor Department, among the weakest areas has been finance, which includes banks and insurers. The industry lost 3,000 jobs in the last year, even with the governor's efforts.

"We're struggling to come out of this one," said Kevin Lembo, Connecticut's comptroller, who said in a report this month that the deficit might be even larger, at $415 million. "The volatility of the situation would argue that the worst is not over yet."

Bond Reward

Even with the budget challenge, investors are rewarding the state with lower relative borrowing costs.

The state on Dec. 12 sold tax-exempt bonds repaid with gas taxes. A 10-year portion priced to yield 1.82 percent, or 0.36 percentage point above benchmark munis, data compiled by Bloomberg show. That spread is down from 0.42 percentage point when Connecticut last sold similar debt on Dec. 1, 2011.

While Hartford, the state capital, has long suffered through a decline from its status as the insurance capital of the world, Fairfield County bordering New York to the south has emerged over the last two decades as a center for hedge funds.

Financiers such as Paul Tudor Jones and Steven A. Cohen set up shop in wealthy enclaves such as Greenwich. Residents in the county, many of whom commute to Wall Street, account for more than half the state's income-tax revenue.

Fueling Fairfield

Swiss Bank Corp. helped fuel the county's emergence in 1994, when it agreed to move its U.S. headquarters to Stamford in exchange for $120 million of tax incentives. It built the world's largest trading floor -- the size of two football fields -- downtown next to Interstate 95. The bank agreed to merge with UBS in 1997 and other financial services companies followed it to the city, including the Royal Bank of Scotland's Greenwich Capital unit.

As financial institutions have been cutting back globally, losing more than 300,000 jobs since the beginning of last year, Connecticut hasn't been spared. Bank of America Corp. said in a filing to the state labor department in June it was letting go about 150 workers in the state. The same month, ESL Investments Inc., the hedge fund run by Edward Lampert, said it was relocating to Miami from Greenwich.

"The proximity to New York and the reliance on the financial industry for high-paying jobs is something that needs to be watched," said Michael Pietronico, who manages $860 million of municipal securities as chief executive officer of Miller Tabak Asset Management in New York. "The hedge-fund community continues to be a vital part of their tax base."

UBS Workers

UBS had more than 3,000 workers in Stamford when the global credit crisis peaked in 2008 and had expanded outside of its headquarters into offices that the bank has either since left or put on the market seeking to sublet, according to Steven Greenbush, a broker at CBRE in Stamford.

The bank in October said it would cut 10,000 people around the world, about 15 percent of its staff, as it seeks to reduce expenses by $3.6 billion. It declines to say how many will lose their jobs or be relocated from Connecticut.

"UBS intends to honor its 2,000-person threshold contained by our agreement with the state of Connecticut, which is far below our present employee and contractor levels statewide," Megan Stinson, a spokesman for UBS in New York, said by e-mail.

State Incentives

Malloy in his 2010 campaign for governor said he helped create thousands of jobs in his 14 years as Stamford mayor. Since he took office at the beginning of last year, the state has almost doubled business incentives compared with the prior eight years, giving out more than $800 million of tax credits, loans and grants to 365 companies in exchange for promises to create or retain almost 32,000 jobs.

"These are focused investments in growth industries," said Andrew Doba, a spokesman for Malloy. "We're confident it will achieve a good net return on investment."

In the largest deal to date, the state last year gave $291 million to Bar Harbor, Maine-based Jackson Laboratory to expand in Farmington. In August, Malloy announced that Bridgewater Associates, the hedge fund that paid its founder Raymond Dalio $3.9 billion last year, would get more than $100 million of tax incentives and forgivable loans to move to Stamford from Westport, Connecticut, and build a $750 million headquarters.

The effectiveness of the deals may become a political issue if Malloy runs for re-election in two years.

Election Ahead

Ben Zimmer, executive director of the Connecticut Policy Institute, called the incentives a "straight-up redistribution of income from middle-class people to politically connected corporations."

The institute was founded by Tom Foley, the Republican who lost the election for governor in 2010 and has been telling reporters he will run again.

"Connecticut has been a poorly run state for a long time, and that includes Republican governors and Democratic Legislatures," Zimmer said. "What he's done is to largely continue that."

In muni trading last week, yields on 10-year benchmark tax-exempts reached 1.81 percent, the highest since August, data compiled by Bloomberg show. The interest rate touched 1.4 percent Dec. 6, the lowest for a Bloomberg Valuation index that began in January 2009.

--With assistance from Michelle Kaske in New York.

--Editors: Mark Tannenbaum, Ted Bunker

To contact the reporter on this story:
Michael McDonald in Boston at +1-617-210-4639 or

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

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Despite Low Yields and Less Supply, Players Still Optimistic About 2013

Thursday, December 20, 2012
By Christine Albano

Dec. 20 (Bond Buyer) -- As the market prepares to ring in the New Year, municipal experts say they have mostly positive expectations when it comes to interest rates, credit quality, investor demand, and the viability of municipals' tax-exemption in 2013.

At the same time, however, they said they have lingering apprehensions — from the potential long-term effects of the fiscal cliff negotiations to the ongoing impact of the overseas financial crises.

Credit concerns will remain of utmost importance for many municipal players as 2013 nears.

"We think that one of the most important things investors can do is to pay close attention to the credit quality of their holdings," said Tom Kozlik, director and credit analyst at Janney Montgomery Scott.

He said the firm is "very bullish" from a relative value and credit perspective — particularly in the single-family housing sector because of its significant premiums to the Municipal Market Data benchmarks.

However, he also warns there could be "several macro-level factors," such as the lack of lawmakers' political will, overall lower economic growth, and probable downgrades that have the potential to affect municipal credit quality in 2013. "Investors need to be aware, plan, and adjust accordingly," Kozlik added.

"Credit will improve, but credit work will still be at the forefront," agreed Jim Pass, managing director at Guggenheim Partners LLC, a New York and Chicago-based asset management, investment banking, and financial services firm. "Regardless of economic conditions, credit is always a concern," he said. "We will continue to shy away from covenant-light transactions and focus on bonds secured by dedicated revenue sources."

"I would expect to see tax-exempt to taxable ratios decline as the credit fear associated with state and local governments dissipates," said Nat Singer, managing director at Swap Financial Group LLC, a South Orange, N.J.-based independent swap advisor. As of Monday, 30-year municipals were yielding 94.4% of the comparable Treasury yield, according to MMD.

Meanwhile, while low rates will usher in the New Year, a public finance banker at a large Wall Street firm, said there are expectations of limited supply, strong demand, and higher tax rates at the upper-end of the income distribution curve.

"Off-setting all that is a growing probability of a cap on deductions as part of the cure for the fiscal cliff, as well as the possibility of other attacks by proponents of fundamental tax reform," he said.

Others are worried about how government policy-making will affect the municipal market in 2013.

"We obviously are paying close attention to the rhetoric coming out of Washington as we realize the tax-exemption is on the table" for the first time in 25 years, said Peter Hayes, managing director and head of the municipal bond group at BlackRock, which had more than $106 billion of municipal assets under management in October.

"While we assign a very low probability that the tax-exemption is done away with altogether, we also believe it is naive to think that as greater tax reform is discussed in the future, that the municipal market will not be impacted in some fashion," he explained. "Recent events such as Hurricane Sandy however, highlight the importance of the tax-exempt market," Hayes continued. "It facilitates an efficient avenue for state, and especially, local governments in this case to access much needed capital for infrastructure and overall capital needs."

Pass shared Hayes' view.

"Tax reform will be critical as we are confident there will be many stops and starts throughout 2013," he said. "Generating current income for our clients will be critical, given the interest rate environment."

Overall, Hayes forecasts that 2013 could produce some of the same themes that drove performance this year — but to a much lesser degree.

"Performance will be a sliver of 2011 and 2012, but what is important is that the fundamental characteristics will remain in place -- these being a safe asset class offering minimal volatility, income and capital preservation being a larger portion of total return, and the tax-exempt benefit at a time where taxes are going up," he predicted.

"We anticipate the first quarter will bring further uncertainty, which will bode well for the asset class; favorable demographics in the U.S. [that will] attract a larger audience for high-quality fixed-income securities," Hayes continued.

He said there is also concern over the longevity of positive fund flows -- which aided performance in 2012 — as well as the direction of interest rates.

"Any small back up in such a low rate environment can have a bigger negative impact on price," he added. "If flows do stop, what type of adjustment will it take to attract other types of investors?"

Mike Pietronico, chief executive officer at Miller Tabak Asset Management, on the other hand, is predicting a municipal bond market where yields are low, but volatility remains rather muted. "We suspect with tax rates poised to move higher, the tax-free bond asset class will remain well supported," he said.

One of the firm's chief concerns going forward is the U.S. resembling Europe's debacle while fiscal cliff negotiations over the future of taxes approach the year-end deadline and $1 trillion of spending cuts kick in, he noted.

"America may come to resemble Europe as austerity gets forced upon it by a frustrated bond market that sees deficits growing, and a Federal Reserve that knows seemingly no bounds when it comes to underwriting this country's debt problem," Pietronico forecasted.

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Record Low Yields Help Make 2012 Memorable

Tuesday, December 18, 2012
By Christine Albano

Dec. 18 (Bond Buyer) -- There was volatility, uncertainty, and even turmoil in the municipal market in 2012, but that didn't stop investors from buying up every bond in sight.

Municipal experts said 2012 was a banner year - as both demand and mutual fund inflows were strong and the market hit record levels - particularly in the third quarter - even in the face of much uncertainty about government finances and the market's unease about future tax policy.

"2012 is memorable for the yield slide to the lowest levels in 40 or more years," said a public finance banker at a large New York firm. "That was propelled by Fed policy, moderate supply, and huge rollover demand."

The intermediate and long end of the curve fell to record lows in late November as the 20-Bond Index of 20-year general obligation yields dipped to 3.29% - the lowest level since Sept. 2, 1965 when it was also 3.29%. The trend has been somewhat reversed in December by a sharp sell-off, driven by heavy supply, profit taking and investor concern about the future of tax exemption for munis.

Despite the backup in yields this month, the 30-year general obligation yield on Monday was at a 2.71%, according to Municipal Market Data - a nosedive from the 3.57% yield achieved on Jan. 3.

Year to date, volume is up over 30%, as total issuance through the first 11 months of the year registered at $343.8 billion among 11,849 issues as of Dec. 1, according to Thomson Reuters.

But that was not enough to satiate the appetite for paper as investors looked for yield.

Robust demand from a broad-based audience helped impact the market significantly as supply for much of the year was unable to match the demand from individuals, U.S. banks, and mutual funds, noted Peter Hayes, managing director and head of the municipal bond group at BlackRock Inc.

"This supply-demand imbalance was supportive of not only a low-rate environment, but was a large proponent in credit-spread tightening," Hayes explained. "Strong and ongoing demand created greater positive returns in addition to the compelling income reward from buying munis."

The relative value of municipals to Treasuries helped boost demand throughout the year and made munis more expensive relative to Treasurys over time. As of Monday, 30-year municipals were yielding 94.4% of the yield of comparable Treasuries, according to MMD.

"While there were many memorable moments that took place in the tax-exempt market this year the one that really changed our strategy was the sensational and consistent demand for municipals throughout the year," Hayes explained.

He cited the more than $50 billion of mutual fund inflows the market has seen so far year to date, and added that the flows, on average, have been greater than $1 billion weekly.

"When you take into account we are coming off of a double-digit performance year in 2011, this is fascinating," Hayes said. Yields were at all-time lows at the end of 2011, and made municipals the year's best performing fixed-rate sector with a 10.7% total return, according to LPL Financial.

"The market underestimated just how much sustainable demand there would be for safe, income-driven assets - given all of the uncertainty 2012 possessed," he continued. "Following such a strong performance year in 2011, this caught many investors who were predicting more muted returns to remain more fully invested throughout the year. We maintained a longer duration bias for a majority of the year than we had envisioned coming into the year."

The fiscal climate overseas was a major driver of the buying opportunity among conservative investors seeking a safe place for cash at a time when fed policy makers were ironing out final revisions to their "QE3" monetary policy and lawmakers were toying with the idea of eliminating municipals' tax exemption, experts said.

"The crisis in Greece, and then in Spain, left bond investors more concerned with the return of capital versus the return on capital," explained Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "The municipal market got swept up in the continued globalization of bond markets as the European fiscal crisis brought waves of buyers into U.S. Treasuries, thus dragging tax-free yields lower too," he continued.

The historically-low rates boosted supply - and created a flood of debt refundings.

Meanwhile, switching from a national scope to the local markets, experts said one of the other memorable events of 2012 involved the shakey financial health of some cities. In California three cities - Mammoth Lakes, San Bernardino and Stockton - filed for bankruptcy in 2012, causing credit concerns to ripple through the market.

However, Nat Singer, managing director of Swap Financial Group, said the enactment in November of Proposition 30 in California helped rectify some of the state's financial woes, and demonstrated the dramatic differences between municipal and corporate credits - the ability, and willingness, to raise taxes if and when necessary.

"While the outcome may have been aided by some expert political strategy, in the end a majority of the constituents in California voted to increase taxes to get the State's fiscal house in order," Singer said. "Combine this with the pension reform in Wisconsin and the potential reform in Rhode Island, and the case for municipal credits being inherently stronger than similarly-rated corporate credits became solidified," he explained.

Coming tomorrow: As the market prepares to ring in the New Year, municipal experts say they have mostly positive expectations when it comes to interest rates, credit quality, investor demand, and the viability of municipals' tax-exemption in 2013.

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Bond Buyer Indexes Reverse From Four-Decade Lows on Heavy Supply

Friday, December 14, 2012
By James Ramage

Dec. 14 (Bond Buyer) -- The municipal market slogged through an extended sell-off this week.

Over the past few sessions, too much supply flooded the market all at once, traders said. What's more, munis weren't helped by the negative reaction in the Treasury market to the Federal Open Market Committee plans Wednesday to expand QE3 by purchasing mortgage-backed securities and long-term Treasuries.

Some investors also appeared to be taking profits after an extended run up in prices and drop in yields.

Since Friday, muni yields beyond the front end of the curve have underperformed their Treasury brethren by rising at a faster pace.

New deals arrived cheaper by up to five basis points. In the secondary, bids were off amid overhang from last week's primary.

Muni bond indexes reflected the jump in rates. The 20-bond index of 20-year general obligation yields increased 17 basis points this week to 3.44%. This was the first increase in the index in nine weeks, putting it at its highest level since Nov. 8, when it was 3.55%.

The 11-bond index of higher-grade 20-year GO yields jumped 17 basis points this week to 3.20%, which is its highest level since Nov. 8, when it was 3.32%.

The yield on the U.S. Treasury's 10-year note increased 15 basis points this week to 1.73%. This is its highest level since Oct. 25, when it was 1.83%. The yield on the Treasury's 30-year bond gained 13 basis points this week to 2.90%, which is its highest level since Nov. 1, when it was also 2.90%.

Muni bond indexes have been falling almost steadily for the past three months before this week's reversal, Thomson Reuters numbers show.

Even with this week's increase, the 20-bond index is down 35 basis points over a three-month period from a high of 3.79% on Sept. 13. For its part, the 11-bond index has plunged 38 basis points from a three month high of 3.58%, also on Sept. 13.

The revenue bond index has plunged 30 basis points over the past three months, to 4.12%.

The heavy tide of supply that rolled in as the muni market generally starts to wind down for the year lifted yields this past week more than anything else, said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. The FOMC announcement certainly pushed Treasury yields higher, he added, but supply tied munis to lower prices, regardless.

"The combination of too much supply in an environment where liquidity is dropping — as it normally does towards the end of the year — is the primary reason why the market's been weak the last few days," Pietronico said. "I would attach to that also some last-minute capital gain selling from investors who, perhaps, see the capital gains rate moving higher next year."

Triple-A tax-exempt yields since Friday have risen dramatically, according to Municipal Market Data numbers. The benchmark 10-year yield jumped 18 basis points over the period to 1.66%.

The 30-year yield rose 17 basis points to 2.65%. The two-year held at 0.30% for a 54th straight trading session.

Muni ratios to Treasuries past the front end of the yield curve have also risen modestly since last Friday, MMD number show. They still remain rich on the intermediate and long ends, despite munis' sharp backup.

The Bond Buyer's revenue bond index, which measures 30-year revenue bond yields, ended a streak of five consecutive all-time lows and rose six basis points this week to 4.12%. This represents its highest level since Nov. 20, when it was 4.14%. The Bond Buyer's one-year note index, which is based on one-year GO note yields, was unchanged this week at 0.23%.

The weekly average yield to maturity of the Bond Buyer municipal bond index, which is based on 40 long-term bond prices, rose three basis points this week to 3.93% for the week ending Dec. 13. But it remains below its 3.98% average from two weeks ago. It is the first time in six weeks that the weekly average has not fallen to a new record low.

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Long Island Power Bonds Underperform Peers in Post-Sandy Fallout

Thursday, December 13, 2012
By Kelly Nolan
Dow Jones Newswires

Long Island Power Authority debt has underperformed similarly-rated power utility bonds, as well as the broader municipal bond market, after widespread condemnation of utility's response to the destruction of superstorm Sandy.

LIPA bonds in Barclays' muni bond index had a total return of 0.12% from Oct. 30, the day after Sandy hit, through Wednesday, while bonds in the muni power index, with similar debt ratings and maturities to the LIPA bonds, had a total return of 1.22% during that same period.

Meanwhile, the broader muni market had a total return of 1.27% during that time, according to Barclays.

The fact that LIPA debt isn't performing as well as its peers, or the broader muni market, means it is likely that more investors are selling the utility's debt than buying it.

In general, since superstorm Sandy struck, muni demand has been strong. Investors have put money into muni-related mutual funds every week except two so far this year, according to Lipper FMI. Munis have also performed relatively well lately in part because of the assumption tax rates may increase for the wealthy next year, boosting the appeal of munis's tax-exemption.

A LIPA spokeswoman acknowledged that the utility's bonds had underperformed.

"That is a reflection on the rating agency actions over the past few weeks," she said. The spokeswoman added that LIPA estimates storm-related costs of $900 million to $950 million.

LIPA's lagging debt performance follows a slew of negative headlines about the utility following superstorm Sandy, including, most recently, a downgrade threat from Moody's Investors Service Monday.

About 1.1 million people were without power for several days following the storm's arrival on Oct. 29, though power had been restored to those customers as of mid-November, according to LIPA's website.

LIPA's chairman, Howard Steinberg, also resigned, and New York state officials have launched an investigation of the utility's preparation and response to the storm.

Mr. Steinberg's resignation follows the loss of three other trustees on LIPA's board since September as well as the recent resignation of the utility's acting chief executive, according to Moody's.

The rating agency said Monday it could downgrade LIPA's roughly $7 billion in outstanding debt, while Fitch Ratings and Standard & Poor's have both dimmed their outlooks on the utility's bonds to negative from stable following the storm.

The three rating agencies generally rate LIPA's debt in the single-A range, though Moody's gives around $700 million of the utility's bonds slightly lower ratings of Baa1 and Baa2.

Another concern is how LIPA handles its storm recovery costs, considering it is still waiting for reimbursements from Hurricane Irene, which hit the New York area in August 2011. At least 75% of the storm costs should be reimbursed with federal aid, according to Moody's, but the timing of the reimbursement is "highly uncertain."

LIPA is still waiting for about $81 million of the approximately $116 million in aid requested for Irene from the federal government, the rating agency said. LIPA has about $440 million of cash on hand, according to Moody's, but it's near-term liquidity shouldn't be pressured since the agency is not expected to spend large sums of money right away, but rather over the course of several months.

Kathy Bramlage, director at Treasury Partners, a unit of financial-advisory firm HighTower Advisors, said her firm, which oversees around $10 billion in fixed-income assets, sold off all its exposure to LIPA after superstorm Sandy.

"We were concerned about a downgrade," as well as the future of the utility, in light of the executive changes recently, she said. "There's a lot of things that could happen. You could see the state come in and restructure LIPA... or maybe LIPA is essentially sold to another investor-owned utility."

Michael Pietronico, chief executive at Miller Tabak Asset Management, said his firm saw the LIPA debt underperformance as an opportunity. Miller Tabak, which oversees about $860 million in munis, has added to its LIPA exposure since the storm, adding debt from the utility that matures in 5 years or less, he said.

"It's an essential service," Mr. Pietronico said of LIPA. "They have a strong cash position," and there should be significant federal reimbursements for the utility's storm costs, he added.

"There are conditions in the muni market from time to time where people trade on emotions," and react to bad headlines, he said. "This is one of them."

-By Kelly Nolan; Dow Jones Newswires;

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Longest Winning Streak Since '05 Shows Tax-Rise Bet: Muni Credit

Friday, November 30, 2012
By Michele Kaske
of Bloomberg

Nov. 30 (Bloomberg) -- U.S. state and city debt is set to outpace Treasuries for the longest stretch since 2005 on bets that tax increases will be part of lawmakers' plans to shrink the nation's deficit.

The $3.7 trillion municipal market has rallied each week since the Nov. 6 re-election of President Barack Obama, who wants to make top earners pay higher taxes on ordinary income, capital gains and dividends. Helping fuel the gains, U.S. muni mutual funds added $1.1 billion in the week to Nov. 21, the most since August, Lipper US Fund Flows data show.

Investors are also set to receive about $21 billion next month from maturing local bonds, funds they will be looking to reinvest, according to Janney Montgomery Scott LLC in Philadelphia.

"There's a wall of cash out there right now that's waiting for debt to come to the market," said Michael Pietronico, who manages $860 million of munis as chief executive officer of Miller Tabak Asset Management in New York.

Obama has proposed raising the top federal tax rate on ordinary income to 39.6 percent from 35 percent. His administration is talking with congressional leaders about ways to avert more than $600 billion of spending cuts and tax increases set to start in January, in the so-called fiscal cliff.

47 Years

The surge in demand pushed muni yields to the lowest since 1965 last week, according to a Bond Buyer index. Munis have earned 1.7 percent this month, compared with 0.6 percent for Treasuries, Bank of America Merrill Lynch data show. Local debt has been the better bet each month since June, the longest span since February 2005.

Benchmark tax-free bonds due in 10 years yield 1.43 percent, the lowest since a Bloomberg Valuation index began in January 2009. The securities are on pace for a fifth straight week of gains, the longest since May. In comparison, Treasuries due in 2022 yielded 1.62 percent as of about 4 p.m. yesterday in New York.

The ratio of the two interest rates fell to 86 percent last week, the lowest in 17 months, a signal that AAA munis were getting expensive relative to federal debt.

Investors can still find yields higher than Treasuries on lower-rated munis.

More Room

Interest rates on 10-year munis rated A, Standard & Poor's sixth-highest grade, are about 165 percent of yields on their federal counterparts, data compiled by Bloomberg show.

"It's a pretty easy asset class to like on a relative basis," Christine Thompson, who helps oversee about $32 billion of tax-exempts as chief investment officer for bonds at Boston-based Fidelity Investments, said in an interview. "There is room for the muni market to continue to outperform equivalent-quality debt in the taxable market."

Investors hunting for a shelter from possible tax increases should be able to absorb a pickup in muni supply anticipated in the next few weeks, said David Frank, managing director of muni trading at CastleOak Securities LP, an investment bank in New York.

Local issuers such as the New Jersey Transportation Trust Fund, which finances roads and mass-transit projects, and the New York City Municipal Water Finance Authority plan to sell about $12 billion of long-term debt in the next 30 days, compared with a one-year average of $8.7 billion, Bloomberg data show.

‘Heavy Demand'

"They're talking about a lot of issuance through year-end, but we're going into a period of pretty heavy demand for munis," Frank said. "I don't think that rates are going to shoot up."

Investors will be looking to buy in December before issuance drops off in January. Supply has decreased in January from December in all but one year since 2003, Bloomberg data show.

"The idea is to put the money to work as soon as possible because when the new-issue supply dries up, and it will for a period of weeks, it's going to be a very difficult time to find bonds," Pietronico said.

The iShares S&P National AMT-Free Municipal Bond Fund, the largest exchange-traded fund tracking munis, rose yesterday to $113.84, the highest since February.

Following are pending municipal sales:

NEW YORK CITY plans to issue $850 million of tax-exempt general obligations as soon as Dec. 11, according to the city's Office of Management and Budget. Proceeds will refund debt. (Added Nov. 30)

ALABAMA FEDERAL AID HIGHWAY FINANCE AUTHORITY is set to borrow $337 million of federal highway grant-anticipation bonds as soon as next week, data compiled by Bloomberg show. Proceeds will help finance roads and bridges, according to bond documents. (Added Nov. 30)

--With assistance from Richard Rubin in Washington.

--Editors: Mark Tannenbaum, Pete Young

To contact the reporter on this story:
Michelle Kaske in New York at +1-212-617-2626 or

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

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New Jersey Readies Postponed $2.6B Deal

Wednesday, November 14, 2012
By Tonya Chin

Nov. 14 (Bond Buyer) -- After a two-week delay due to Hurricane Sandy, New Jersey is planning to sell its $2.6 billion of tax and revenue anticipation notes on Thursday in a negotiated sale, instead of the planned competitive offering.

New Jersey originally planned to auction the notes on Oct. 30, but after it became clear that Sandy would hit, the state postponed the sale and selected JPMorgan to be the deal's sole manager.

The investment bank said it would reach out to investors who understand that the state is a strong credit that has never failed to meet its debt obligations.

"We have more than 30,000 employees and 10 million customers in the tri-State area. This storm hit home for all of us," said Matt Zames, co-chief operating officer of JPMorgan Chase. "JP Morgan wants to be part of the rebuilding process that restores New Jersey's communities and the Jersey Shore. We think investors will want to be there, too."

Michael Pietronico, chief executive officer and senior portfolio manager at Miller Tabak Asset Management, also thinks demand will be there, even after the state has incurred storm costs. "We suspect any yield penalty will be small given the substantial amount of federal aid that is on its way to the Garden State," he said.

The Federal Emergency Management Agency has agreed to an increased reimbursement level at 100% for energy restoration and transportation repair costs from the initial 10-day period of the storm and its aftermath.

"Tourism will suffer with the shore being terribly impacted but the other side of the equation is that rebuilding of the boardwalks and homes will create many new construction jobs for the state," Pietronico said.

Gov. Chris Christie has said the state will benefit from federal aid and help from private insurance companies.

"I think we'll be okay from a budgetary perspective, but if it turns out that there are monies that need to be incurred, I'm going to incur them, and we'll make budget cuts elsewhere to be able to pay for them," Christie said last week.

Richard Larkin, senior vice president and director of credit analysis at Herbert J. Sims & Co., said that financial stress from the storm would not significantly affect New Jersey's credit.

"In the case of the larger entities in the region, I am confident in the belief that credit stress will be temporary, and will not jeopardize repayment of their bonds," he said.

"Until these issuers can access FEMA funds and insurance proceeds, they all have the resources to withstand temporary service disruptions until normalcy can be reached, and while debt loads may rise because of the storm damage, financial operations should remain sound."

Since cost estimates have not been made, credit rating agencies have not assessed the full effect the storm will have on New Jersey's AA-minus credit rating, though they have said it could be pressured.

"Impacts to the state could range from increased short-term expenditures and delays in revenue collections to increased revenue flows to the state from insurance and FEMA proceeds and reconstruction efforts," Standard & Poor's said.

"The state has not modified its cash flows to reflect the impact of Superstorm Sandy, which adds an additional level of risk to the projected cash flows."

Fitch Ratings noted the uncertainty of how the state will cover its expenses given its narrow cash balances prior to receiving FEMA reimbursements, adding that additional cash flow borrowing is possible.

All three credit ratings assigned New Jersey's new notes the second highest short-term credit ratings, citing declining liquidity and optimistic revenue projections.

The ratings - MIG 2 from Moody's Investors Service, SP-1 from Standard & Poor's, and F1 from Fitch - have been lowered from the highest short-term ratings assigned to the state's last Trans sale in Dec. 2011.

"The rating captures the potential for modest reductions in the state's projected ending balance or need for issuance of notes on parity with the current issue," Moody's analysts said.

The agency also cited a strong short-term credit quality based on cash management procedures and New Jersey's history of successful annual cash-flow borrowings.

The state usually issues Trans every year to manage cash flow needs, and in the past has generally done two each year - the first one in July or August after the budget gets passed, and the second towards the end of the year.

In the past two years, however, the state has opted to take out a line of credit in lieu of the first Trans sale.

Proceeds from Thursday's notes sale will pay off a $2.1 billion credit line the state took out earlier this year with Bank of America Merrill Lynch. The remaining $500 million will be used for any cash flow issues going forward this year.

"One of the reasons we've done a line of credit, instead of doing an early Tran sale, is that interest rates on a line of credit are exceedingly favorable now," said Andy Pratt, a spokesman for the N.J. Department of Treasury.

He said that last year, New Jersey paid a .58% interest rate on a line of credit, and a 2.8% interest rate on its Trans.

"We've paid more than $55 million in interest on debt in previous administrations for Trans borrowings. Last year's cost less than $5 million," Pratt said.

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Sustained Demand Pushes Most Muni Bond Indexes Lower

Friday, September 28, 2012
By James Ramage

Sept. 28 (Bond Buyer) -- Strong reception to new issues on Monday and Tuesday and secondary activity on Thursday propelled the municipal market to a week of falling yields at the intermediate and long ends of the curve.

Healthy appetite to a massive California deal for $1.78 billion of general obligation bonds started the week off on a strong note.

A midweek holiday halted momentum somewhat, but vigorous dealers-to-dealer trading and interest in the aforementioned Cal GOs in the secondary kick-started the market on Thursday.

True to form, muni bond indexes tracking all but the short end of the yield curve also fell, reflecting the fall in rates there. The 20-bond index of 20-year GO yields dropped five basis points this week to 3.67%, the lowest level for the index since Aug. 2, when it was 3.66%.

The 11-bond index of higher-grade 20-year GO yields also fell five basis points this week to 3.46%. That is its lowest level since Aug. 2, when it was 3.45%.

The yield on the U.S. Treasury's 10-year note declined 14 basis points this week to 1.64%. That is its lowest level since Aug. 30, when it was 1.63%.

The yield on the Treasury's 30-year bond also dropped 14 basis points this week to 2.82%, which is its lowest level since Sept. 6, when it was 2.80%.

Light issuance over much of the month coupled with sustained demand has driven prices higher. "Supply has been disappointing," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

"On the upside, from that perspective, investors got caught perhaps with more cash then they wanted. Our expectation here is that October is probably going to be a nice opportunity to put cash to work if the calendar picks up," he added.

Treasury yields, boosted by relatively soft economic numbers, had a strong week. They both outperformed and towed along muni yields.

"We're trending with Treasuries," Pietronico said. "As far as the underperformance, it's really not that unusual, given where rates are, and the fact that munis generally underperform when the market rallies."

Yields from the belly of the curve on out followed those of Treasuries on the week since last Friday, Municipal Market Data numbers showed.

The benchmark triple-A muni yield fell eight basis points over the period to 1.71%.

The 30-year yield dropped seven basis points to 2.88%. The two-year yield ticked up one basis point to 0.30%.

Muni underperformance strengthened ratios to Treasuries, leaving them in richer territory above 100% across the curve.

The Bond Buyer's one-year note index, which is based on one-year GO note yields, increased one basis point this week to 0.23%, but remained below its 0.24% level from two weeks ago.

The Bond Buyer's revenue bond index, which measures 30-year revenue bond yields, declined six basis points this week, to 4.31%, its second consecutive all-time low. The Bond Buyer began calculating the revenue index on Sept. 20, 1979.

The weekly average yield to maturity of The Bond Buyer municipal bond index, which is based on 40 long-term bond prices, declined five basis points this week to an all-time low of 4.21% for the week ending Thursday.

The previous record low was 4.22%, set during the week ended Aug. 30. The Bond Buyer began calculating the yield to maturity on Jan. 1, 1985.

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Suffolk County Water Authority to Sell $80M

Thursday, September 27, 2012
By Tonya Chin

Sept. 27 (Bond Buyer) -- The Suffolk County Water Authority, which provides water service to the majority of eastern Long Island, is scheduled to sell $80 million of triple-A rated revenue bonds in a competitive offering Thursday.

Proceeds will retire the authority's outstanding variable-rate bond anticipation notes, Series 2008, and finance improvements to the water system.

The bonds, which will mature in 2038, are payable solely from the authority's net revenues and are not a debt of Suffolk County.

"We think that demand for this particular issue will be solid," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "It's obviously an essential purpose - water and sewer - and the service area is fairly large."

Pietronico said that, given the market supply right now, which is light in New York State, Suffolk County's financial troubles will probably not affect demand for the authority's bonds.

Though Suffolk County declared a state of fiscal emergency in March, the Water Authority operates independently and its bonds were affirmed at AA-plus by Standard & Poor's and AAA by Fitch Ratings.

"This is not a Water Authority name that you see quite often in the secondary market, so just based on those dynamics, the deal should do very well," Pietronico said.

The agency last sold revenue bonds in January this year at a true-interest cost of 2.6898%. The $84 million of bonds had maturities from 2019 through 2026.

Fitch cited positive operating results, rate-setting flexibility, and limited future borrowing needs supporting the gilt-edge rating.

Standard & Poor's had a slightly different view of the authority's borrowing needs.

"In our view, the authority's need to raise rates to maintain debt-service coverage near current levels due to increasing debt service requirements and likely continued debt issuance to fund capital needs partially offsets the credit strengths," its analysts said in a report.

Both agencies assigned stable outlooks.

The authority, founded in 1951, is an independent public-benefit corporation that operates without taxing power and on a nonprofit basis.

In Suffolk County's recently proposed $2.77 billion budget for 2013, County Executive Steve Bellone said the county is currently exploring options for sewer district operations to enhance the capital expansion of the sewer systems.

This could include a "collaborative relationship" with the Water Authority for sewer district operations.

"I will be working closely with the Legislature on this issue - any proposal, sale, or memorandum of understanding related to a change in sewer operations will have a full public vetting and will require legislative authorization," Bellone said.

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Suffolk Fails to Score as Home of Hamptons Pays Up: Muni Credit

Wednesday, September 19, 2012
By Brian Chappatta
of Bloomberg

Sept. 19 (Bloomberg) -- New York's Suffolk County, home of the Hamptons beach towns, is paying twice as big a penalty to borrow than it did a year ago, even after budget analysts cut its projected deficit in half.

The 86-mile (138-kilometer) stretch of eastern Long Island, where billionaires George Soros and John Paulson own estates, may face a $179 million gap through next year, according to the county Budget Review Office. The August forecast, which includes a planned nursing-home sale and expected savings on employee health care, is down from a $400 million shortfall in March.

Investors may be dubious about the deficit reduction because it relies on one-shot revenue and optimistic sales-tax projections, said Howard Cure, director of municipal research at New York-based Evercore Wealth Management LLC, which oversees about $3.5 billion, including Suffolk bonds.

"They have accomplished some gains in their budget as far as trying to get control over their overtime, lay off people, and increase revenue, but they still have a way to go," Cure said in a telephone interview.

County Executive Steve Bellone, a 43-year-old Democrat, declared a fiscal emergency in March after Suffolk's spending plan ended out of balance for the first time in two decades. The worst recession since the 1930s diminished its property- and sales-tax revenue. That has increased borrowing costs and forced officials to cut services and payrolls in the 16th-wealthiest U.S. county.

December Downgrade

Suffolk sold $105 million in tax-anticipation notes this month. The one-year debt was priced to yield 0.6 percent, or 0.41 percentage point more than top-rated debt with the same maturity, according to data compiled by Bloomberg.

That was more than double the 0.15 percentage-point premium the county paid in September 2011 on the biggest portion of its $120 million note sale, Bloomberg data show. Three months after that sale, Moody's Investors Service downgraded the county's tax-anticipation notes one level to MIG 2, the second-highest short-term rating, citing Suffolk's "narrowed cash position, with the potential for further financial weakness."

The Budget Review Office presented its shortfall projections to Suffolk's Budget and Finance Committee on Aug. 14, according to Gail Vizzini, the agency's director.

More Leery

The office forecast a $232.7 million budget gap, with the potential for it to be reduced to $179 million. The lower figure includes adjustments under consideration such as a property-tax increase, savings on employee health care and the sale of the John J. Foley Skilled Nursing Facility, which was approved by the legislature on Sept. 13.

"Analysts are now more leery of one-time fixes because there's not as much confidence about the economy coming back," Cure said. Suffolk, "for a good part of its revenue, depends on sales taxes, which have fluctuated," he said.

Sales levies provided about 44 percent of Suffolk's $2.8 billion budget for 2012, Vanessa Baird-Streeter, a spokeswoman for Bellone, said in June. The full valuation of taxable real property in the county has declined by about $50 billion since 2008, when the financial crisis began, according to offering documents for this month's sale.

No Rating

Suffolk usually has two large cash borrowings a year, according to Richard Tortora, president of Great Neck-based Capital Markets Advisors LLC, which works with the county. For this month's sale, the county chose not to seek a Moody's rating, he said. Suffolk plans to sell $400 million in tax-anticipation notes in December, he said.

The 0.6 percent interest rate on this month's sale compares with 1.29 percent on a seven-month deal in December, when Moody's lowered its rating. That means buyers still expect the county to meet its debt-service obligations, said Michael Pietronico, who oversees $800 million of munis as chief executive officer of Miller Tabak Asset Management in New York. Suffolk has the fifth-highest long-term bond rating from Moody's, Standard & Poor's and Fitch Ratings.

"While that is certainly punitive relative to other issuers, overall it's not an indication the market is concerned about repayment," Pietronico said. "The overall G.O. credit is still an acceptable credit to buy for a conservative investor."

In the broader tax-exempt market, yields on benchmark 10- and 30-year munis declined yesterday. The interest rate on 10-year securities fell about 0.01 percentage point to 1.78 percent, Bloomberg data show.

The one-year notes that Suffolk sold this month traded Sept. 14 at an average yield of 0.4 percent, down from the original 0.6 percent rate, data compiled by Bloomberg show.

That's still more than double the yield on top-rated munis maturing in a year, the data show.

Suffolk "is certainly problematic in the near-term," Pietronico said. Still, "their recognition of those issues is the beginning of correcting the financial ills that plagued the county."

Following are pending sales:

PORT AUTHORITY OF NEW YORK & NEW JERSEY, which finances reconstruction of the World Trade Center site, plans to sell $2 billion of taxable revenue bonds as soon as next week, with maturities as long as 50 years, according to a preliminary notice of the sale. (Updated Sept. 19)

MASSACHUSETTS plans to issue $400 million of general-obligation bonds via competitive sale as soon as Sept. 25, according to data compiled by Bloomberg. The debt will finance capital projects in the commonwealth. (Added Sept. 19)

--Editors: Mark Schoifet, Justin Blum

To contact the reporter on this story:
Brian Chappatta in New York at +1-212-617-0698 or

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

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After Fiscal Emergency, N.Y.'s Suffolk County Pays Higher Rates

Wednesday, September 12, 2012
By Mike Cherney
Dow Jones Newswires

Suffolk County, N.Y., which declared a fiscal emergency in March, paid higher rates on a $105 million note sale Wednesday as investors sought compensation for the county's shakier finances.

The one-year notes from Wednesday's deal, which carry the county's general obligation pledge and are backed by its taxing authority, are sold every year for cash-flow needs in anticipation of collecting delinquent property taxes. The deal was priced to yield 0.60% for investors, but including underwriting costs, the county's net interest on the sale is about 0.72%. Last year, the Long Island county got a net interest rate of 0.38% on a $120 million note sale, a record low.

Last year's notes were sold before County Executive Steve Bellone declared a fiscal emergency in the wake of a financial task force that found the county faced a $530 million budget deficit over a three-year period. "That has a way of getting investors' attention," said Howard Cure, director of municipal research at Evercore Wealth Management.

Rating agencies have since downgraded the county. Standard & Poor's lowered its rating to A-plus from double-A, Moody's lowered it to A1 from Aa2 and Fitch lowered it to A-plus from double-A-minus. Wednesday's deal carried the second-highest short-term ratings from Fitch and S&P, but that's one notch below what Fitch rated last year's sale. S&P did not previously provide a rating.

The fiscal troubles in Suffolk County come as its western neighbor, Nassau County, deals with issues of its own. Nassau County has been subject to an oversight board created by the state legislature in 2000. Last year, financial worries spurred the board to impose a control period that increases its power.

In June, Nassau County sold a 10-and-a-half month note with a yield of 0.85%.

Fitch blamed Suffolk County's financial woes in part on its overestimating of sales tax revenue. But officials say they are working on a plan to address their deficit. Measures in phase one and phase two of their budget mitigation plan will reduce the projected deficit to $202 million. The proposed 2013 budget, to be released later this month, will address the remaining deficit.

Among the measures taken so far is the establishment of a traffic violations bureau and a ticket surcharge on moving violations, which will go into effect next year, as well as adding intersections to its red-light camera program. Through layoffs and attrition, the county has cut staff by more than 600, and is seeking to sell a nursing facility to a private operator, according to a bond prospectus.

Still, Suffolk County earlier in the year issued an $85 million revenue anticipation note for the first time in more than two decades, Fitch said. The borrowing "is in response to a worsening liquidity position attributable to a prolonged period of fiscal imbalance," S&P added. Wednesday's sale was supposed to be $90 million, but was increased to $105 million to "pay accrued vacation and lagged payroll to employees electing early retirement during the summer," S&P said.

Investors said although Suffolk County has made progress since the emergency declaration, more work needs to be done. Asset manager BlackRock, for example, has said it sold off Suffolk County general-obligation bonds from its high-quality accounts prior to March. Joseph Pangallozzi, a credit analyst and managing director at BlackRock, said Wednesday he'd want to see "more evidence that they're taking action to close the gap before we add back to the high-quality accounts."

Michael Pietronico, chief executive of Miller Tabak Asset Management, said he skipped the note sale because the yield was too low. But he said he is comfortable with the credit overall, and that some clients hold the county's general-obligation bonds in their accounts.

"They are making a move in the right direction in terms of getting their finances in order," he said. "In a lot of ways, once a municipality recognizes that there's an issue, that is usually the beginning of the healing process in terms of fiscal stability."

-By Mike Cherney; Dow Jones Newswires;

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Cuomo Turning Table on Christie as N.Y. Beats N.J.: Muni Credit

Tuesday, September 11, 2012
By Michelle Kaske and Terrence Dopp
of Bloomberg

Sept. 11 (Bloomberg) -- New York and its municipalities have achieved lower 10-year borrowing costs than their New Jersey counterparts since Governor Andrew Cuomo took office, reversing a trend that stretched back to 1994.

Since Cuomo, a 54-year-old Democrat, took his post at the start of 2011, 10-year debt sold by New York and its localities has yielded less on average than bonds issued in Republican Governor Chris Christie's New Jersey, data compiled by Bloomberg show. From 1994 through 2010, New York had the higher interest-rate penalty.

While the three major credit-rating companies last year downgraded New Jersey one level, citing reasons including its unfunded pension liability, New York is poised for its highest credit grade in four decades. Standard & Poor's last month revised its outlook on the Empire State to positive from stable after two consecutive on-time budgets.

"I have a bit more concern about New Jersey only because of their pension funding," said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG's private-wealth unit in New York. "New York pension funds are very highly funded."

Pension Gap

Both governors have made changes to retirement benefits, capped property taxes and cut spending. Yet New Jersey had about 68 percent of assets to pay future retirement costs as of June 30, 2011, according to state data. New York's system was 90 percent funded at the end of fiscal 2011, according to the office of state Comptroller Thomas DiNapoli.

Localities in both states are borrowing at levels close to record lows. Still, since Jan. 1, 2011, yields on 10-year debt sold in New York are 0.014 percentage point below New Jersey bonds of similar maturity on average, Bloomberg data show.

That's a reversal from the 16 years through 2010, when 10-year New York securities yielded 0.13 percentage point more on average than New Jersey's, according to Bloomberg index data starting in 1994. In five-year debt, New Jersey issuers have paid more extra yield than New York borrowers on average since the start of 2010.

Longer-term bonds tell a different story in recent months. Interest rates on 30-year debt sold in the Garden State have been below New York bonds with a similar maturity since May 1, Bloomberg data show. It's the first time that's happened since August 2009. For 20-year maturities, New Jersey's costs have been below New York's for most of the past year.

'Simply Inaccurate'

"Any suggestion that New York's overall borrowing costs are trending lower than New Jersey's is simply inaccurate," Andy Pratt, a spokesman for New Jersey Treasurer Andrew Sidamon-Eristoff, said in an e-mail. "In fact, based on Bloomberg data, the trend is exactly the opposite for 20-year and 30-year debt, especially since the passage of New Jersey's latest budget."

Christie, 50, who took office a year before Cuomo, on June 30 signed a $31.7 billion budget for fiscal 2013 after vetoing $361 million in Democratic spending initiatives. His plan included $8.87 billion of aid for public schools, a $1.03 billion pension payment and $347 million in business-tax cuts.

S&P cut New Jersey's rating in February 2011 by one grade to AA-, its fourth-highest level, citing the state's "poorly funded pension system."

On-Time Budgets

New York is rated AA, one step higher. Two more years of balanced budgets may earn it a one-step increase to AA+, S&P said last month. That would be the highest mark since the state was cut to AA from AAA in 1972.

"The governor has emphasized keeping spending growth under control and eliminating fiscal gimmicks," Morris Peters, a spokesman for New York's budget division, said in an e-mail.

Under Cuomo, lawmakers approved the first consecutive on-time budgets since 2006. New Jersey's constitution doesn't allow it to spend money without a budget in place by the July 1 start of the fiscal year. Failure to meet that deadline can result in the closing of some government operations. The last time that happened was in 2006 under Democratic Governor Jon Corzine.

For some investors, the higher New Jersey yields have an appeal as the debt crisis in Europe has pushed interest rates in the $3.7 trillion muni market to their lowest level in 45 years.

New Jersey 'Upside'

"You don't quite get those opportunities to buy the extra yield in New York these days," said Michael Pietronico, who oversees $790 million of munis as chief executive officer of Miller Tabak Asset Management in New York. "There is some upside in New Jersey paper relative to New York."

New Jersey debt is also delivering a better total return.

The state's bonds have earned 6.8 percent this year, compared with 5.4 percent for New York, according to S&P data. New Jersey returns are set to outpace New York's for the second straight year, the longest stretch since 2006.

Both states have jobless rates that exceed the national average of 8.1 percent in August. New York's rate was 9.1 percent in July, compared with 9.8 percent for New Jersey.

From the start of July 2009 through March 2012, New York ranked 17th among the 50 states and the District of Columbia in economic health, according to data compiled by Bloomberg. New Jersey was 41st, according to the Bloomberg Economic Evaluation of States. The gauge is based on the performance of local-company shares, tax collections, mortgage delinquencies, job growth and personal income.

Direction Measurement

The index is intended to indicate the direction of each economy, rather than absolute health, so a state that's quickly rebounding will have a higher rank than one with a steady but slower pace of growth.

For new workers, Cuomo boosted the state's retirement age to 63 from 62 and created 401(k)-style retirement accounts for some non-unionized employees. Christie since taking office has raised the minimum age for workers to leave with full benefits and required them to pay more for retirement and health benefits in a package designed to save $120 billion over 30 years.

Christie in July 2010 imposed a 2 percent cap on real-estate tax increases, cutting in half the maximum allowable increase and limiting exemptions. Cuomo also limited the boosts to 2 percent, and both states included a provision allowing voters in a community to exceed the threshold.

In the muni market yesterday, yields on top-rated tax-exempts due in 10 years were little changed at about 1.75 percent, Bloomberg Valuation data show. The record low was 1.63 percent in July.

Following are pending sales:

OMAHA PUBLIC POWER DISTRICT in Nebraska plans to sell $550 million of tax-exempt bonds as soon as next week to refinance debt, data compiled by Bloomberg show. (Added Sept. 11)

SUFFOLK COUNTY, New York, home to Long Island's Hamptons beach communities, plans to issue $105 million in tax-anticipation notes as soon as tomorrow, data compiled by Bloomberg show. (Updated Sept. 11)

--Editors: Mark Tannenbaum, Pete Young

To contact the reporters on this story:
Michelle Kaske in New York at +1-212-617-2626 or
Terrence Dopp in Trenton at +1-609-278-3175 or

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

Top Of Page 

Recent Rise in Yields Stirs Retail

Tuesday, August 21, 2012
By Christine Albano

Is this the buying opportunity retail has been waiting for?

Encouraged by the recent uptick in municipal bond yields, retail investors are getting more active, searching for new bonds and looking to reinvest any remaining rollover proceeds. While some are coming up empty-handed due to the summer supply slump and relatively low absolute yields, it's certainly not for lack of trying, municipal experts said.

Mom and pop investors are looking to spend cash — either on plain-vanilla paper in the high-quality market, or exploring yield-ier opportunities by extending their duration or sacrificing quality — but are finding it challenging.

"We are seeing our investors trying to be as active as they can in the primary and secondary markets," said Tom Kozlik, director and municipal credit analyst at Janney Montgomery Scott. "They have been operating at a high pace of activity because there is a strong relative-value argument to be made for municipals."

For instance, on Aug. 20, the 10-year triple-A municipal bond was yielding 103.3% of the 10-year Treasury yield, while the 30-year municipal was yielding 102.7% of its taxable counterpart, according to Municipal Market Data.

But, Kozlik said, "the low-rate environment and lack of supply remain barriers on a trade-bytrade basis."

Despite the mammoth short-term deals that have priced recently, including $10 billion of California revenue anticipation notes, the long-term market has faced a typical seasonal lull.

Rick Calhoun, first vice president of retail sales at Crews & Associates, agreed that retail investors continue to be active yet selective, but that finding value is tough due to the relatively low rates and supply.

However, lately, the recent weakness is stimulating retail demand and helping investors implement a mixed range of strategies — when and if supply is available, professionals noted.

Yields started backing up from their recent lows about three weeks ago. On Aug. 20, the 30-year triple-A yield curve ended at 3.01% for the third consecutive session. That was up six basis points from the previous week when the 30-year ended at a 2.95% on Aug. 14, which was up three basis points from the previous session. Overall, the 30-year muni has increased 22 basis points in the past three weeks on the heels of a strong rally in July.

"We have seen over the past few trading sessions some higher yields related to a better economic outlook, so that in itself could create additional volatility," said Peter Hayes, managing director at BlackRock Inc. "However, yields have fallen very far this summer, so any backup would ultimately be healthy and create value for investors."

At Miller Tabak Asset Management, retail investors are being driven to reallocate money to municipals as opportunities arise — but they are staying relatively conservative, said chief executive officer Michael Pietronico.

"High-net-worth clients have shown increased interest of late as yields have ticked higher," he said. In addition, investors have been interested in putting available cash back to work in tax-exempt munis in anticipation of higher taxes.

"The overall backdrop of the search for income has added an additional element to demand," Hayes agreed. He said retail investors over the last two months have lived up to their reputation of being dominant buyers of municipal securities. "This summer, it seems as if this has been even more apparent," he said.

But experts said not all retail buyers are reaching for individual bonds. Many investors prefer to leave the decision-making, portfolio analysis and risk management to the professionals.

"Retail demand for direct purchases seemed to have gone on strike after the last run-up, which was a bit too far, too fast," said Peter Delahunt, national institutional sales manager at Raymond James & Associates Inc.

Delahunt and Hayes said retail investors opted to pour money into municipal mutual funds.

"Flows into open-end municipal mutual funds have exceeded [$1 billion] per week, according to [the Investment Company Institute], for the last several weeks, as more investors turn to managed solutions rather than buying individual bonds," Hayes said.

"The evidence in terms of strong mutual fund inflows tends to support the notion that they are putting the money to work," he said. "Income is important to many of these investors, and with cash paying near zero interest, the need for income drives the decision to reinvest quickly."

The professionally managed alternative to owning individual bonds, Hayes said, helps allay retail investors' concerns over finding bonds, understanding credit and replacing called bonds, especially on the heels of the year's massive refunding volume.

Overall, he has observed a trend toward income generation, "either through longer duration, as evidenced by flows into long-term and intermediate bond funds, as well as by migrating down the credit curve, as can be seen from strong flows each week into high yield municipal funds."

Calhoun of Crews & Associates said while most of the firm's retail clients are sticking with investment-grade securities, some are venturing beyond the norm.

"We have seen a shift toward larger coupons," he said. "As one trader put it, '110 is now the new par.' Customers are also moving out longer on the curve for more income and some investors have lowered their rating standards in order to pick up a little more income."

At Janney Montgomery, Kozlik said retail investors are active across the board — and are also willing to take a little risk for reward.

"A limited number of retail investors are mindful of the direction of interest rates and want to keep their money in short maturities, but the low yields in those spots make it difficult," he said.

As a result, some investors are moving out on the credit curve for yield, when and if it's appropriate for their investment strategy, he said.

"Sometimes this means that investors who were in high-grade GOs move out to capture additional yield with high-quality revenue bonds," Kozlik said. "And sometimes when they move further out on the credit curve, it means investors look at a high-yielding sector, such as health care."

Meanwhile, back at Miller Tabak, Pietronico said new money from clients of late "might reflect a more conservative bias by investors."

"From our perspective, clients are more concerned about preservation of capital, and as such they are not reaching down the credit curve for yield," he said.

"Sophisticated investors understand that 4% coupons represent value in this market, as the extra spread these bonds offer is a compelling value, considering the Federal Reserve is quite far from raising rates," Pietronico added.

Experts said retail participation could hinge on how the market reacts to any volatility unfolding in the fourth quarter.

"The election will create some noise as speculation grows over who will control Washington and what agendas may ultimately get pushed through in 2013," Hayes said, referring to the upcoming presidential election.

"An entire new set of potential concerns are on the horizon with the near-term fiscal performance of the U.S. economy, the potential effect of Europe, the November elections and the fiscal cliff all barreling down on investors pretty fast," he said.

Potential tax reform and lower federal spending are also on the list, he added.

Calhoun agreed. "The presidential election is on everyone's mind because of how a change in leadership could impact U.S. fiscal policy," he said.

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New York State Helps Northeast Volume Surge in First Half

Friday, August 17, 2012
By Tonya Chin

Municipal bond issuance increased in every Northeast state and commonwealth in the first half of 2012, with regional volume up 63% from the same period last year.

Issuers sold a total of $59.3 billion of debt this year through June, compared to $36.4 billion for the same period last year, according to Thomson Reuters.

As usual, New York issuers led the Northeast, accounting for about 43% of total issuance in the region. With $25 billion of debt, the Empire State not only leads the region, but its issuers have also sold more debt than any other state in the nation, including California, where they issued $22.3 billion.

Before 2011, when New York took the number one spot, California had been the nation's leading debt issuer.

"Generally speaking, the top four states have usually been where the population is the greatest. So you're going to see California, New York, Illinois and Texas go back in forth in terms of which one is issuing the most debt and that obviously has to do with the population and infrastructure needs," said Michael Pietronico, who manages about $770 million of municipal bonds as chief executive officer at Miller Tabak Asset Management.

The reason for New York taking the lead could be attributed, simply, to timing, he said.

For example, New York may have greater infrastructure needs right now, compared to what's going on in other states.

"New York's economy is doing reasonably well and their needs have always been substantial. I would imagine that at some point, California is going to overtake them strongly," Pietronico added.

The amount of debt issued in New York increased by 73% from the first half of 2011, outpacing the broader market, which saw a total increase of 65%.

New York Comptroller Thomas DiNapoli views the state's top position with concern.

"The state is uncomfortably close to the statutory debt limit, partly because of excessive use of debt in past years and partly because of current economic conditions," said Eric Sumberg, a spokesperson for the Comptroller's Office.

Many of New York's top issuers are state agencies, which account for almost half of the state's debt. State agencies have sold around $12.3 billion of bonds for the first half of the year, according to Thomson — a 119% increase.

With record low interest rates, the increase in volume has been largely boosted by refundings. Nationwide, refundings have increased 145% since last year. New York issuers have outpaced that amount with a 151% increase.

This is likely because New York has some of the most advanced issuers and they are taking advantage of market conditions more so than other states, said Chris Ryon, manager of municipal bond portfolios at Thornburg Investment Management.

"New York issuers are typically some of the most sophisticated issuers in the market," Ryon said. "We are at historic lows of interest rates, so a great deal of the issuance you're seeing coming out of New York is termed, refunding deals."

In the region as a whole, refundings totaled $24.6 billion, up 142% from last year.

June Matte, a Boston-based managing director at Public Financial Management Inc., said that refundings, while significant, are not the only activity.

"We're seeing — particularly at the local level — folks layering some new money as they're going to market. So it's both new money and refundings that are sustaining the market," Matte said.

New-money issuance in the Northeast totaled $24 billion, up 21.8% from last year. Combined new money and refunding totaled $10.8 billion.

PFM, credited with 184 issues that total $11.2 billion, was the top financial advisor in the Northeast in the first half.

"We're very proud of that and happy for those results," said James Haddon, managing director at PFM in New York. "It's definitely a total team effort from our PFM colleagues around the country."

The Government Development Bank for Puerto Rico, which acts as financial advisor for Puerto Rico and its issuers, was ranked second, with 10 issues totaling $7.6 billion. Lamont Financial Services Corp. was the third top financial advisor with 32 issues, totaling $5.9 billion.

In New York, specifically, PFM has worked on 16 issues, totaling $4.5 billion so far this year, ranking it second in the state behind Lamont.

"We have continued to grow as our clients in the Northeast market — particularly New York City and Nassau County — have all come to the market to take advantage of these low interest rates as well as to borrow to support their annual capital spending," Haddon said.

In New York City, PFM is financial advisor for the Transitional Finance Authority, which has come to the market with five issues this year, totaling $1.9 billion.

PFM has also been financial advisor for the region's top issuer, the Dormitory Authority of the State of New York, which has sold $3.9 billion in 22 issues. DASNY is also the top issuer in the nation.

"We have a lot of activity because our platform is so inclusive," said DASNY's president and chief executive officer, Paul Williams.

The agency is a primary vehicle for New York, its public entities and private not-for-profits in health care and higher education to access capital for major projects at the lowest possible cost.

"All of those dollars that we issue — whether they're for the state or for private not-for-profit borrowers — are going into projects that are then employing workers to build those projects, and ultimately people to fill those buildings up," Williams said. "We feel very much a part of New York State's economic development platform."

DASNY issued the second-largest individual deal in the region with $1.8 billion of personal income tax refunding bonds in June.

Proceeds from the bonds were used to refund various series of New York State-supported debt, including bonds for the Metropolitan Transportation Authority, the Empire State Development Corp. and state universities.

Even taking into account the volume of refundings this year, DASNY's issuance has been pretty consistent with past years, Williams said.

"Generally speaking, our volume is split roughly in half — for state-related issuance and the private, not-for-profit issuance," he said.

Since 2008, when Williams started working at DASNY, issuance has typically been between $5 billion and $7 billion a year.

Other top issuers in the region were New York City with $3.3 billion, the MTA with $2.8 billion and Puerto Rico with $2.7 billion.

Puerto Rico had the largest deal in the Northeast, a $2.3 billion general obligation refunding in March, which was the nation's second-biggest deal of the first half.

The deal would not have earned its number-one spot if it hadn't been upsized from the expected $1.5 billion, due to high demand. Puerto Rico's bonds are typically attractive to investors due to their high yields and triple tax-exemption.

The commonwealth's ratings are lower than any state with Baa1, BBB and BBB-plus ratings from Moody's Investors Service, Standard & Poor's and Fitch Ratings, respectively.

The sectors that saw the most debt issuance in the region were general purpose, with $21.3 billion, and education, with $11.2 billion.

"There are more heavy repairs and rebuilding that need to be done," said John Hallacy, head of municipal research at Bank of America Merrill Lynch. "Tearing down existing substandard infrastructure and rebuilding the new is a very great focus."

Hallacy also noted a shift in structure that began last year.

"It's mostly fixed-rate," he said. "There is some experimentation going on with floating-rate notes, but the vast majority of issuance has come as fixed rate."

About 93% of the region's total issuance consisted of fixed-rate bonds. The issuance of long-term variable rate bonds decreased by 88% since last year to a mere $37 million.

B of A Merrill was the top underwriter for the region by volume, credited with $11.4 billion in 63 issues.

JPMorgan took second place, with just over $6 billion, and Citi took third, at a hair under $6 billion.

Hawkins Delafield & Wood LLP topped the bond counsel table, with $9 billion in 116 issues. Sidley Austin LLP worked on 20 issues totaling $5.8 billion, and Nixon Peabody LLP worked on 30, totaling $5.7 billion.

Bond volume was up throughout the Northeast.

"In New England, in some ways, the region was not hurt as much as others in the recession, so we're starting to see communities beginning to come back to the market in a more robust way," Matte said.

Vermont saw the greatest increase in volume in the region, as well as the nation — up a whopping 766% from last year's $47.3 million.

Pennsylvania saw the region's third-largest bond volume behind New York and Puerto Rico, with $6.4 billion.

New Jersey issuers sold more than $5.2 billion of debt.

Massachusetts saw the lowest volume increase in the Northeast; Its $5.2 billion first-half volume was a modest 7.9% increase from last year's.

Its largest deal was $766 million of sales tax refunding bonds for the Massachusetts School Building Authority.

Connecticut issuers sold $3.1 billion of municipal bonds.

Matte said that the level of activity right now versus what it was last year is hugely different.

"Whether it's being fueled by refundings or fueled by the fact that communities in this area are beginning to recover, it's hard to say, but there is definitely a feeling that the second half of the year is going to be very busy," she said.

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Munis Holding Steady, Mirroring Treasurys

Wednesday, August 8, 2012
By Kelly Nolan
Dow Jones Newswires

11:16 EDT - The muni market is "flatlining," says Miller Tabak's Michael Pietronico, with prices unchanged, mirroring the Treasury market. Thomson Reuters Municipal Market Data notes an institutional pricing is out for the New York City Transitional Finance Authority's $850M deal, with yields coming at more-attractive levels than the retail order period on Monday and Tuesday. Other deals in the market include a $721M offering for Chicago's O'Hare Airport and a $225M Metropolitan St. Louis Sewer District issue.

-By Kelly Nolan; Dow Jones Newswires; 615-679-9299;

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N.Y.C. Agency Sells $1.2B in Week's Largest Deal

Monday, August 6, 2012
By Tonya Chin

Aug. 6 (Bond Buyer) -- The second largest deal out of New York this year is expected to come to market the week of Aug. 6 with $1.2 billion of combined new money and refunding bonds.

The New York City Transitional Finance Authority, an instrumentality of the state, is planning to sell future tax-secured bonds on Wednesday. About $350 million of the bonds will be offered competitively; the negotiated $850 million portion will price for institutions after a two-day retail order period that begins Monday.

The competitive sale will include $150 million of taxable qualified school construction bonds and $200 million of conventional taxable bonds.

The negotiated sale is all tax-exempt and consists of $750 million of refunding bonds and $100 million of new-money debt bonds. All of the bonds will be secured by future personal income tax and sales tax revenues.

Because of its size, expected triple-A ratings, and current market conditions, the deal is expected to meet strong demand.

"There's always demand for triple-A bonds," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "I would think in this environment there's probably more demand for bonds that offer more spread, but there's going to be a fair amount of money out there looking to be put to work, so this is an issue that should be well received."

The volume of refundings this year through July is up 135% from the same period last year, according to Thomson Reuters data.

This week's deal will add $750 million of refunding to that volume, but the remaining $450 million of bonds is new money, with proceeds expected to go toward funding a wide range of costs in New York City's capital finance as well as projects for public schools.

Scott Sieber, a spokesman for NYC Comptroller John Liu, said the amount of savings the city will receive from the refunding bonds will depend on market conditions at the time of sale.

"We continuously monitor our portfolio of outstanding bonds for opportunities to efficiently refinance at lower rates," Sieber said. New York, its local governments and agencies, have issued $28.7 billion of total debt this year, the largest amount issued by any state so far.

"Right now, the market still seems to want New York paper, and national investors are certainly buying New York paper, so there's still a very good demand," said Pietronico. "This deal will also see national investors because of its size."

BofA Merrill Lynch will lead the underwriters for the negotiated portion, with Barclays Capital, Citigroup, Goldman, Sachs & Co., JPMorgan, and Morgan Stanley serving as co-senior managers.

Bond counsel is Sidley Austin LLP and financial advisors are Public Resources Advisory Group and Public Financial Management.

Maturities will range from 2013 to 2034. The QSCBs, taxable debt for which the issuer receives a federal subsidy, will mature in 2034.

The longer maturities are likely to attract intermediate mutual funds, said Chris Ryon, a portfolio manager at Thornburg Investment Management.

"The intermediate portion of the yield curve in this market is typically the most attractive when you compare it to the long end because you get larger increments of income per units of risk, which would be duration," Ryon said. "But you could have long term mutual funds looking to maximize income by the long ones."

In addition to mutual funds, the deal will likely attract risk-averse investors, specialty state investors from New York, and specialty mutual funds, Ryon said, though it really depends on how the deal prices.

"TFA's earlier deals were priced at a larger spread to triple-A, making them more attractive to the national market. Subsequent deals have priced at narrower spreads, making them less attractive to national investors," Ryon said.

Despite the narrowing spreads, the TFA deals have been placed very well, he added.

The TFA's last sale of future tax-secured bonds in June saw yields ranging from 0.37% in 2014 to 3.41% in 2035. Bonds maturing in 2039 had a 3.58% yield.

The five-year bonds had a spread of five basis points above Municipal Market Data's triple-A benchmark scale and the 20-year bonds had a spread of 34 basis points above the scale.

Five-year bonds from a previous sale in April had a wider spread at 17 basis points above the scale, and for the 20-year bonds, 39 basis points above the scale.

In a November 2011 deal, 20-year bonds had an even wider spread of 48 basis points above the scale.

The bonds were rated AAA by both Standard & Poor's and Fitch Ratings, and Aa1 by Moody's Investors Service.

Standard & Poor's has confirmed its AAA rating for the new bonds, citing a strong bond structure, the city's diverse economy, the authority's cash flows and coverage, and the sales and income tax revenue that supports the bonds' "resilient nature."

"Although this revenue stream is susceptible to economic slowdowns, it has generally, as evidenced by recent decreases, been quick to recover," analysts said in a report.

Since the adoption of the PIT in 1966, revenues have risen from $130 million to $7.6 billion in fiscal year 2011. Revenues for fiscal year 2012 are projected to be approximately $8 billion.

Sales tax revenues will be available for the payment of the future tax-secured bonds if personal income tax revenues are projected to be insufficient to provide at least 150% of the maximum annual debt service on the authority's outstanding bonds.

Sales tax revenues for 2011 totaled $5.6 billion and are projected to be approximately $5.9 billion in 2012. Sales tax is imposed on most categories of property and services at a rate of 4.5%.

Neither tax revenue payment stream is subject to city or state appropriation.

The report from Standard & Poor's also cited the authority's cash flows and coverage, which are strong and more than sufficient to make timely interest and principal payments under severe stress requirements.

"We believe coverage will likely remain, in our view, strong despite additional planned debt issuance. Furthermore, we believe the city's substantial and diverse economy will likely continue to support pledged revenue growth," said analyst Nicole Ridberg.

Due to these factors, a change in outlook — currently stable — is not expected in the next two years. With projected tax revenues for 2012 totaling $13.9 billion, the debt service coverage is projected to be 8.39 times.

Fitch has also affirmed its AAA rating, citing strong legal framework, statutory cash flow provisions, robust coverage, and manageable debt plans, which include approximately $10.6 billion in additional future tax-secured bonds in the next five years.As of Friday afternoon, Moody's had not yet assigned a rating.

A portion of this week's debt sale includes around $150 million of taxable QSCBs, which are part of a bond program created by the American Recovery and Reinvestment Act of 2009.

Under the act, bonds can be issued as tax-credit bonds or taxable direct payment bonds, similar to Build America Bonds.

The TFA will issue the QSCBs as direct-payment bonds and will receive federal interest rate subsidy payments from the U.S. Treasury, which will be used for education capital purposes only.

The other portion of taxable bonds being issued will finance city capital expenditures that are not eligible for tax-exempt financing, Sieber said.

Toward the end of the month the TFA is also planning to sell $350 million of variable rate bonds. The proceeds will be used for the same purposes as the fixed rate tax-exempt bonds being offered this week.

"The city's policy is to diversify its debt portfolio and achieve lower interest rates by including variable debt in its debt structure," Sieber said.

Further details on the variable-rate bonds will be available closer to the sale date, he said.

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Cook County Turns to Sales Tax Bonds and Snags a AAA

Wednesday, August 1, 2012
By Caitlin Devitt

Aug. 1 (Bond Buyer) -- CHICAGO - Cook County, Ill., plans to enter the market next week with $100 million of sales-tax-backed bonds, a new security for the nation's second-largest county and one that snagged a prized AAA rating from Standard & Poor's.

Bond proceeds will finance highway projects. The county will take retail orders on Tuesday and hold the institutional pricing on Wednesday.

Standard & Poor's is the only agency to rate the bonds.

Ahead of the deal, Moody's Investors Service and Fitch Ratings affirmed their respective Aa3 and AA-minus general obligation ratings on Cook.

However, Moody's revised its outlook on the GO credit to negative from stable, warning of the county's growing unfunded pension liability, risks with its massive public health and hospital system, and declining sales-tax revenue.

Fitch analysts had already maintained a negative outlook on Cook County.

Tariq Malhance, Cook's chief financial officer, downplayed Moody's negative outlook revision.

"They're talking about pensions, the hospital system, sales tax history - they didn't tell us anything new," Malhance said.

The county requested a rating only from Standard & Poor's due to the relatively small size of the sales tax deal and after examining the rating methodologies of all three major credit agencies, according to officials.

At Moody's and Fitch, an issuer's GO rating is typically the highest, while Standard & Poor's more often assigns higher ratings to non-GO revenue-backed deals. For example, Standard & Poor's rates Illinois' sales tax bonds triple-A, far higher than the state's struggling single-A-level GO credit.

Standard & Poor's rates Cook County GOs AA with a stable outlook.

"We are cognizant of [Moody's and Fitch's] recently published rating methodology, and we view our sales-tax credit as a unique credit with tremendous coverage, and Standard & Poor's has a greater recognition of that, as does the investor community," said Ivan Samstein, the county's deputy chief financial officer.

Cook County, the nation's second-most populous with more than five million residents, enjoys a broad and diverse tax base that includes Chicago and 40% of the population of Illinois.

The credit is strengthened by home rule status that gives it sole authority to raise fees and taxes.

It has $3.8 billion of outstanding debt, all of which is general obligation. Next week's deal will be the first time it has tapped its sales-tax stream for a borrowing.

The county originally planned to finance the highway projects with bonds backed by motor fuel taxes, a plan that board President Toni Preckwinkle touted a year ago.

But the underwriting team on the deal convinced the administration to instead tap sales tax revenue as a stronger credit, in part because of its home-rule status and because it will offer debt-service coverage levels of around 45 times, according to Malhance.

The county has less control over the motor fuel tax, which the state of Illinois collects and then distributes back to local governments.

The motor fuel tax, or MFT, generates roughly $95 million annually for the county, providing sufficient coverage for the bonds but less certainty than the sales tax revenue stream, Samstein said.

"The ability for the state to make changes reduces the marketability of the motor fuel-tax credit," he said. "There's a lot of revenue, but the state has the ability to adjust the allocations, and we felt, based on the state of Illinois' credit challenges, that providing a credit relying on home rule is a stronger overall package."

Chicago and DuPage County are the only two credits in Illinois to have floated MFT-backed bonds, Malhance said.

The use of the sales tax pledge also allows the finance team to stress the absence of state risks to repayment as they market the deal to investors this week.

The state's struggles to keep up to date on its payments due to local governments, transit agencies, schools and vendors - along with local governments' own headline risks stemming from their financial struggles - have forced most borrowers in the state to pay an interest rate penalty, even those with top ratings.

The penalty could carry less sting to the county this time around as investors hunt for yield, according to one investor. "The Illinois penalty is less and less these days just because of the lack of yield that's available in the market," said Michael Pietronico, head of Miller Tabak Asset Management LLC.

He said the market today compared to the county's last deal - a GO offering that had to be repriced several times to attract investors - is "night and day."

"Not to say that they can aggressively price this deal, but any deal with a reasonable rating and an excess amount of spread should easily be absorbed in this market," he said.

The county government expects to save 25 to 30 basis points, or $7 million, by using the triple-A rated sales-tax pledge instead, according to Malhance.

Wells Fargo Securities is the senior book-running manager. Rice Financial Products Co. is the co-senior. JPMorgan, Ramirez & Co., BMO Capital Markets, George K. Baum & Co. and PNC Capital Markets LLC round out the underwriting team.

Mayer Brown LLP and Charity & Associates are co-bond counsel. A.C. Advisory is financial advisor.

Debate over the sales tax rate has dominated Cook County's political landscape for the last few years, and helped Preckwinkle unseat former President Todd Stroger in 2010.

Stroger in 2008 pushed through a wildly unpopular 1% increase in the rate - raising it to 1.75% from 0.75%, a move estimated to bring in an additional $400 million annually. Preckwinkle ran her campaign on a promise to repeal the tax hike, which she has accomplished through a gradual, quarter-percent repeal over the last few years. By January 2013, the rate will be back down to 0.75%.

While in existence, the 1% tax increase brought in hundreds of millions in additional revenue for the county. Sales tax revenue jumped 70% to $659 million in 2009, the first full year of the 1% hike. It has since fallen steadily, and is projected to drop another 21% in 2013 to $361 million. The declining revenue is one of the drivers for Moody's and Fitch's negative outlook.

For Standard & Poor's, the importance of the sales tax revenue to Cook's general fund strengthens it as a pledge, according to Standard & Poor's analyst Helen Samuelson.

"The county relies on sales tax to fund its operations, so there's not a lot of incentive to issue debt against that stream," Samuelson said. "So you tend to see really strong coverage and there's not a lot of pressure there from the debt service."

Sales taxes are an economically sensitive revenue, but the sheer size of the county's tax base has helped inure it against major fluctuations, Samuelson noted.

"We took a look at it as if they'd been levying 0.75% the whole time, and overall it's performed pretty well," she said. "Drawing from such a large market area, you don't see the same volatility."

Debt service on the bonds will total $7 million annually through 2037. Sales tax revenue in fiscal 2012 is projected to total $319 million, providing 45 times coverage.

The bond indenture features additional security for investors, including a covenant not to lower the tax rate below a point that would cause pledged revenues to drop below 1.35 times annual coverage.

Officials said they have no plans to issue additional sales-tax-backed debt.

All three rating agencies warn that Cook's unfunded pension and other post-employment benefit liabilities are growing. Together, the county's pension and OPEB liability reached $5.8 billion, with a funded ratio of 57.5%, at the end of fiscal 2011, according to bond documents. Cook County is not legally obligated to pay retiree health care costs.

County officials are in the midst of crafting a final 2013 budget. Preckwinkle's preliminary budget figures, released last month, show a general fund deficit of $267 million, the bulk of which comes from the troubled health care and hospital system.

The administration has not yet released a plan to bring down the deficit. It expects to release a final blueprint by the end of October, and county commissioners will then spend the month of November debating a final budget. The county's fiscal year begins Dec. 1.

"While positive steps are being taken to reduce the county's annual operating shortfalls, with significant successes being recorded in fiscal 2011 and 2012, a structural imbalance remains in the county's operations as it continues to roll back a key revenue stream and fund increasing personnel expenditures," Moody's analyst Genevieve Nolan wrote in the report revising the outlook to negative.

"Moody's will continue to monitor the fiscal 2013 budget process closely as the county works to right size expenditures to available revenue sources," she added.

For the current budget, the county restructured debt to push off debt-service payments in 2012 and 2013 to bring down its deficit.

Malhance said Cook County does not plan to use similar one-time measures to balance the current budget.

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California Luring Most Cash Defies Bankruptcy Wave: Muni Credit

Tuesday, July 31, 2012
By Gillian White
of Bloomberg

July 31 (Bloomberg) -- California municipal funds are garnering the most demand since 2007, helping fuel the biggest rally in the state's debt since May and allaying concern that bankruptcies would curb the appetite of individual investors.

With local yields close to the lowest since the 1960s, investors seeking tax-free income are willing to take the added risk of debt from Standard & Poor's lowest-rated U.S. state. Bond funds focusing on California issuers have added assets for 18 straight weeks, the longest streak since 2007, according to Lipper US Fund Flows data.

The funds increased even as three municipalities in the past six weeks from the most-populous state decided to file for bankruptcy protection, including San Bernardino and Stockton, a city east of San Francisco that is trying to set a precedent by imposing losses on bondholders.

"Those names have not been large enough to rattle investors even at generational-low yields," said Marilyn Cohen, who oversees $195 million of munis as president and chief executive officer of Los Angeles-based Envision Capital Management. "The appetite is voracious."

Buyers are more concerned with pending tax increases than recent bankruptcies, she said. Governor Jerry Brown, 74, signed a second straight on-time budget in June. The plan relies on voters in November approving $8.5 billion of temporary increases in sales and income taxes for the fiscal year that began July 1.

45 Years

Investors demand about 0.94 percentage point of extra yield to hold debt of California issuers, Bloomberg Fair Value data show. The yield gap, down from a six-month high of 1.06 percentage point two weeks ago, has narrowed the most since May.

Munis have joined a fixed-income rally led by Treasuries as investors seek shelter from Europe's debt crisis and signs of a slowing global economy. Twenty-year general-obligation yields fell to 3.61 percent last week, according to a Bond Buyer index, close to a 45-year low set in January.

Tax-exempt debt declined across most maturities yesterday, with 10-year securities posting their biggest loss since mid-May, Bloomberg Valuation data show. Yields on AAA bonds due in 2022 rose about 0.04 percentage point to 1.66 percent, after last week touching 1.63 percent, the lowest since at least January 2009.

With tax increases looming while yields remain depressed, flows into California funds may persist, said Michael Pietronico, who handles about $770 million of munis as chief executive officer of Miller Tabak Asset Management in New York.

"Given that yields are so low, anything an investor can do to enhance return they're doing," he said.

Scarcity Effect

Individual investors have added $676 million to California bond funds since the streak of asset increases began in March, according to Lipper.

California debt has also benefited from relative scarcity. As part of steps to trim the state's deficit, Brown cut issuance of general-obligation borrowing to $11.5 billion in 2011 and 2012, the lowest two-year total since 2006, data compiled by Bloomberg show.

The state's securities have returned 6.9 percent this year, compared with 5.8 percent for the broader muni market and 2.4 percent for Treasuries, Bank of America Merrill Lynch data show.

California localities are still feeling the pinch of the recession that ended three years ago. San Bernardino, a city of 209,000 east of Los Angeles, said last week it will defer paying $3.4 million in pension bonds and $2.2 million toward retiree health care to tide it over before seeking court protection.

At the state level, California has made fiscal progress. June marked the first time in a dozen years the world's ninth-biggest economy accomplished a second-consecutive timely budget. S&P said the plan's "realistic" deficit solutions merit a positive debt outlook. S&P rates California A-, seventh-highest.

"People are more comfortable with what's going on in the Golden state," said Bud Byrnes, president and chief executive officer of RH Investment Corp., a muni-bond trading company in Encino, California.

Following are pending sales:

CALIFORNIA STATE UNIVERSITY plans to sell about $365 million of revenue bonds as soon as tomorrow, according to data compiled by Bloomberg. A $16.8 million portion will be taxable. Moody's Investors Service rates the debt Aa2, third-highest. Proceeds will go toward refunding and projects such as construction of campus buildings, according to S&P. (Added July 31)

New York's TRIBOROUGH BRIDGE & TUNNEL AUTHORITY plans to sell about $1.2 billion of revenue bonds as early as this week, according to an offering statement. Proceeds will be used to refund debt. (Updated July 31)

--Editors: Mark Tannenbaum, Pete Young

To contact the reporter on this story:
Gillian White in New York at +1-212-617-0446 or

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

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Munis Weaker, Catching Up to Treasurys

Monday, July 30, 2012
By Kelly Nolan
Dow Jones Newswires

13:28 EDT - Munis have a slightly weaker tone, market participants say, catching up with the rout in Treasurys Friday, and as investors book profits as munis come off record-low yields hit last week on Thomson Reuters Municipal Market Data's benchmark scale. Initial read on MMD's scale shows AAA muni yields unchanged to as much as 2 bps higher, with yields up most in bonds maturing around 10 years. Miller Tabak Asset Management CEO Michael Pietronico said he isn't worried about price weakness being a trend in the muni market. "There's going to be some profit-taking," given munis are bouncing off record-low yields, he said.

-By Kelly Nolan; Dow Jones Newswires; 615-679-9299;

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New York Beats California in Sales for First Time: Muni Credit

Thursday, July 26, 2012
By Freeman Klopott and Michelle Kaske
of Bloomberg

July 26 (Bloomberg) -- New York is set to topple California from its two-decade reign as the biggest borrower in the $3.7 trillion municipal bond market.

Wall Street's home state and its local governments are on a pace to sell more debt than their California counterparts for an unprecedented second straight year, according to Citigroup Inc. data starting in 1991. The relative shortage of securities from the most-populous state is fueling gains that are beating the rest of the tax-exempt market.

California issuers were the top sellers in every year but 1998 until Governor Jerry Brown, facing $25 billion of budget deficits, cut general-obligation sales to $11.5 billion in 2011 and 2012, the smallest two-year total since 2006. New York and its cities and towns, by contrast, are offering more as yields close to the lowest since the 1960s spur refinancing as well as borrowing for repairs to aging infrastructure.

"From a New York perspective, there are capital needs that need to be addressed and less hesitancy to enter the market," said Howard Cure, head of research at New York-based Evercore Wealth Management LLC, which manages about $3.5 billion.

This year, New York issuers have offered about $26.1 billion in long-term, fixed rate debt, to $22.7 billion for California, data compiled by Bloomberg show. In 2011, New York sales totaled $33.8 billion, compared with $31.7 billion for the world's No. 9 economy.

Bond Dream

Securities of Golden State issuers have earned 6.5 percent this year, beating the broader muni market's 5.8 percent advance, according to Standard & Poor's total-return data. Meanwhile, New York's 5.2 percent return trails 16 of 27 U.S. states and territories tracked by S&P.

"There's a risk that New York's total returns could be lagging the broader market just because of the potential for more supply," said Michael Pietronico, who oversees $770 million of munis as chief executive officer of Miller Tabak Asset Management in New York. "That's going to be something that might be more of a problem for investors in terms of total returns should interest rates begin to move forcefully higher."

California, the lowest-rated state by S&P, is also drawing investors willing to take more risk as muni interest rates sink amid a fixed-income rally. California's A- rating from S&P is seventh-highest, and four grades below New York's.

Brown's Tenure

The extra yield investors demand to hold California issuers is below the average since Brown, a 74-year-old Democrat, took office in January 2011. The yield spread for 10-year local debt from California is about 0.93 percentage point above top-grade municipals, compared with the 1.11 point average since the start of 2011, data compiled by Bloomberg show.

For New York, the added yield over AAAs is about 0.51 percentage point, above the 0.42 point average since the beginning of 2011, when Democratic Governor Andrew Cuomo, 54, took office.

The New York Thruway Authority, operator of the longest U.S. toll road, sold $1.1 billion of bonds last month for highway improvements, data compiled by Bloomberg show. The New York Metropolitan Transportation Authority issued a combined $1.9 billion in the past month, some of which went to refund high-cost borrowings.

California may yet regain its spot as the top issuer. Brown won lawmakers' approval this month to sell $4.75 billion in debt for a high-speed passenger rail line. Voters also are scheduled to decide on $11 billion of water bonds in 2014.

November Vote

Brown has proposed solving California's perennial budget deficits in part by raising the state sales tax and boosting income taxes for some residents. Voters will decide on the plan in November.

California municipalities may be reluctant to issue debt without knowing how the tax boosts will play out as they deal with declining home prices, said Cure at Evercore.

From the time Brown took office through the first quarter of this year, housing prices dropped 5.6 percent, according to the Bloomberg Economic Evaluation of States. In that same period, state tax revenue grew 1 percent, compared with 8.5 percent in New York.

In California, "with the declines in assessed property values, there may be more hesitancy to enter the market," Cure said.

In the past month, three California municipalities decided to seek bankruptcy, including Stockton. With 292,000 residents, it's the largest U.S. city to do so.

"There's a lot of demand for New York paper," said Matt Dalton, who manages about $1 billion in munis at Belle Haven Investments Inc. in White Plains, New York. "It's not necessarily the supply, but also the quality. New York issuers are generally in better fiscal shape than those in California."

Following are pending sales:

MINNESOTA plans to borrow about $659 million of general-obligation debt through competitive bid as soon as Aug. 7, data compiled by Bloomberg show. The deal includes $234 million of debt repaid with motor-vehicle taxes, according to bond documents. S&P rates the state AA+, its second-highest grade. (Added July 26)

REGENTS OF THE UNIVERSITY OF CALIFORNIA plan to sell about $920 million of revenue bonds, including $100 million of taxable debt, as soon as today, according to data compiled by Bloomberg. Proceeds will help finance student housing and parking and refinance debt, according to bond documents. Moody's Investors Service rates the bonds Aa2, third-highest. (Updated July 26)

--With assistance from Michael B. Marois in Sacramento

--Editors: Mark Tannenbaum, William Glasgall

To contact the reporters on this story:
Freeman Klopott in Albany, New York, at +1-518-426-9921 or;
Michelle Kaske in New York at +1-212-617-2626 or

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

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US Treasuries and the Safe Haven Flows Myth

Tuesday, July 17, 2012

(July 2012) On a daily basis, I read about Treasuries serving as the safe haven investment to the investors of the world. If Italian bond yields rise, the financial media reports "investors are piling into treasuries". If political turmoil increases in Greece, Bloomberg and Reuters report "investors are fleeing into US government bonds." If you are worried about the global economy, the implication is that the only logical course of action is to buy US Treasuries.

Being a contrarian by nature, I wondered what would happen if the world suddenly became a safer place. Would a bunch of money suddenly flee the US Treasury market, pushing treasury yields much higher. To explore or "debunk" this idea, I spoke to two bond experts, Michael Pietronico, CEO of Miller Tabak Asset Management, and Brett Wander, Chief Investment Officer – Fixed Income of Charles Schwab Investment Management.

Michael Pietronico, CEO – Miller Tabak Asset Management

My First question: How much lower is the yield of US Treasuries due to them being a safe haven? Michael answered that he believed the yield was reduced by only 20 basis points on the longer end of the yield curve.

What about the headlines that I read about all the money sloshing around? He thought the relatively small moves happening during "risk-on" and "risk-off" days where due to hedge funds putting on and covering short positions in treasuries. These moves were not the result from long-term investors re-allocating assets, the moves came from players already in the markets.

He then explained US interest rates within a global context. Basically, US interest rates were not actually low compared to the world's major economic powers. The 10 year rates for sovereign debt from the UK, Germany, and Japan were: 1.58%, 1.32%, 0.80% respectively. The US 10 year rate at 1.51% seems in fact high comparatively. Michael's primary observation was that the economic cycles of the world have converged. Everyone is wrestling with the forces of slowing economic growth and deflation at the same time. While policy makers, primarily central banks, have a very clear cure for inflation (raising interest rates), the same cannot be said for deflation. The Federal Reserve and other central banks in his opinion are almost out of ammunition for spurring economic growth.

If there was any factor stirring demand for safer assets, it is the potential collapse of the Euro. Michael was very closely watching the Spanish and Italian bond markets. While he did not believe that the situation would naturally resolve itself, he did think it could get far worse. If the Euro collapses, there could be a flight of capital out of Europe into treasuries. In this scenario a 10-year treasury yield below 1.0% is very possible.

I tried to play devil's advocate to Michael's position and tried posit a couple scenarios in which rates could rise. What if China used this opportunity to unload its supply of treasuries or the US experienced another downgrade by the rating agencies? He had great answers for both:

  • The China Question? Where would China put the money? With yields so low globally, a move by China would only provide a buying opportunity for others.
  • A downgrade scenario? He reminded me that during the downgrade of the US by S&P, US treasury rates actually fell and prices rose. He said there was a logic to this. Declining ratings had political consequences and would prevent more fiscal stimulus (government spending), which in turn would lead to lower inflation.

Interview With Brett Wander, CIO – Fixed Income, Charles Schwab Investment Management

Question: Are US Treasury rates lower as a result of the US being a safe haven? Brett answered that he believed that rates were 25 to 50 bps (0.25% to 0.50%) lower on the longer part of the yield curve, maturities over 10 years. As rates for shorter maturities were primarily driven by FED actions, a desire for safety had a minimal impact on that part of the yield curve.

Very quickly in the interview, Brett provided his view on the three forces driving US Treasury rates. In no particular order of importance they are:

  1. The slow growth of the US Economy.
  2. The degree to which the FED is supporting Treasuries.
  3. Europe.

When asked if he thought the FED would do another round of bond buying to keep rates low, commonly described as QE3, he answered that he thought it was "likely". Furthermore, he reminded me that the FED has publicly indicated that they intend to hold rates steady through the end of 2014. This would mean that a rate increase would occur in 2015 at the earliest.

Implicit in Brett's answer about the FED's future course of action were his thoughts about the economy. If economic growth picked up, the FED would not need to do QE3. Thus, he was not predicting a major change in the economy's sluggish pace of growth.

At the end of interview, I asked if there was something else that I should have asked. He mentioned that investors commonly feel that they need to meet specific yield targets. In a low interest rate environment, this means that investors could be tempted to take on more risk than they should. However, he wanted to emphasize that investors should remember to focus on the real rate of return – interest minus inflation. When this is taken into consideration, current rates really don't appear to be out of line.

What’s the Bottom Line?

Both, Brett Wander and Michael Pietronico indicated that the impact of US Treasuries being a global investment safe haven was limited to the longer end of the yield curve and reduced yields by less than half a percent. Michael went even further and thought much more risk of US rates going lower from global economic events.

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Week's Bigger Calendar and Weak Treasuries Push Muni Indexes Higher

Friday, June 8, 2012
By James Ramage

Municipal bond yields in the short and intermediate parts of the curve rose sharply this week.

Bond Buyer Indexes

In a week that has seen a marked uptick in muni issuance, demand for tax-exempt paper hasn't kept pace, traders say. Despite the backup, new deals were reasonably well-received on Tuesday.

Investors needed concessions, though, to clear volume on Wednesday.

And the secondary market struggled on both days, traders noted.

Muni bond indexes reflected higher bond yields.

All but those representing the front end of the yield curve saw increases on the week.

The Bond Buyer's 20-bond GO index of 20-year general obligation yields increased 15 basis points this week to 3.92%. It is the highest level for the index since April 12, when it was 3.97%.

The 11-bond GO index of higher-grade 20-year GO yields rose 15 basis points this week, as well, to 3.71%. It also sits at its highest level since April 12, when it was 3.77%.

The yield on the U.S. Treasury's 10-year note increased eight basis points this week to 1.66%.

The 10-year remained below its 1.78% level from two weeks ago.

The yield on the Treasury's 30-year bond also rose eight basis points this week to 2.75%, but remained below its 2.86% level from two weeks ago.

With triple-A yields lingering near historic lows, the market was due for some kind of correction.

Municipal bond yields were going to feel pressure from increased supply this week, regardless of what Treasuries did, said Michael Pietronico, chief executive officer of Miller Tabak Asset Management.

"As a market, we were primed to give back some of last week's gains, even if Treasuries were stable this week, as we're going to experience too large a calendar relative to the yield levels in the market," he said.

Since last Friday, the triple-A 10-year and 30-year yields have risen 15 basis points each, according to Municipal Market Data numbers.

Over the same period, the 10-year and 30-year Treasuries have risen 19 and 21 points, respectively.

As a result, muni ratios to Treasuries have gotten richer on the week. But they still remain at incredibly cheap levels, each settling above 110%.

The two-year ratio stood at 114% Thursday. The 10-year and 30-year ratios sit at 115% and 116%, respectively.

The backup in Treasuries expedites price discovery, according to Pietronico.

"We were heading in that direction anyway," he said. "But certainly the fact that Treasuries turned and got weaker just helped the momentum in munis."

The revenue bond index, which measures 30-year revenue bond yields, gained seven basis points this week to 4.80%. That is its highest level since April 19, when it was 4.81%.

The Bond Buyer's one-year note index, which is based on one-year GO note yields, was unchanged again this week at 0.24%.

That is still its lowest level since April 18, when it was 0.23%.

The weekly average yield to maturity of the Bond Buyer municipal bond index, which is based on 40 long-term bond prices, declined one basis point this week, to an all-time low of 4.38%.

Still, the technicals are a positive for overall performance, Pietronico said.

It's just likely going to take a little more of a sell-off to get muni yields to levels that the market can digest, he added.

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Illinois Warned by S&P as Pension Reform Stays Stalled

Thursday, June 7, 2012
By Yvette Shields

CHICAGO — Illinois Gov. Pat Quinn and legislative leaders failed to resolve their differences on stalled pension reforms following a meeting this week as Standard & Poor's sent the message that a reckoning looms over the strain of massive pension obligations on the state's balance sheet.

S&P rates Illinois' general obligation debt A-plus and has assigned a negative outlook to the credit since January 2011. "We expect to resolve the outlook on Illinois this year based on our review of the fiscal 2013 enacted budget and the state's progress, if any, on addressing its significant pension liabilities and associated cost pressures," read a report authored by analysts Robin Prunty and John Sugden.

The state is struggling with $82.9 billion of unfunded pension liabilities — representing a funded ratio of just 43% — and will pay $5.2 billion towards pensions in fiscal 2013, up by $1.1 billion in the current fiscal year.

The Wednesday report comes nearly one week after political differences derailed pension reforms in the Illinois General Assembly despite pressure from Quinn and progress on other fiscal challenges. Before adjourning, lawmakers limited spending growth in the $33.7 billion fiscal 2013 budget, completed a $2.7 billion overhaul of Medicaid, and made a dent in up to $9 billion of unpaid obligations.

The report said S&P would evaluate the budget to assess progress in moving toward structural balance, the soundness of state revenue estimates, and implementation risks of the Medicaid changes.

"There was no action during the regular legislative session on pension reform and we consider this negative from a credit standpoint," the analysts wrote. "Despite significant revenue enhancement and ongoing revenue recovery, structural budget balance has been elusive and liquidity remains strained due to the state's growing accumulated deficit."

Prunty said in an interview that while Illinois retains some breathing room to act, she is concerned over the difficulty of achieving the three-fifths majority needed to approve legislation in a special session: "We are watching to see if there is credible action, but it's hard to know if they will come to an agreement," she said.

Quinn sought to use the rating agency message's to nudge lawmakers. "It is clear from this as well as past ratings agencies' comments that pension reform must happen immediately," the statement read.

Legislative leaders all agree on the need for reforms but after a two-hour meeting with Quinn Wednesday they remain divided over how to achieve them. They will meet again in two weeks.

A dispute between Republicans and Democrats over a provision that would have shifted from the state's public teacher pension payments to districts and colleges derailed the plan, and no vote was taken on its centerpiece, which would have cut cost-of-living increases. The COLA changes alone were estimated to trim up to $88 billion off state payments under a schedule that puts the state at full funding in 30 years. The teacher cost-shift savings were estimated at up to $29 billion.

Quinn, a Democrat, had backed away from the teacher cost shift backed by Democratic leaders in an 11th hour attempt to get the COLA changes passed last week, but after the meeting Wednesday he said the cost shift needs to be part of the pension solution. The GOP remains opposed.

A number of investors and rating agency analysts did praise Illinois' successes, but they showed little surprise at the state's inaction on pensions and warned of the looming impact.

"It's frustrating, but it's certainly not surprising," said Shawn O'Leary, senior research analyst at Nuveen Investment Management. He recalled that the state's finance team visited the Nuveen offices in Chicago last March and spoke with confidence that pension reforms would sail through the General Assembly in the spring.

"Illinois is at a point where it needs to demonstrate it has the willingness to do something substantive on pensions before the market begins to question their ability to do so," O'Leary said. "The headline risks related to Illinois is such that as a manager you have to question what products it [Illinois paper] is suitable for."

Moody's Investors Service rates Illinois A2, the lowest rated state, with a stable outlook, and Fitch Ratings assigns an equivalent A and stable outlook. Investors have demanded a steep interest rate penalty from the state due to its liquidity and budget struggles. It topped more than 200 basis points in 2010, but narrowed to 160 to 170 basis points after adoption of an income tax increase early last year.

"I think they have a mountain to climb, a long way before they regain the trust of the market," said Richard Ciccarone, chief research officer at McDonnell Investment Management LLC.

On Friday, the spread on a credit default swap for Illinois paper widened to 249.6 basis points from 236 at the end of May, although other states also showed a widening. Spreads on Illinois paper already are trading at a level that reflects a credit rated one to two notches lower.

Illinois faces a long and rough road, and that's after reforms are adopted, according to Ciccarone.

"In order for the market to trust the state it will have to achieve true reform and they will have to show consistent evidence that they have funded the plan," he said.

Neither a much-hailed 1994 reform plan nor a $10 billion pension bond sale in 2003 solved the state's pension woes.

While the COLA changes would make a significant dent in future payments, Ciccarone said an infusion of cash is still needed. Quinn's original proposal called for additional employee contributions.

Quinn's focus on the issue won praise from Michael Pietronico, head of Miller Tabak Asset Management LLC. "There's still a lot of work to be done but from an investor standpoint it's a good thing when the governor is attentive to the problem," he said. He added that he wouldn't expect to see much movement in either direction on trading spreads until "more concrete news" comes out of Illinois.

Moody's analyst Ted Hampton praised the session's achievements and said his agency at the moment remains comfortable with the state's current rating level, though pensions remain a central concern.

"Obviously this session yielded some progress on some fronts and not on others," he said.

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S.F. Utility Sets $686M to Strengthen Water System

Monday, May 21, 2012
By Randall Jensen

May 21 (Bond Buyer) -- SAN FRANCISCO - The San Francisco Public Utility Commission will hit the market with $686 million of revenue bonds as it continues to raise billions for a seismic upgrade of its water system.

The agency will sell fixed-rate bonds with maturities out to 30 years via a competitive sale Tuesday, and officials expect strong demand for the double-A-minus rated credit.

"I think you will see very aggressive bidding on our sale next week," said Todd Rydstrom, SFPUC assistant general manager and chief financial officer. "We are in the market so much because of our [water] program - investors know us."

Rydstrom said the deal is timed to meet cash needs for a $4.6 billion upgrade project and take advantage of funds becoming available due to bond redemptions and to be ahead of sales by the state of California.

The timing may be just right.

"The market is starved for size, and given the shortage of supply in California, our best guess is that the deal goes very well," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management in New York.

During their last deal in July of last year, SFPUC sold $720 million of bonds for the same project. The average interest cost across four series of 30-year bonds was 4.3%.

"I'm knocking on wood, hopefully it will be even stronger demand given there is so much money in redemptions right now in the hands of investors and portfolio managers," Rydstrom said.

SFPUC officials have gone with competitive sales for the last several years because they feel they have been able to secure the best interest rates due to the utility's strong and regular market name.

"We have had a very strong track record on selling on a competitive basis," said SFPUC's debt manager Richard Morales.

A small piece of the deal, $93 million, will be refunding bonds.

But $575 million of bonds backed by the utility's water revenues is slated to help pay for SFPUC's seismic upgrade of its Hetch Hetchy water system - one of 10 planned bond sales for the project.

The utility is about half way through the 86 projects involved in the upgrade that are expected to be finished by 2016. Rydstrom said the utility makes payments of between $5 million and $30 million a week to fund the upgrade.

"We are in the market frequently," he said.

The biggest project funded by the bond issue will be fixing the Calaveras Dam in Santa Clara County. It will one of the first major dams SFPUC has rebuilt since the 1970s.

The system upgrade is financed from a ballot measure that voters passed in 2002. The measure laid out $5 billion of costs funded by increasing water rates from $13 a month in 2002 to around $40 to $42 a month by the time the project is finished in 2016.

The measure passed in the wake of the 1989 Loma Prieta earthquake, which damaged infrastructure across the Bay Area region. The Hetch Hetchy water system crosses or runs next to three major fault lines.

SFPUC officials say they won't be back in the market for the water system until 2014, but will be back this summer to raise money for the wastewater system.

Rydstrom said they are in the early stages of planning what may be a $6-7 billion construction program for the utility's wastewater system over the next 15 years. The agency will also likely be selling refunding bonds in July, which may be a negotiated sale because of possibly shorter maturities.

The utility's capital program requires the issuance of another $2.1 billion through 2015 after issuing $2.2 billion over the last two fiscal years, according to a Standard & Poor's report earlier this month.

Standard & Poor's rated the revenue bonds being sold this week AA-minus. Moody's Investors Service assigned them a Aa3. S&P said SFPUC's annual debt service is expected to climb to $400 million by 2024 from $70 million in 2010, reducing its coverage ratio to 1.4 times by 2016.

Moody's analysts said ts rating "reflects the SFPUC's narrow but stable fiscal position."

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Credit Quality Still a Key Attraction for Retail Buyers

Monday, May 14, 2012
By Christine Albano

May 14 (Bond Buyer) -- Retail investors continue to rank credit quality high at the top of their list of criteria when shopping for municipal securities, whether they be individual bonds or tax-exempt bond funds.

The concern over credit strength persists even though recent predictions of widespread municipal defaults and bankruptcies have not come to pass, according to industry analysts and portfolio managers.

Though there is currently strong demand from the retail crowd compared to early 2011 at the height of a sell-off in muni bond funds, many conservative mom-and-pop investors are still very guarded, the experts said.

"Meredith Whitney fanned the flames of those fears - way overdone - but the fears were and still are there on the retail side," said John Mousseau, managing director and portfolio manager at Cumberland Advisors in Vineland, N.J.

"We think investors are worried about muni credit from both the risk of eroding credit quality, or from just headline risk," he said.

Whitney, a well-known banking analyst, predicted late in 2010 that there would be "hundreds of billions" of dollars in municipal defaults.

Mousseau cited the distressed Rhode Island capital of Providence. Standard & Poor's on Tuesday lowered its long-term and underlying rating on the city's general obligation debt to BBB from BBB-plus and maintains a negative outlook.

The action came on the heels of downgrades in March by Fitch Ratings to BBB from A and by Moody's Investors Service to Baa1 from A3.

"Underlying credit quality is absolutely one of the most important factors retail investors are considering," said Tom Kozlik, director and municipal credit analyst at Janney Montgomery Scott LLC.

Mike Pietronico, chief executive officer at Miller Tabak Asset Management in New York, said the retail market is still harboring apprehension.

"No longer do investors see fixed income as having virtually no risk other than interest-rate volatility," he said. "It is clear that capital-preservation strategies are at work as the asset class continues to see solid demand even as rates close in on generational lows."

"Retail investors are now clearly more driven by safety, bond structure and achieving geographic diversification," Pietronico said. "While yield will always be of importance to retail investors, the problems surrounding sovereign debt in Europe have reshaped what many believed was 'money good.' "

Meanwhile, the robust returns for municipal bonds during the latter part of 2011 boosted retail investors' confidence, demonstrated the market's strength and resiliency, and helped many shrug off some, but not all, of their fears, Mousseau said.

At the close of 2011, the 10-year triple-A bond dropped to a record low of 1.83%, municipal bond mutual funds boasted four weeks of strong inflows and the sector as a whole returned 10.7%.

"The long-term story on municipal bonds is and continues to be quite good," Mousseau said.

Municipal bond yields last week again were setting record lows, according to Municipal Market Data.

On Wednesday the 30-year fell one basis point to 3.08%. That beat its previous record of 3.09% set Tuesday, which topped the prior record of 3.13% set Monday. Before that, the previous low was 3.14% set on Feb. 2.

Individual investors so far this year have been plowing cash back into muni bond funds.

Despite the recent strength, other factors, like the collapse of the triple-A municipal bond insurance industry, continue to weigh on retail investors' minds, causing them to focus more attention on the importance of strong underlying credit quality, sources said.

Currently, only Assured Guaranty Ltd. is offering new insurance for municipal bonds, enhancing about 5% of new par value. That's a far cry from the more than 50% of new issuance that was once insured in any given year by the large monoline insurers, before they lost their top-flight ratings during the financial crisis.

A fledgling municipal bond insurer, Build America Mutual Insurance Co., hopes to launch by mid-year.

"In a world without much insurance, credit surveillance is very important to retail investors and that is an aspect of bond management which is clearly ramped up in importance versus a few years ago," Mousseau said.

Kozlik added: "I believe that most retail investors were focused on underlying credit even before the supply of bond insurance dropped and the financial crisis of 2008. But recent events have also drawn more attention to the sector, such as Meredith Whitney's strikeout at the end of 2010 and into 2011, and various other predictions calling for the collapse of the municipal market."

To help allay their clients' fears and satisfy their demand for high quality, muni experts recommend a wide range of investment options in the current market, from GOs to essential-service revenue bonds.

"We are fans of the A-rated general obligation sector right now, as it represents true discounted value as opposed to triple-A rated debt," Pietronico said.

On Thursday, for instance, A-rated GOs due in 2042 yielded 3.81%, according to MMD. Generic, triple-A GOs due in 30 years yielded 3.09%.

"One should be suspicious of such high ratings in this challenging economic environment," Pietronico said. "Triple-A-rated bonds introduce higher durations into portfolios with interest rates at generational lows. This, combined with the likelihood that triple-A ratings may be hard to justify given the federal deficit and state pension obligations, gives us the view that the best risk-reward investment falls in the A-rated range."

Meanwhile, Mousseau sees value elsewhere.

"I think the appearance of a dedicated revenue stream with essential service revenue bonds or sales tax-backed bonds has a much better appeal to clients than the old primacy of general obligation bonds," Mousseau said. "I think most investors realize that though pretty solid, from a general obligation standpoint if there are severe problems, an investor is really just an unsecured creditor."

He referenced the Port Authority of New York and New Jersey's debt as an example of the type that has strong retail appeal chiefly because it is backed from a variety of revenue sources. "You can fly out of, or drive over or through, the sources of revenue paying your bonds," he said.

On Thursday, a $1.4 million block of the port's consolidated bonds with a 4 1/2% coupon due in 2034 traded six times with yields ranging from 3.24% to 4.09%, according to, the Securities Industry and Financial Market Association's website. The bonds have underlying ratings of Aa2 from Moody's, and AA-minus from Standard & Poor's and Fitch.

Kozlik, on the other hand, is recommending a mixed bag of investments for Janney's retail clients, even those with the need for slightly more yield.

"We recommend more conservative investors consider high-quality general obligation and revenue bonds," he said. "Those looking for additional yield are reaching further down the credit curve, but we advise investors to make sure they have a complete understanding of an issue's underlying credit quality before they do so."

Overall, despite their skittishness regarding credit quality in the municipal market, retail investors, especially baby boomers, refuse to take a backseat in a market that plays a crucial role in their portfolios and asset allocation, experts said.

"Retail investors are important and definitely participating at a strong pace - sometimes driving bond sales," Kozlik said.

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State-Local Governments Proving Market Doubts Wrong

Monday, May 7, 2012
By Michelle Kaske
of Bloomberg

May 7 (Bloomberg) -- U.S. municipal bond yields are back to where they were in 1967, defying forecasts that the $3.7 trillion market's biggest rally in three years was near an end.

States and cities are refunding the most debt in at least five years. As a result, investors have fewer new bonds to purchase even as the largest wave of money in two years is surging into muni mutual funds. The appetite for the safety of local-government debt has grown since March on signs the U.S. economic rebound is cooling while state finances improve.

Municipal debt has earned 3.5 percent this year through May 3, beating the 0.2 percent gain for Treasuries, according to Bank of America Merrill Lynch indexes. It's the best annual start for munis since 2009.

"You're seeing more demand for municipal bonds than we would have initially expected at this part of the economic cycle," Neil Klein, who helps manage $650 million as senior managing director at Carret Asset Management in New York, said in an interview. "The strength of the municipal market is a bit surprising."

Since last year, Wall Street banks such as Citigroup Inc. and JPMorgan Chase & Co. have forecast a jump in municipal issuance after sales dropped in 2011 to the lowest since at least 2004. Klein was among investors predicting in January that Treasuries might beat munis.

Four Straight Weeks

Instead, state and local debt earned 2.6 percent that month including interest and price changes, to 0.5 percent for federal bonds, according to Bank of America Merrill Lynch indexes.

Then, after a one-month hiatus in March, the muni rally came back even stronger.

Top-rated tax-exempt bonds due in 10 years have gained for four straight weeks, the longest streak since December, according to a Bloomberg Valuation Index. Their 1.88 percent yield is the lowest since February, after ending last year at 1.78 percent. A Bond Buyer index of 20-year yields has fallen to levels not seen in more than four decades.

Sliding interest rates have spurred municipalities from California to Illinois to refinance. About 60 percent of the $120 billion of bonds sold this year has been for refunding, data compiled by Bloomberg show. The ratio, the highest since at least 2007, was about 40 percent at this point in 2011.

Net Supply

The refinancing wave and projected redemptions may exceed the supply of new bonds for a second straight year, Citigroup strategists George Friedlander and Vikram Rai said last month.

With issuance of at least $340 billion and redemptions rising, "the net supply of bonds issued in 2012 is likely to be negative once again," they wrote in a report.

Individual buyers, who own about two-thirds of municipal debt, have also been pouring in. Investors have added $10.5 billion to muni funds this year, the most since an 18-week span through early April 2010, according to Lipper US Fund Flows.

They have been lured in part by signs municipal finances are stabilizing almost three years after the 18-month recession that ended in 2009.

More than half of U.S. states project ending this fiscal year with cash surpluses, the first time since the start of the recession that so many will have extra funds, according to the National Conference of State Legislatures.

Defaults Drop

Twenty-one issuers have defaulted for the first time this year, compared with 29 in the same stretch of 2011, according to Municipal Market Advisors in Concord, Massachusetts.

A drop in U.S. Treasury rates amid concern that European economies are weakening has also helped depress municipal yields, said Michael Pietronico, who manages $730 million of munis as chief executive officer of Miller Tabak Asset Management in New York.

Ten-year Treasury yields touched a three-month low of 1.87 percent last week as U.S. companies added the fewest jobs in six months, heightening concern the economic expansion is slowing. Euro-region services and manufacturing output contracted more than initially estimated in April, a measure showed last week.

"The perception in late March changed once again that perhaps all is not good over in Europe and the global economy may be losing momentum and here you go, rates are back down again," Pietronico said in an interview.

Following are descriptions of coming sales:

COLUMBIA UNIVERSITY in New York City plans to issue $100 million of taxable bonds as soon as this week to finance capital projects and refund debt, according to sale documents. The longest maturity for the bonds is 2042. JPMorgan is the underwriter. Standard & Poor's rates the bonds AAA. (Added May 7)

MASSACHUSETTS is set to issue $419 million of debt secured by gas-tax revenue through competitive bid as soon as May 8, according to sale documents. The bonds are special obligations of the state, payable from pledged revenue and not general-obligation debt. Proceeds will help finance bridge replacements and repairs. Moody's Investors Service rates the bonds Aaa. (Added May 7)

--Editors: Mark Tannenbaum, Mark Schoifet

To contact the reporter on this story:
Michelle Kaske in New York at +1-212-617-2626 or

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

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Illinois Expects Strong Demand for GOs

Friday, April 27, 2012
By Yvette Shields

CHICAGO — Illinois Gov. Pat Quinn's recent proposals to stabilize state finances may not help shrink the interest rate penalty demanded by investors on the state's $1.8 billion refunding set for next week, but its size and the opportunity for yield should draw solid investor demand, several market participants said.

The sale includes a mix of advance and current refunding general obligation bonds with an estimated 7% net present-value savings. Though the state faces statutory limitations on structuring, it was able to squeeze a good level of up-front savings totaling $63 million in fiscal 2012, 2013 and 2014. With a final maturity in 2026, the state is also shaving two years off the final maturity of the bonds being refunded with Tuesday's issue.

"We wanted a nice, clean economic refunding with savings in each year, but we also wanted to capture some up-front savings," said James Prichard, manager of capital markets for the state. "We are getting a lot of interest from investors and we should be the largest deal in the market next week, so it's good timing."

The book-runners, based on a rotation list of qualified firms, are Jefferies & Co., BMO Capital Markets and Duncan-Williams Inc./Rice Financial Products Co. Duncan-Williams and Rice submitted a joint bid during the state's request for proposals process last year. Public Financial Management Inc. is advisor. Mayer Brown LLP and the Hardwick Group Inc. are bond counsel.

Ahead of the sale, all three rating agencies affirmed Illinois' GO ratings. The credit has benefited from an income tax hike last year that is expected to generate $6.5 billion annually, but is only temporary. The state is challenged by large pension obligations, rising Medicaid costs and $9 billion in unpaid bills. Its fiscal woes have resulted in higher borrowing costs.

Moody's Investors Service earlier this year lowered its rating for Illinois one notch to A2 with a stable outlook. It is the lowest rated state by Moody's. Fitch Ratings rates the state's $27 billion of GOs A with a stable outlook and Standard & Poor's rates it A-plus with a negative outlook. The GO pledge benefits from a priority claim on state revenues.

Quinn earlier this month unveiled a plan aimed at eventually erasing the state's $82.9 billion of unfunded pension obligations by asking employees to cut benefits in exchange for keeping health care benefits in retirement and other perks. About $5.2 billion of the proposed $34 billion fiscal 2013 budget will go to cover payments to a pension system that is only 43% funded. Quinn also recently unveiled a plan to save $2.7 billion in Medicaid spending through benefit and reimbursement cuts and a cigarette tax increase that would leverage additional federal matching funds. The Medicaid cuts would help put a significant dent in the state's bill backlog. The proposals are before the General Assembly.

The state's budget and liquidity crisis have forced it to pay an interest rate penalty to borrow, though that spread has narrowed since the income tax hike in early 2011. The state captured its lowest true-interest cost in memory — 3.9125% — in January on a new-money tax-exempt GO issue, benefiting from a strong market. The long bond on the state's taxable series in that deal priced at 277 basis points over comparable Treasuries. The long bond on the state's taxable GO sale in 2010 — before the income tax increase — carried a yield of 325 basis points over Treasuries.

The spread against triple-A tax-exempt bonds on a March GO sale ranged from 55 to 168 basis points, down by as much as 100 basis points for bonds sold before the tax hike. Market participants said the spread on state GOs has held steady at about 165 basis points in the secondary.

The state isn't likely to reap any benefit from Quinn's proposals Tuesday, as market concessions likely won't come until there is legislative action, but investors searching for yield and attracted by the repayment strength of Illinois' GO pledge are expected to be buyers. "Investors still want yield and will go after it," said Robert Novembre, managing director at Arbor Research & Trading.

"The governor has begun to say the right things that will impact the credit positively in the long term, but investors are taking a wait-and-see approach on implementation," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

Illinois is under pressure to act on its finances. "If the state does not implement meaningful changes to further align revenue and spending and address its accumulated deficit for fiscal 2013, we could lower the rating this year," S&P's Robin Prunty wrote in the agency's latest review. "Furthermore, we could also lower the rating by more than one notch if there is no progress on structural budget solutions and if Illinois does not address the significant pension liabilities and associated cost pressure."

The state will follow the sale with a $360 million sales tax-backed new-money issue later in May.

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Yields Seen Declining Based on 200-Year History

Friday, April 27, 2012
By Michelle Kaske
of Bloomberg

April 27 (Bloomberg) -- Investors in U.S. municipal bonds should look back to James Madison's tenure in the White House for guidance on how far tax-exempt interest rates may fall.

The $3.7 trillion market's best annual start since 2009 drove yields to the lowest since the 1960s this year. Even at that level, they're close to three times their trough since 1900 and just below their 200-year average, according to Janney Capital Markets.

"History shows that there is room for yields to go down," Tom Kozlik, director of municipal credit analysis at Janney in Philadelphia, said in an interview.

A Bond Buyer index of 20-year general-obligation bonds yielded 3.86 percent yesterday, following a seven-week climb that was the steepest since 2010. The record low on the benchmark was 1.29 percent in 1946.

Looking back two centuries to the presidential administration of Madison, who was first elected in 1808, long-term municipal yields have averaged 4.65 percent, according to Kozlik. He used data from "A History of Interest Rates" by Sidney Homer and Richard Sylla for his calculation.

New England municipal bonds yielded about 5 percent the year Madison took office, according to the book.

Cash Flow

Tax-exempt mutual funds added $17.5 billion in the first 14 weeks of the year, the biggest start since 2007, according to data from JPMorgan Securities LLC and Lipper US Fund Flows. Buyers have been lured in part as eight straight quarters of rising state tax revenue signaled fiscal pressures are easing following the 18-month recession that ended in 2009.

Local debt has earned 3.15 percent in 2012 through April 25, the best start in three years and beating a 0.05 percent decline in Treasuries, according to Bank of America data tracking price changes and interest payments.

In the next two months investors will receive about $60 billion combined from interest and redemptions, almost $30 billion more than the total in March and April, according to Bank of America Merrill Lynch.

That wave of funds is chasing a dwindling supply of bonds. States and cities are set to issue $7.6 billion in the next month, down from $12.8 billion of projected sales on April 3, data compiled by Bloomberg data show.

Reinvestment Plan

Bondholders tend to reinvest coupon and maturity payments, helping push down tax-exempt yields, Ebby Gerry, who manages $14 billion as head of municipals at UBS Global Asset Management Inc. in New York, said in an interview.

"There's a greater potential for muni yields to come down because of the increased demand," Gerry said.

Signs of improving municipal credit quality may also add to demand. Standard & Poor's raised the credit rating on 1.46 public-finance issuers from January through March for each one it downgraded, according to an April 24 report. That's the first time upgrades dominated since the second quarter of 2011.

"There is a feeling that the asset class is safer than many expect," Michael Pietronico, who manages $720 million of municipals as chief executive officer of Miller Tabak Asset Management in New York, said in a telephone interview.

Interest rates on benchmark 30-year municipals dropped to 3.32 percent yesterday, the lowest level since March 6, according to Bloomberg BVAL data. Yields on AAA tax-exempts due in 10 years were 1.9 percent.

Following are descriptions of coming sales:

ILLINOIS is set to sell $1.8 billion of general-obligation bonds as soon as May 1 to refund debt. Jefferies & Co. is the underwriter. S&P rates the state A+, fifth-highest. (Added April 27)

SEATTLE plans to borrow as soon as next week about $127 million of general-obligation bonds to refund debt, according to bond documents. The debt will price through competitive bid. S&P rates the sale AAA. (Added April 26)

--Editors: Mark Tannenbaum, Mark Schoifet

To contact the reporter on this story:
Michelle Kaske in New York at +1-212-617-2626 or

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

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Despite State Oversight, Nassau Sells $207 Million Muni Deal

Wednesday, April 25, 2012
By Kelly Nolan
Dow Jones Newswires

Nassau County, N.Y., sold $207 million in general obligation bonds Wednesday, even as a state control board continues to actively oversee its finances and Moody's Investors Service warned the county still has "limited financial flexibility."

A term sheet showed Bank of America Merrill Lynch placed the winning offer on the competitive sale, where banks place bids on bonds and sometimes reoffer them to investors.

Representatives from Nassau County, a collection of mostly affluent suburbs just east of New York City, didn't immediately respond to a request for comment on the bond deal.

In the Nassau sale, Bank of America didn't re-offer about two-thirds of the deal, suggesting at least some of the bonds may have been pre-sold to yield-hungry investors, said Kathy Bramlage, director at Treasury Partners, a unit of financial-advisory firm HighTower Advisors in New York.

"It's A-rated, and it's a New York name with a lot of yield on it" in an usually low-interest rate environment, she said.

New York is a high-tax state, so there's generally strong demand for debt from its issuers. Nassau County bonds have more yield because of the county's well publicized financial troubles, said Bramlage, who declined to comment on whether her firm bought any Nassau debt from this sale.

The bonds that Bank of America did reoffer mature in seven to 10 years, as well as in 15 to 17 years. A 10-year maturity was reoffered with a yield of 2.65%, a term sheet showed, 0.80 percentage point more than comparable triple-A rated debt on Thomson Reuters Municipal Market Data's benchmark scale.

Not all investors thought the debt was attractively priced. Michael Pietronico, chief executive of Miller Tabak Asset Management in New York, said his firm owns some other Nassau County debt but he passed on this sale. He said his firm could buy Nassau bonds at higher yields in the secondary trading market.

Nassau County's fiscal troubles have been well publicized. Last year, the state's Nassau County Interim Finance Authority, or NIFA, assumed control of the county's finances, which was challenged at the time by County Executive Edward Mangano. NIFA took control of Nassau's finances because it estimated the county's 2011 budget gap at $176 million, well above the trigger set in the state law creating the board in 2000.

Rating agencies generally view the board's takeover as a good thing, but challenges remain. Moody's says Nassau still has an "extremely narrow cash position," which may pressure it to do short-term borrowing throughout the year.

Fitch Ratings noted that the county continues to rely on one-time measures to patch budget gaps. Currently, Nassau is considering privatizing its sewer system, using part of the upfront payment to help mend its budget, which Fitch called a "concern."

On the positive side, both rating agencies noted the county has above average wealth-levels, and a large, diverse tax base, which benefits from the county's proximity to New York City.

Moody's and Standard & Poor's give Nassau's bonds mid-level investment-grade ratings of A1 and A-plus, respectively. Fitch, meanwhile, rates the bonds a notch higher, at double-A-minus, the fourth highest of 10 investment-grade ratings. Fitch says proceeds from this week's bond sale will be used for capital projects, termination pay and judgments and settlements.

-By Kelly Nolan; Dow Jones Newswires; 615-679-9299;

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Munis Holding Steady Despite Lower Treasurys

Wednesday, April 25, 2012
By Kelly Nolan
Dow Jones Newswires

11:24 [Dow Jones] Prices of top-rated munis are holding steady, according to an initial read from Thomson Reuters Municipal Market Data. There's a lighter supply of new bond sales this week as compared with weeks past, a positive for the market. However, some market participants are cautious as Treasury yields push higher, says MMD's Domenic Vonella. Munis generally tend to trade in sympathy with Treasurys. Miller Tabak Asset Management's Michael Pietronico says muni market participants are also waiting to hear what's in the Fed's policy statement later Wednesday. (

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Local Debt Wins Biggest Over Treasuries Since 1989

Sunday, March 29, 2012
By Michelle Kaske
of Bloomberg

March 29 (Bloomberg) -- The $3.7 trillion municipal bond market is poised for its longest first-quarter winning streak in 23 years as U.S. Treasuries come out losers.

Tax-exempt bonds have earned 2.11 percent in price gains and interest through yesterday, their best first-quarter return since 2009, while U.S. Treasuries have lost 1.19 percent, according to Bank of America Merrill Lynch indexes.

States and cities plan to borrow $8.3 billion over the next 30 days, down 26 percent from the five-year average of $11.2 billion, according to data compiled by Bloomberg. That will combine with a near-doubling of interest and redemption payments to bondholders in coming months to buoy the market.

"There's a lot of people buying," Alan Schankel, a fixed-income director at Janney Montgomery Scott, said by telephone from Philadelphia. "You just don't have that much supply."

Municipals are on track to beat federal debt for the fourth consecutive first quarter, the longest stretch since at least 1989, when the index data begin.

Illinois, the U.S. state with the lowest rating from by Moody's Investors Service, received $2.3 billion of orders for the $500 million of general-obligation bonds it put on sale March 13. It boosted the amount by $75 million and lowered the yield on 10-year debt by six basis points. A basis point is 0.01 percentage point.

State and local bonds have defied banking analyst Meredith Whitney's prediction in December 2010 of "hundreds of billions of dollars" of defaults. Investors added assets to municipal-debt funds for 16 straight weeks through March 21, the longest streak since 2010, Lipper US Fund Flows data show.

Fiscal Improvement

Governments have cut borrowing, reduced spending and raised taxes to close budget deficits created by the longest recession since the 1930s. U.S. state and local-government tax collections rose 2.1 percent in the fourth quarter of 2011, the ninth straight increase, according to U.S. Census data.

Borrowing remains restrained as coupon payments and redemptions are set to rise to $62 billion in May and June from $34 billion in March and April, according to Bank of America Merrill Lynch.

"We'll be back to a very strong technical condition," Michael Pietronico, who manages $700 million of municipals as chief executive officer of Miller Tabak Asset Management in New York, said in a telephone interview. "Municipals should continue to outperform Treasuries."

The 2.11 percent first-quarter gain for municipals is 330 basis points more than the 1.19 percent loss for Treasuries, the biggest difference since 2009, when tax-exempts led by 585 basis points. Company debt has earned 2.6 percent and taxable munis returned 3.3 percent, the Bank of America indexes show.

Reach for Yield

"Higher-yielding bonds did better as people reached for yield," Guy Davidson, who oversees $30 billion as director of municipal investments at AllianceBernstein LP in New York, said in a telephone interview.

Rates on tax-exempts with the top credit grade due in 10 years fell to 2.14 percent yesterday, down 24 basis points from a five-month high of 2.38 percent March 22, as borrowing this week dropped 46 percent from last week. It's the biggest rally since the first half of December, according to Bloomberg data.

The 10-year yield added 36 basis points from the end of 2010. Yields on bonds rated BBB, two levels from noninvestment grade, were unchanged in the period, at 3.72 percent yesterday, according to a Bloomberg Fair Value index.

Yields on Treasuries due in 10 years were 2.2 percent yesterday, up about 32 basis points this year, as Federal Reserve policy makers raised their assessment of the economy March 13.

Divergent Yields

Rates on benchmark 30-year municipals dropped 13 basis points this year, as of yesterday, while like-maturity Treasuries jumped 42 basis points.

The tax-exempt yield was 3.48 percent yesterday, still higher than 3.3 percent for 30-year Treasuries. The muni yield averaged 110 percent of Treasuries this year. They traditionally yield less because their interest is exempt from federal tax.

"Investors take a lot more home with a municipal bond than they do with a Treasury or corporate bond or some other taxable bond where they have to pay tax," Schankel said.

Following are descriptions of coming sales:

NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY plans to issue $1.08 billion of cigarette revenue refunding bonds as soon as April 3, according to data compiled by Bloomberg. The bonds are secured by a $2.70 per-pack tax. Bank of America Merrill Lynch will lead a group of banks. Moody's rates the deal Baa1, its third-lowest investment-grade rating. (Added March 29)

MICHIGAN is set to sell $225 million of taxable general-obligation debt as soon as April 4 through competitive bid. Proceeds will build schools and refund debt sold in 2010, according to sale documents. Fitch Ratings gives the bonds AA-, its fourth-highest investment grade. (Added March 29)

--Editors: Jerry Hart, Pete Young

To contact the reporter on this story:
Michelle Kaske in New York at +1-212-617-2626 or

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or

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Muni Market Steadies a Bit; Bond Buyer Indexes Increase

Friday, March 23, 2012
By James Ramage

March 23 (Bond Buyer) -- The municipal market has steadied somewhat after muni yields mostly battled those of Treasuries to a draw over the week.

Bond Buyer Indexes

New-issuance found buyers with few hiccups. But traders reported a sturdy overhang of bid-wanteds in the secondary that weighed down the market.

Treasury yields, more than the calendar, drove those of munis both higher and lower as the week progressed, according to Michael Pietronico, chief executive officer of Miller Tabak Asset Management.

"The market still feels as if there's a reasonable amount of supply coming," he said. "But it also feels at this point that it's forming a bottom around the belly of the yield curve."

Muni bond indexes still show a market that's backing up.

The Bond Buyer's 20-bond index of 20-year general obligation yields increased six basis points this week to 4.01%. It stands at its highest level since Dec. 1, when it was 4.12%.

The 11-bond index of higher-grade 20-year GO yields rose seven basis points this week to 3.79%. That represents its highest level since Dec. 1, when it was 3.85%.

The yield on the Treasury's 10-year note declined one basis point this week to 2.28%. But it remains above its 2.03% level from two weeks ago.

The yield on the Treasury's 30-year bond fell five basis points this week to 3.37%. Still, it sits higher than its 3.18% level from two weeks ago.

The benchmark 10-year triple-A yield has risen 57 basis points since the start of February, and 23 basis points since March 12.

Since last Friday, it has fallen one basis point, closing Thursday's session at 2.25%, according to Municipal Market Data.

The two-year muni yield hovered at 0.36% all week.

Meanwhile, the 30-year triple-A yield slid two basis points on the week to 3.42%, recovering from a high of 3.48%.

The muni market saw yields beyond the short end of the curve surge on Monday and Tuesday, only to rally on Wednesday and Thursday.

Treasury yields performed a similar dance across the curve, only starting each ascent and descent one day earlier.

The 10-year triple-A remains well below its historical three- and five-year averages, according to numbers from RBC Capital Markets.

The benchmark muni yield's extensive backup should be viewed as a healthy correction, Pietronico said.

"And now it should be viewed as short-term oversold, meaning that it's apt to see a nice bounce-back in terms of higher prices and lower yields," he said.

Over the near term, April's employment report stands out as the next huge hurdle for interest rates, Pietronico said. The municipal market will likely be range-bound until that point, he added.

If muni yields have been range-bound, then so have their ratios to Treasuries. Ratios across the curve have mostly settled around 100% since last Friday.

Over that period, the 10- and 30-year ratios largely ended where they started, at 98.7%. The two-year ratio ended five percentage points richer since last Friday, falling to 94.7% from 100%.

The revenue bond index, which measures 30-year revenue bond yields, gained five basis points this week to 4.88%. It is at its highest level since Jan. 5, when it was 4.93%.

The Bond Buyer's one-year note index, which is based on one-year GO note yields, increased two basis points this week to 0.24%. This stands the same level as two weeks ago.

The weekly average yield to maturity of The Bond Buyer municipal bond index, which is based on 40 long-term bond prices, increased five basis points this week to 4.68%. It is the highest weekly average for the yield to maturity since the week ended Jan. 12, when it was 4.73%.

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Detroit consent agreement wouldn't constitute swap termination event

Monday, March 19, 2012
By Ben Eisen

If the City of Detroit signs a consent agreement with the State of Michigan by the 26 March deadline, the city would avoid a termination event on its swaps and swaptions, said Terry Stanton, spokesperson for the state Department of Treasury. However, if a consent agreement is not reached, thereby necessitating the appointment of an emergency manager, a termination event would be triggered.

A termination event on the city's USD 3.8bn of outstanding hedging derivatives would cost the city anywhere between USD 280m and USD 400m, according to a report released by the Treasurer in December, which adds more uncertainty as onlookers wait to see if a consent agreement can be hammered out. The city is expected to run out of cash in the next few months.

The city's cash shortage means that in some sense, it doesn't matter whether a termination event occurs or not, according to Michael Pietronico, chief executive officer of Miller Tabak Asset Management. "There's no money to put on the table. The city needs the state's help," he said.

City and state officials stand far apart on the proposed consent agreement, despite the fact that both Mayor Dave Bing and state officials have previously touted the benefits of such a solution. The city council expressed widespread skepticism of a draft agreement presented by the governor and treasurer on Tuesday, and Bing spurned the agreement in a statement that afternoon, calling Governor Rick Snyder "disingenuous".

Snyder and Treasurer Andy Dillon have shot back, saying that time is running out to make a deal. Dillon reaffirmed that Detroit would get cash in the form of USD 37m from debt refinancing and USD 100m from a bond issue backed by state aid.

Bing said in a statement yesterday that he and the city council are drafting their own agreement. Bing gave a modified version of the governor's draft consent agreement to the city council today, and a counter-proposal is in the works, according to a statement from mayoral chief of staff Kirk Lewis.

The Financial Review Team charged with recommending to the governor the city's fate will vote tomorrow on the current draft consent agreement proposed by the state.

Because the city needs the financial help of Michigan, the state holds all the cards in this debate, Pietronico said, noting bondholders shouldn't be surprised that Detroit is finding itself at a "potential default line."

"Speaking from the 10,000 foot altitude, it's in every state's best interest not to let the city default, but sometimes it's unavoidable," Pietronico said. Broadly speaking, Detroit needs to stem its population outflow before it can stabilize its tax base and bring fiscal stability back to its operations, he said.

A municipal financial advisor noted that Bing has done a good job of embracing the wishes of his constituents in his fight to keep the city in its own hands, but that Michigan's weak home rule gives the state power to impose its wishes.

A USD 2.77m tranche of Series 2003A general obligation bonds maturing in 2023 traded yesterday at 93.7, yielding 6.04%, according to trading data posted to Electronic Municipal Market Access. Trading levels jumped from the mid-80s on Monday. As previously reported, bondholders include Nuveen Premium Municipal Income Fund, with USD 1.27m, and Oppenheimer Rochester National Municipals Fund, with USD 100,000.

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Biggest 30-Year Rally Jeopardized as Jobs Increase

Wednesday, March 14, 2012
By Michelle Kaske
of Bloomberg

March 14 (Bloomberg) -- The biggest rally in 30-year municipal bonds since October is coming to an end as signs of an improving economy lead investors to speculate the Federal Reserve will stop buying long-term U.S. Treasuries.

Thirty-year munis offer 130 basis points more yield than 10-year tax-exempts, near the least since Nov. 2, according to data compiled by Bloomberg. The gap narrowed from 189 points Dec. 28, the widest since the data began in January 2001. The decline is the biggest since 71 basis points from May to October. A basis point is 0.01 percentage point.

Buyers in the $3.7 trillion municipal market should avoid debt due in more than 20 years because yields will rise when the Fed's Operation Twist, its effort to lower interest rates by buying longer-term Treasuries, ends in June, said Michael Pietronico, who manages $690 million of munis as chief executive officer of Miller Tabak Asset Management in New York.

"It's overvalued relative to the rest of the curve and is primed for a correction," Pietronico said about debt due in 20 to 30 years and its relation to shorter-maturity bonds in the so-called yield curve. "It's going to be tested, and when it does, we think it's going to show tremendous weakness."

Issuers from California to Puerto Rico have sold long-term debt this year with rates at 45-year lows. Yields on 20-year general-obligation bonds fell to 3.6 percent in the week ended Jan. 19, the lowest since 1967, according to a Bond Buyer index. They ended last week at 3.84 percent.

Long-Term Buyers

Investors added $3.5 billion to long-term U.S. municipal-debt funds this year, about 75 percent more than what they put into intermediate funds, according to Lipper US Fund Flows.

When the yield gap between longer and shorter maturities narrows, municipals due beyond 20 years that can be refinanced in 10 years, known as callable bonds, trade closer to their call dates, said Guy Davidson, who oversees $30 billion as director of municipal investments at AllianceBernstein LP in New York.

"If yields rise, they'll begin to trade like long bonds and could lose a lot of money," Davidson said. "We're buying more of the 15- to 20-year maturity," which offers "better price stability," he said.

The Federal Reserve in late September began buying $400 billion of U.S. bonds with maturities of six to 30 years while selling an equal amount of debt maturing in three years or less to help push down longer-term interest rates.

Treasury yields rose to the highest level this year yesterday after Fed policy makers raised their assessment of the economy and refrained from new actions to lower borrowing costs. Thirty-year bond yields climbed 10 basis points to exceed 3.26 percent for the first time since Oct. 31.

Growth Seen

The Fed said it expects "moderate economic growth" and predicted the unemployment rate "will decline gradually." About 1.2 million jobs were created in the past six months, the most since the same period ended May 2006. That helped boost retail sales in February by the most in five months.

"The Fed has been supporting the longer end of the bond market by removing supply," Pietronico said. Ending the program will "cause rates to move higher, or at least steepen the yield curve, as the economy continues to recover."

The Fed's action helped narrow the difference between 10-year and 30-year Treasury yields to 114 basis points yesterday from 145 basis points Aug. 16, the widest in nine months. Municipal bonds tend to follow the Treasury market.

"The Treasury curve has flattened with Operation Twist and the municipal curve has flattened even more," Davidson said. "We just don't think that we're being compensated to own out beyond 20 years."

Higher Yields

Rates on benchmark 30-year tax-exempt bonds rose about 1 basis point to 3.36 percent yesterday. They fell to 3.26 Feb. 21, the lowest since a Bloomberg Fair Value index began in 2009, from as much as 5 percent in January 2011.

As tax-exempt yields fell faster than federal bonds, the relative value of long-term municipals against comparable Treasuries declined. Munis due in 30 years yielded about 103 percent of Treasuries yesterday, down from 137.7 percent Nov. 24, the highest ratio in two-and-a-half years.

Ten-year muni yields rose to a three-month high of 2.09 percent last week as borrowers sold $10.4 billion of fixed-rate bonds, the most in a week since Nov. 18, Bloomberg data show.

A maturity of around 10 years "generally gets more of the supply that comes in," Miller Tabak's Pietronico said. "So it weakens quicker because there's more price transparency."

Following are descriptions of coming sales:

NEW YORK LIBERTY DEVELOPMENT CORP. is set to issue $452.8 million of so-called Liberty Bonds backed by revenue as soon as next week. Proceeds will refund bonds sold by the New York City Industrial Development Agency for construction of 7 World Trade Center, according to offering documents. JPMorgan Chase & Co. will lead a group of banks on the deal. (Added March 13)

BOSTON plans to borrow $238 million of general-obligation bonds as soon as today through competitive bid. Proceeds will help finance capital projects, refund debt and refinance Boston City Hospital bonds sold in 2002 into general-obligation debt, according to sale documents. Moody's Investors Service rates the deal Aaa, its highest grade. (Added March 13)

DORMITORY AUTHORITY OF THE STATE OF NEW YORK, which finances hospital and education facilities, will issue $205 million of revenue bonds on behalf of New York University as soon as today. Proceeds will pay for building renovation, office space and refund debt sold in 2001 and 2003, according to offering documents. Bank of America Merrill Lynch will underwrite the sale. Standard & Poor's rates the bonds AA-, its fourth-highest grade. (Added March 13)

--Editors: Jerry Hart, Pete Young

To contact the reporter on this story:
Michelle Kaske in New York at +1-212-617-2626 or

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or

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Rally Seen as Three-Month-High Yields Shrink Supply

Monday, March 12, 2012
By Michelle Kaske
of Bloomberg

March 12 (Bloomberg) -- An April rally is likely for the $3.7 trillion municipal market as sales drop to a four-week low after tax-exempt yields jumped to the highest since December.

Issuers plan to borrow about $5.9 billion in the next 30 days, according to data compiled by Bloomberg, the least since $4.8 billion on Feb. 10. Sales in April have declined from March in six of the past seven years.

Top-rated 10-year yields jumped to 2.09 percent last week, the highest since Dec. 6, as borrowers sold $10.5 billion of long-term debt, the most since Nov. 18. Interest rates will fall in the second half of April as issuance ebbs, said Joe Darcy, head of municipals at Hartford Investment Management.

"The muni market has a tendency to be able to reverse field and suddenly feel as though there's never going to be enough muni bonds produced to be able to satisfy the insatiable appetite that suddenly appears," Darcy, who manages $15 billion of municipals from Hartford, Connecticut, said by telephone.

Sales will decline for 60 to 90 days beginning late next month, just as investors begin to receive more bond-coupon payments, said Michael Pietronico, who manages $690 million of municipals as chief executive officer of Miller Tabak Asset Management.

"If you thought it was hard to buy bonds in January, it will be three times the pain" in coming months, Pietronico said in a telephone interview from New York.

January Decline

State and local borrowers sold $15 billion of long-term debt in January, 21 percent less than the nine-year monthly average of $19 billion, according to data compiled by Bloomberg.

Investors will get about $17 billion of coupon payments and bond redemptions this month and again in April, according to a Bank of America Merrill Lynch report March 2. The amount will increase to about $27 billion in May and more than $40 billion in July, the most this year, according to the report.

That will turn the current supply and demand balance "completely upside down," Pietronico said.

Rising yields in March have made tax-exempts the cheapest compared with U.S. Treasuries in three months, according to Bloomberg data. The 10-year muni yield equaled 104 percent of federal debt March 8, the most since 104.4 percent on Dec. 19. The ratio was 123.4 percent Oct. 6, a two-and-a-half-year high.

Ebby Gerry, who manages $14 billion as head of municipals at UBS Global Asset Management Inc. in New York, said tax-exempt rates will increase more.

Intrinsic Value

"Current pricing of securities and valuations are above where we believe intrinsic values exist," Gerry said in a telephone interview.

Darcy likes municipals in the 10-year range because their tax-exempt yield is more than similar-maturity Treasuries, which yielded 2.04 percent March 9. He also sees lower interest-rate risk there than in longer-maturity munis.

"That's one area that we think is particularly interesting," he said.

Following are descriptions of coming sales:

ILLINOIS is set to issue $500 million of general-obligation bonds as soon as tomorrow for transportation, school construction and state facilities, according to sale documents. Samuel L. Ramirez & Co. is the underwriter. The bonds are rated A2, Moody's sixth-highest grade. (Updated March 12)

TEXAS will sell $137 million of general-obligation debt as soon as this week for water projects. Morgan Stanley will lead a group of banks. Fitch Ratings rates the bonds AAA, its highest grade. (Added March 9)

DISTRICT OF COLUMBIA WATER AND SEWER AUTHORITY, which serves 2.2 million residents, including the White House, members of Congress and the Supreme Court, is set to issue $445 million of subordinate-lien revenue bonds as soon as next week. Proceeds will help finance system upgrades and refund debt sold in 2003, according to offering documents. Siebert Brandford Shank & Co. is the senior manager. (Added March 9)

MARYLAND STATE DEPARTMENT OF TRANSPORTATION, which oversees the state's highway, transit, maritime and airport facilities, will issue $265 million of revenue bonds as soon as next month, according to data compiled by Bloomberg. The bonds will be sold through competitive bid. (Added March 9)

--Editors: Jerry Hart, Pete Young

To contact the reporter on this story:
Michelle Kaske in New York at +1-212-617-2626 or

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or

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Biggest Illinois Rally Belies $9 Billion of Bills

Friday, March 9, 2012
By Darrell Preston and Brian Chappatta
of Bloomberg

March 9 (Bloomberg) -- Illinois debt is rallying the most in a year, signaling increasing demand for the lowest-rated U.S. state as it prepares to issue $500 million of bonds next week while struggling to pay $9.2 billion of overdue bills.

Bonds sold by Illinois state and local issuers yield 70 basis points more than like-graded debt, according to data compiled by Bloomberg, near the least since February 2011. A basis point is 0.01 percent. Debt from Illinois, rated A2 by Moody's Investors Service, have earned the most of states tracked by Barclays Capital indexes in the past year.

Illinois has struggled since the recession began in 2007 to balance rising spending with falling revenue. It projects unpaid bills will grow to $9.2 billion by June 30. General-obligation bondholders will still be paid before other creditors, one of the strongest debt arrangements in the municipal market, said Alan Schankel, managing director of Janney Montgomery Scott LLC.

"The market has been inclined to shop around for more yield," said Michael Pietronico, chief executive officer of Miller Tabak Asset Management. He said his firm will consider adding Illinois bonds to its $690 million of assets under management. "The market is slightly more comfortable with Illinois than it was six or 12 months ago."

The state is scheduled to sell $500 million of general-obligation bonds as soon as March 13 through banks led by Ramirez & Co. The securities are expected to come at maturities from 2013 through 2037.

Best Returns

State and local Illinois bonds have returned 15 percent in the past 12 months, the most among Barclays state indexes of price changes and coupon payments.

Governor Pat Quinn, a Democrat, proposed a $33.8 billion budget Feb. 22 that would cut $2.7 billion from the Medicaid health-care program for the poor. The plan would reduce spending in most departments by an average of 9 percent and close two prisons and two psychiatric hospitals.

In January 2011, lawmakers of the fifth-most-populous state passed a 67 percent income-tax increase, the largest in its history, to help close a deficit of about $13 billion.

"The market perception is better" for Illinois, said Philadelphia-based Schankel. "They've got this huge pile of unpaid bills, but they've got all this new tax revenue."

Bonds rated A1, one level higher than Illinois, yielded 91 basis points more than AAA debt yesterday, according to data compiled by Bloomberg, up from 76 basis points a year earlier.

Price Projection

At next week's sale, Illinois may price bonds maturing in seven years or longer to yield from 155 basis points to 170 basis points above top-rated debt, said Tom Boylen, a trader at Chicago-based Performance Trust Capital Partners.

In January, after Moody's cut $32 billion of Illinois debt one level to its sixth-highest rank and one step lower than California, the state borrowed at about 110 basis points over top-rated debt.

Illinois still has an A+ rating from Standard & Poor's, its fifth-highest. That's two grades better than California's A-.

Following are descriptions of coming sales:

TEXAS will sell $137 million of general-obligation debt as soon as next week for water projects. Morgan Stanley will lead a group of banks. Fitch Ratings rates the bonds AAA, its highest grade. (Added March 9)

DISTRICT OF COLUMBIA WATER AND SEWER AUTHORITY, which serves 2.2 million residents, including the White House, U.S. Congress and the Supreme Court, is set to issue $445 million of subordinate-lien revenue bonds as soon as next week. Proceeds will help finance water-system upgrades and refund debt sold in 2003, according to offering documents. Siebert Brandford Shank & Co. is the senior manager. (Added March 9)

MARYLAND STATE DEPARTMENT OF TRANSPORTATION, which oversees the state's highway, transit, maritime and airport facilities, will issue $265 million of revenue bonds as soon as next week, according to data compiled by Bloomberg. The bonds will be sold through competitive bid. (Added March 9)

--With assistance from Timothy Jones in Chicago and Michelle Kaske in New York.

--Editors: Jerry Hart, Mark Schoifet

To contact the reporters on this story:
Darrell Preston in Dallas at +1-214-954-9454 or;
Brian Chappatta in New York at +1-212-617-0698 or

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or

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Univ. of California Sets $500M of Century Bonds

Wednesday, February 22, 2012
By Randall Jensen

SAN FRANCISCO — The University of California this week will sell $500 million of 100-year bonds in an effort to attract pension fund and overseas investors.

The university's 100-year bonds backed by revenues will be taxable, which will likely mainly attract pension funds or foreign investors that are normally interested in U.S. Treasury bonds.

"Hundred-year bonds are quite uncommon in the municipal market," said Michael Pietronico, chief executive and head of fixed-income research at Miller Tabak Asset Management.

"Not only are they likely looking for potential pension money, but they are also possibly trying to appeal to overseas investors," he said.

Pietronico said the deal would also help fill a shortage of long-term bonds in the market because the Federal Reserve has been gobbling up so many Treasury bonds.

The university system, California's largest, will have the final pricing for the revenue bond sale with institutional investors Wednesday or Thursday, according to the university's capital market finance department.

University officials said they may increase the size of the deal if yields remain low enough.

As of last week, officials said they had around 15 institutional investors interested in the bonds.

The money raised from the bonds will be used to fund various capital projects.

Moody's Investors Service on Friday released a report giving the university's century bonds a Aa1 with a stable outlook.

The agency noted the system's outstanding debt will be near $18 billion after the sale.

The university has $2 billion of authorized but unissued debt.

Moody's said the university's financial strength stems from its solid reputation and its position as the largest higher education system in the country. Last year, the it had more than 230,000 full-time students.

The university's revenues are expected to hit $23 billion this fiscal year.

"It also incorporates UC's ability to leverage its market position to raise revenue and reduce expenses while maintaining a robust balance sheet despite continued reductions in state appropriations and potential cuts in federal research funding," Moody's said.

However, the rating agency said the system still faces growing debt and rising exposure to liabilities from pensions and other post-employment benefit plans, which, according to Moody's, are the largest of any university system in the country.

Analysts said very few universities provide their own defined-benefit plans to employees.

Standard & Poor's and Fitch Ratings had not released their reports on the bonds by press time.

The university's general revenue bonds are rated AA-plus by Fitch and AA by Standard & Poor's. Both agencies give the bonds stable outlooks.

Goldman, Sachs & Co. will lead the sale, along with Barclays Capital.

Orrick, Herrington & Sutcliffe LLP is bond counsel.

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Christie Bets on N.J. Economic Rebound to Fund Tax Cuts, Pension

Wednesday, February 22, 2012
By Terrence Dopp and Romy Varghese
of Bloomberg

Feb. 22 (Bloomberg) -- New Jersey Governor Chris Christie is betting on the sharpest revenue increase since 2007 to help finance his personal and business income-tax cuts and the biggest pension contribution in the state's history.

Christie, a 49-year-old first-term Republican, proposed a $32.1 billion spending plan which counts on tax revenue increasing the most since the longest recession since World War II began in 2007. The budget, which is $2.4 billion more than the plan enacted last year, would cut income and business taxes while more than doubling the pension payment to $1.1 billion.

Nationwide, combined state tax revenue rose 6.1 percent from July to September, the seventh-straight quarter of growth, and the streak may have extended into the three months ended in December, according to a Jan. 26 report from the Albany, New York-based Nelson A. Rockefeller Institute of Government. Yet the gains appear to be weakening, the group said. New Jersey's revenue has missed forecasts in the six months through December.

"Everyone's fanning any numbers that appear positive," said Matt Dalton, who manages about $1 billion in municipal securities as chief executive officer at Belle Haven Investments Inc. in White Plains, New York. "Cheering for a better economy is an easy way to deal with the problem."

Christie is calling for a 10 percent income-tax cut over 36 months. In his plan to spend the largest amount in five years, he predicts revenue will rise 7.3 percent in fiscal 2013, which begins July 1. He has said the levy reductions, which will cost more than $500 million in the first year, will spur the economy.

Growth Era

"Today, we will both maintain our fiscal discipline, and drive New Jersey into a new era of growth," Christie said yesterday in a speech to lawmakers. "It is time to put the New Jersey comeback into high gear."

Governments from New York City to California have begun crafting budgets based in part on anticipated revenue growth. Two Republican governors, Florida's Rick Scott and Michigan's Rick Snyder, have proposed higher spending. Scott's budget relies on a $1.3 billion, or 5.7 percent, increase in general revenue. Snyder anticipates his state will begin fiscal 2013 Oct. 1 with a $670 million surplus and would raise spending 1.4 percent, including more money for schools and public safety.

In New Jersey, Democrats, who control the Legislature say Christie's income-tax cut would favor the wealthy and that he should focus on easing property levies. Christie has said Democrats have ignored taxes and job creation while spending the past month on a same-sex marriage bill that he vetoed Feb. 18.

Beating Mississippi

New Jersey is ranked 41st among U.S. states and the District of Columbia in the Bloomberg Economic Evaluation of States, just ahead of Mississippi. The index scores economic health and growth across categories such as employment, income, mortgage delinquencies and tax revenue.

Christie's budget calls for the largest jump in revenue since collections increased 8.7 percent in fiscal 2007 from a year earlier. Yet in the first six months of fiscal 2012, revenue trailed forecasts by 3.2 percent, according to figures from Treasurer Andrew Sidamon-Eristoff.

Rising pension costs and a slow recovery prompted Standard & Poor's, Moody's Investors Service and Fitch Ratings to lower New Jersey's credit grade last year. While first-half revenue rose 3.2 percent compared with the same period a year earlier, it was $326 million less than targets.

Revenue Declines

New Jersey's revenue dropped about 11 percent in fiscal 2009 as the economy slumped. It fell 3.5 percent the next year, before rising 2.9 percent in 2011, and is projected to rise 3.5 percent this fiscal year. The governor stressed that spending for 2013 remains below fiscal 2008 levels.

"We also have avoided overly optimistic assumptions about revenue," Christie said. "These will only get us in trouble in the future."

The $29.7 billion budget Christie signed last year has increased to $31 billion as the administration supplemented spending, in part because the Legislature underfunded some areas, Sidamon-Eristoff told reporters. His proposed plan for fiscal 2013 would be 3.7 percent more than the revised figure.

Michael Pietronico, who oversees $670 million in municipal bonds as chief executive officer at Miller Tabak Asset Management in New York, said he would like to see more details of Christie's estimates on key signs such as foreclosures.

Standard & Poor's rewarded California's revenue assumptions by giving its credit rating a positive outlook on Feb. 15, Pietronico said. S&P rates the Golden State as A-, its fourth-lowest investment grade and the lowest of any state. Perhaps Christie hopes to receive the same treatment, he said. The company rates the Garden State three steps higher at AA-.

Variables to Consider

"The assumptions are reasonable, but there are a lot of variables at play," Pietronico said.

The state's estimated pension-funding deficit fell to $36.3 billion after Christie signed bills last year that raised workers' contributions to the plan and health-care expenses, increased the minimum retirement age for new employees to 65 from 62 and froze cost-of-living increases. Yet the governor's budget didn't include the $3 billion recommended pension payment and the unfunded liability swelled to $41.8 billion for the 12 months through June.

A 2010 law required the state to phase in full payments over seven years after a decade of lapsed funding. Christie budgeted $484 million payment for the current fiscal year. Actuaries recommended the state put in $3 billion. His plan calls for more than $1 billion in payments in fiscal 2013.

Growing Deficit

The unfunded liability will continue to grow, however, because of the failure to make full contributions until fiscal 2018, Fitch has said. The company rates New Jersey's general-obligation debt AA-, its fourth-highest grade.

The pension payment represents about 3.4 percent of the total budget this year, Christie said in his speech. "My proposal of $1.1 billion for pensioners in this state reinforces my commitment to the security and financial future of all public workers," he said. "Stand with me on this commitment. Let us live up to our word."

Christie proposed school aid of $8.87 billion in his budget, an amount of spending on kindergarten to 12th-grade schools that he said is a "record level of investment."

Even with the 10 percent tax cut, rates in many income brackets will be higher than those in New York, Connecticut and Pennsylvania, the governor said.

Reversing Course

"We need to reverse our competitive disadvantage," Christie said. "In the mid-Atlantic region, New Jersey needs to be the best home for growth."

Democrats say a family with a $50,000 annual income would pay $80 less in taxes under Christie's plan, while someone earning $1 million would save $7,200.

Democrats led by Senate President Stephen Sweeney, of West Deptford, and Assembly Speaker Sheila Oliver, of East Orange, said a central tenet of Christie's spending plan may be in doubt as their party formulates a proposal to lower property taxes. Christie has "coddled" about 16,000 millionaires and Democrats won't support any tax cut that favors the wealthy, Sweeney said.

"It's not hard to figure out: He controls the numbers all the way around and he certifies the revenue," Sweeney told reporters. "They play a lot of games with those numbers."

While 52 percent of registered voters support the income-tax cut, 76 percent would prefer reducing property taxes first, according to a Rutgers University Eagleton Institute of Politics poll released yesterday. Property taxes, the highest in the nation, rose 2.4 percent to average $7,759 in 2011, according to state data.

Overestimate Gain

Voters overestimate how much money they would get from Christie's tax cut, the poll showed, with 35 percent of respondents saying it would save them more than $500. A household would have to earn more than $150,000 a year to reach that level, the institute said. Only 14 percent said their household income was more than $150,000 annually.

The telephone survey from Feb. 9-11 compiled responses from 914 registered voters and the results had a margin of error of plus or minus 3.3 percentage points.

Patrick Murray, who teaches politics and directs the Monmouth University polling institute, said since January both Republicans and Democrats have become "overly concerned with Christie's political future." In the process, the government is acting as if economic trouble Christie has warned of since taking office in January 2010 is over, Murray said.

"There's a bit of a rosy picture in this budget," the professor said. "It's hard to see how any economy can rebound that quickly."

Assemblyman Declan O'Scanlon, a Republican from Little Silver who serves as his party's budget officer, said he isn't concerned with Christie's reliance on growth, considering the governor's past record of balancing spending plans.

"It's really the budget we've all been hoping for over the past few years," he said in an interview. "We're not now, once again, facing massive cuts which everyone agrees was a tough thing. Now of course we have to pay attention and be fiscally responsible."

--With assistance from Chris Christoff in Lansing, Michigan; Henry Goldman in New York; and Michael Bender in Tallahassee, Florida.

--Editors: Ted Bunker, Mike Millard

To contact the reporters on this story:
Terrence Dopp in Trenton, New Jersey, at +1-609-278-3175 or;
Romy Varghese in Philadelphia at +1-267-519-9942 or

To contact the editor responsible for this story:
William Glasgall at +1-212-617-3023 or

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New York City Looks To Low Rates In $800 Million Bond Sale

Tuesday, February 21, 2012
By Mike Cherney
Dow Jones Newswires

NEW YORK (Dow Jones)--New York City began selling $800 million in general-obligation refinancing bonds Tuesday, tapping unusually low interest rates that the city hopes will save it $100 million in interest payments over time.

The new debt will mature in stages, from less than one year to as long as 20 years.

Given the relative lack of supply in the municipal market so far this year, investors said the city should have no problem selling the bonds. The deal, the largest to hit the market this week, is being priced for individual investors on Tuesday and Wednesday and will be priced for institutions on Thursday.

"The city has done a nice job and it's been noticed as diversifying away from financial services into more of a tourist destination," said Michael Pietronico, CEO of Miller Tabak Asset Management. "It's well managed at this time, and the market has been very receptive to this credit of late."

Pietronico said his firm, which manages $670 million in munis, might participate in the deal, depending on how the bonds are priced.

The municipal market weakened Tuesday, with 30-year debt seeing yields rise by four basis points and ending the day at 3.27%, according to Thomson Reuters Municipal Market Data. Treasurys also saw losses as investors digested news of a bailout for Greece.

Still, 30-year muni yields were about 30 basis points lower than at the start of the year. Investors have previously attributed the strong performance of the muni market to a lack of new supply and high demand from buyers who were flush with cash from coupon payments and maturities.

The city last sold general-obligation bonds in September, netting a yield of 1.67% on a 2017 maturity. In contrast, retail pricing released Tuesday for this week's sale had yields of 1% on a 2017 maturity.

"The market has been strong these past weeks and it's been five months since our last sale, so we anticipate pent-up demand for our GO bonds," said Deputy Comptroller for Public Finance Carol Kostik.

The bonds come rated Aa2 by Moody's and AA by Standard & Poor's and Fitch. In its ratings report, Fitch cited the city's highly effective budget management, solid economic base and increase in tourism as credit positives. Fitch said the city attracted 50.5 million visitors in 2011, higher than the previous record of 48.7 million visitors in 2010. Per-capita income is at 123% of the national average, Fitch said.

"No other city is as much a gateway to the world as New York is, and as a result it is almost an essentiality," said Steven Schrager, director of research at SMC Fixed Income Management, which manages $150 million in munis in separately managed accounts. "While New York had the fiscal crisis in the 1970s and will periodically have difficult times, New York will always persevere."

Schrager said his firm would like to participate in the deal.

Michael Brooks, senior portfolio manager at AllianceBernstein, praised the city's budget management and said his firm would participate in the deal. But he noted there is little room left for New York City general-obligation bonds in the firm's New York portfolios.

At the moment, New York City general-obligation debt is usually kept to around 7% of holdings, he said. The maximum would be 10%, but Brooks said it's not cheap enough yet to justify an increase. The city does have some unique credit risks.

"There's no question New York is vulnerable to terrorism and a target, and the last time it got attacked, the value of the bonds fell sharply," Brooks said.

-By Mike Cherney, Dow Jones Newswires, 212-416-3163,

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Treasuries Trounced Amid Biggest Inflows Since 2010

Tuesday, February 21, 2012
By Michelle Kaske
of Bloomberg

Feb. 21 (Bloomberg) -- Municipal-debt mutual funds are drawing the most money in 17 months, helping power tax-exempt bonds to their best returns over U.S. Treasuries since 2009.

State and local securities earned 2.64 percent this year through Feb. 16 as Treasuries lost 0.45 percent, Bank of America Merrill Lynch indexes of prices and interest payments show. The difference is the most for the period in three years.

Borrowers plan $9.6 billion of sales in the next two weeks, the least since Jan. 20, according to data compiled by Bloomberg. They should see demand from municipal-bond funds, which took in $5 billion in the seven weeks ended Feb. 15, according to Lipper US Fund Flows, the most for such a period since September 2010.

"Issuance remains very low," said Peter Hayes, a managing director at BlackRock Inc. who helps oversee $105 billion of municipals. "We thought we'd begin to see a pickup by now."

States and cities are loath to spend as tax revenue stays below the peaks reached before December 2007, when the longest recession since the 1930s began. Issuance dropped to $258.3 billion in 2011, the least in eight years, Bloomberg data show.

California cut sales to a four-year low and fell to second place behind New York as the largest borrower. A $2 billion issue California plans for March will be its first tax-exempt offering since October.

Total issuance in the first six weeks of this year was $24.7 billion, about $4 billion less than average for the period since 2004, when Bloomberg data began.

Small Calendar

"We're looking out two, three, four weeks and we're still not seeing a big, big calendar," Hayes said in a telephone interview. His New York-based company is the world's biggest asset manager, with $3.5 trillion of investments. "Normally, back over the past 10 years, we'd begin to see that."

Municipal returns this year also exceed the 2 percent for company debt, the Merrill indexes show. When adjusted for price volatility, munis beat companies 1 percent to 0.5 percent, while Treasuries lost 0.12 percent, according to Bloomberg data.

Lack of supply has helped even lower-rated borrowers sell bonds and save money.

The Puerto Rico Aqueduct and Sewer Authority, which Standard & Poor's rates BBB-, one step from non-investment grade, boosted a sale of revenue bonds last week 40 percent to $1.8 billion to meet demand. It got $5.6 billion of orders.

Lower Yields

Yields on water bonds maturing in 2042 were 68 basis points less than on 30-year debt sold in 2008, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

"The market conditions were favorable in terms of the inflows," said Jose Otero, vice president of financing for the Government Development Bank, Puerto Rico's borrowing agent. "The light supply also helped."

Buyers looking for a haven from the European debt crisis pushed down municipal and Treasury rates. Yields on 20-year general-obligation munis in a Bond Buyer index fell to 3.6 percent Jan. 19, the lowest since 1967. Thirty-year Treasuries fell to 2.7 percent Oct. 4, the least since December 2008.

Muni-bond holders are flush with cash after receiving $60 billion of principal and coupon payments in January and February, according to Chris Mauro, head of municipal strategy at RBC Capital Markets in New York. Some will be forced to buy soon, even at low rates, said Michael Pietronico, chief executive officer at Miller Tabak Asset Management in New York.

No More Pain

"People are throwing in the towel because they've been putting off their income needs" waiting for rates to go up, Pietronico, who manages $670 million of munis, said in a telephone interview. "They can't take the pain any longer."

Yields should increase as supply expands later in the year, said Neil Klein, who helps manage $650 million of municipals as senior managing director at Carret Asset Management in New York. Borrowing will rise to about $350 billion from $296 billion last year, Citigroup Inc. analysts led by George Friedlander estimated in a Jan. 13 report.

"It definitely will hold true at some point," Klein said, referring to yields rising as borrowing grows. "It's just that when demand outstrips supply, it will help keep rates low."

Following are descriptions of coming sales:

PORT OF SEATTLE plans to sell $615 million of revenue bonds as soon as this week to refinance debt sold in 1999, 2001 and 2003, according to offering documents. JPMorgan Chase & Co. is the underwriter. Moody's Investors Service rates the bonds Aa3, its fourth-highest grade. (Added Feb. 21)

SAN FRANCISCO is set to issue $344.5 million of general-obligation debt as soon as Feb. 23 through competitive bid, according to data compiled by Bloomberg. Bond proceeds will help finance earthquake-safety infrastructure, park upgrades and street repairs, according to sale documents. The deal is rated AA-, Fitch Rating's fourth-highest grade. (Updated Feb. 21)

OHIO plans to sell $120 million of general-obligation bonds for capital projects as soon as tomorrow through competitive bid, according to offering documents. Standard & Poor's rates the deal AA+, its second-highest grade. (Updated Feb. 21)

--With assistance from William Selway in Washington.

--Editors: Jerry Hart, Mark Schoifet

To contact the reporter on this story:
Michelle Kaske in New York at +1-212-617-2626 or

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or

Top Of Page 

Strong Demand for New Issuance Lifts Munis This Week

Friday, February 17, 2012
By James Ramage

Even without the tailwinds of a strong rally, the municipal market coasted through a solid week, held aloft by falling yields and supply that was well-received.

Bond Buyer Indexes

Before Thursday, muni yields hovered throughout the week on all but the long end of the curve, where they firmed. On Thursday, though, investors bought in the short end, where the two-year triple-A dropped three basis points to a record low 0.26%.

Investors gobbled up the new supply. The institutional order periods for the week's two biggest deals arrived a day earlier than scheduled, thanks to robust retail demand. Two large deals were also upsized, while other deals generally priced well, industry pros said.

Treasury yields rose modestly on the week. But they provided little direction for munis, said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

"The market's just meandering around, overall, in a very tight range," he said. "And there's apathy, in terms of reaching for bonds that perhaps you can wait for. On the other hand, there's very little impetus to sell."

Muni bond indexes fell across the board. The Bond Buyer's 20-bond index of 20-year general obligation yields declined five basis points this week to 3.65%, but remained above its 3.60% level from two weeks ago.

The 11-bond index of higher-grade 20-year GO yields dropped three basis points this week to 3.39%. But it remained above its 3.34% level from two weeks ago.

The yield on the U.S. Treasury's 10-year note declined five basis points this week to 1.99%, but remained above its 1.83% level from two weeks ago. The yield on the Treasury's 30-year bond fell five basis points this week to 3.14%, but is still higher than its 3.01% level from two weeks ago.

Muni got richer to Treasuries. Accordingly, muni ratios to Treasuries fell across the curve. They were two percentage points lower on the intermediate and long ends of the curve.

And they continued their freefall at the two-year mark, where the ratio dropped 20 percentage points on the week to 86.67%, according to Municipal Market Data numbers. On Sept. 20, the two-year ratio stood at 200%.

Against a backdrop of rising issuance, demand among investors this week remained solid. The $834.7 million sale of Dormitory Authority of the State of New York bonds stood out for Pietronico and set a nice tone for the market.

"The pricing was very well received, and as of right now, the bonds are trading up in the secondary market," he said. "It proves that for the right credit, there's some sizable amount of cash out there."

The revenue bond index, which measures 30-year revenue bond yields, decreased three basis points this week to 4.74%. But it is still above its 4.70% level from two weeks ago.

The Bond Buyer's one-year note index, which is based on one-year GO note yields, declined one basis point this week to 0.24%. This is its lowest level since Jan. 25, when it was also 0.24%.

The weekly average yield to maturity of the Bond Buyer municipal bond index, which is based on 40 long-term bond prices, held this past week at 4.58%. It remained below its 4.67% average from the week ended Jan. 26.

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California's Credit Rating Outlook Is Raised to Positive by S&P

Wednesday, February 15, 2012
By James Nash and Michael B. Marois
of Bloomberg

Feb. 15 (Bloomberg) -- California's credit, saddled with a negative outlook as recently as eight months ago, has been raised to positive and is poised for a higher rating, Standard & Poor's said.

The second revision since July comes as the most-populous state prepares to sell $2 billion in general-obligation bonds. California's A- rating, S&P's fourth-lowest investment grade and the lowest of any state, was affirmed on $73.4 billion of general-obligation debt.

California is positioned for a higher grade if revenue comes closer to projections in Governor Jerry Brown's budget, S&P said. Brown is promoting a November ballot measure that would raise income taxes on people who earn more than $250,000, and increase sales taxes statewide to avoid further cuts to education.

"Barring any other credit deterioration, we think the state is poised for credit improvement -- and potentially a higher rating -- pending its ability to better align its cash performance and budget assumptions," said Gabriel Petek, an S&P analyst, in a statement. "By downsizing its spending base, the state has corrected a significant portion of its budget imbalance."

California will offer about $2 billion of general-obligation bonds to refund debt March 1, the largest sale by the state since October. The most indebted state will also sell as much as $1 billion of cash-flow notes Feb. 22.

Lowest Rating

In January 2010, California's credit rating was cut one level, with a negative outlook, after a budget stalemate in August forced the state to issue $2.6 billion of IOUs to pay some bills. In July 2011, S&P boosted the outlook to stable, saying passage of Brown's budget mitigated the potential for a cash shortage. The state's rating remains S&P's fourth-lowest investment grade and the lowest of any state. Moody's Investors Service gives it an A1, the second-lowest after Illinois.

"The fact that California's ratings outlook has shifted from negative to positive in less than a year is a powerful vote of confidence in our state," Brown said in a statement.

While the state isn't at risk of default, S&P's action ignores concerns about California's liquidity, said Richard Larkin, director of credit analysis at Herbert J. Sims & Co. in Iselin, New Jersey.

Brown's budget for the fiscal year starting July 1 assumes voters will pass tax increases in November, without which the state would cut $4.8 billion from public schools, the equivalent of taking three weeks from the academic year.

"S&P's rating action is either vastly forward-looking or oblivious to real-time cash-flow problems," Larkin said by e-mail.

Below Projections

California collected $528 million less in taxes in January than Brown estimated in his latest budget, Controller John Chiang said Feb. 10. Most of the shortfall was in income taxes, down $525 million, or 6.3 percent less than projected Chiang said. Corporate taxes were down $127.9 million, while sales taxes were up $42.8 million.

California's fiscal situation doesn't "warrant consideration of an upgrade until their budget is truly stabilized," Larkin said. "I am at a loss as to what prompted today's decision."

The state's brightening outlook corresponds with the rebound in the stock market, since the state depends disproportionately on capital-gains taxes, said Michael Pietronico, who manages $670 million of municipals as chief executive officer at Miller Tabak Asset Management in New York.

Possible cash-flow disruptions shouldn't obscure the improvement in California's budgetary picture, he said in a telephone interview.

"Investors tend to anticipate the state to have short-term cash-flow needs," Pietronico said. "Most large states and municipalities do at some point, and it seems to have been well-budgeted and forecast so no one was surprised."

Yield Down

California 10-year general-obligation bonds yielded 85 basis points more than AAA municipal debt yesterday, compared with a peak yield spread in the past year of 1.47 percentage points in June, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

State and local debt of California returned a total of 14.8 percent last year, according to a Bank of America Merrill Lynch index. That's more than the 11.2 percent for the full $3.7 trillion municipal market, the 9.8 percent for U.S. Treasuries and the 7.5 percent for investment-grade company debt.

"Whenever ratings agencies take positive action, ultimately it should accrue to the benefits of taxpayers by constraining borrowing costs," said Tom Dresslar, a spokesman for state Treasurer Bill Lockyer, in a telephone interview.

--Editors: Pete Young, Ted Bunker

To contact the reporters on this story:
James Nash in Sacramento at +1-916-492-6041 or;
Michael B. Marois in Sacramento at +1-916-492-6042 or

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or

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Munis Steady Amid Sparse Supply

Thursday, February 2, 2012
By Kelly Nolan
Dow Jones Newswires

11:28 (Dow Jones) Prices of top-rated munis are holding steady Thursday, an initial read from Thomson Reuters Municipal Market Data shows. "There's nothing to trade," says Lord Abbett's Dan Solender. Big deals that came this week have been "put away," so there's "little volume." Still, there's plenty of cash to be put to work: "portfolios around the country are seeing cash hit due to Feb. 1 coupon payments," says Miller Tabak Asset Management's Michael Pietronico. That only helps the "positive technical backdrop" that also lifted muni prices most of January. (

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Fed Move Creates Hunger For Fixed Income

Thursday, January 26, 2012
By Patrick McGee
Dow Jones Newswires

NEW YORK (Dow Jones)--Riskier bonds and safe-havens had the same reaction to the Federal Reserve's latest communique: they rallied.

Benchmark 10-year Treasury bond yields, which move inversely to prices, fell 14 basis points to 1.92% in the wake of the Fed's announcement to keep interest rates ultralow through late 2014.

Treasurys suffered a notable trip-up later, when the Fed published its rate forecasts for the first time ever, but the 10-year note was still stronger on the day, with its yield finishing 6 basis points lower at 2%.

Anthony Valeri, senior vice president at LPL Financial, called the Fed's decision to hold interest rates near zero through late 2014 was more dovish than expected--meaning it was less focused on inflation risks and more focused on monetary easing. Keeping interest rates lower for longer makes fixed-income investments more attractive, causing investors to pile into bonds.

"Both investment-grade corporate bonds and high-yield corporate bonds are rallying," he said. "With the Fed on hold for longer than anticipated, rates are lower for longer, and cheap funding for corporates is available for longer."

Markit's CDX North America Investment Grade index, a measure of health in the U.S. corporate bond market, improved 1.9% Wednesday, allowing a multiday rally to resume after a hiccup Tuesday.


U.S. Treasurys soared Wednesday, fueled by a stellar auction and accommodative central bank, only to pull back a bit after further clarity was provided about policy makers' stance on where rates are headed.

In this unprecedented move toward greater transparency, the projections caused some worry among bondholders as it showed three officials expecting the first rate hike to come some time this year and three others seeing it happening in 2013.

This didn't quite jibe with the official Federal Open Market Committee statement, released earlier, which pledged to keep the policy rate near zero through at least late-2014--even longer than the early-2014 most analysts had expected.

"It is a bit strange that the first release of individual committee members' policy-rate forecasts did not appear to be consistent with the loose policy commitment in the statement," said Scott Sherman, interest-rate strategist at Credit Suisse. The Fed's policy-making committee likely wanted to avoid providing an aggressive estimate it might have to retract later on, Sherman added. The firm believes the real intention is to begin tightening sometime in 2015 to 2016.

Whatever the time frame, analysts agree that on balance, the Fed and Chairman Ben Bernanke's press conference reflected a group of policy makers still concerned about the pace of the U.S. recovery. The Fed chief reiterated that further active stimulus, known as quantitative easing, is still on the table and ready to be deployed if economic conditions warrant it.

The bond-friendly stance gave Treasury investors confidence to buy notes dating further out on the curve. This so-called curve maps out the yield gap between Treasurys of various maturities. A flatter curve means the yields on relatively longer-dated debt are falling faster than shorter-dated ones, often reflecting expectations of slow economic activity ahead.

"The committee threw the market a curve ball today," said Sean Simko, fixed-income portfolio manager at SEI. "This tells me that it is not confident with the prospects of robust economic growth. Today's language supports an extended move in the front end of the curve."

Investment-Grade Corporates

One sizeable issue priced in the investment-grade corporate bond market Wednesday, confirming the trend of tepid issuance on days when the Federal Reserve plans major announcements.

Grupo Aval sold $600 million of senior unsecured bonds in the Rule 144a private-placement market, pricing the 5.25%, five-year bonds at a yield of 5.375%, a person familiar with the issue said. That equates to a 457.5-basis-point risk premium over Treasurys.

The anticipated ratings on the bonds were Baa3 from Moody's Investors Service and BBB-minus from Fitch Ratings.

In the secondary market, most actively-traded bonds rallied, including volatile bank bonds and recent new issues.

Goldman Sachs Group 5.75% bonds due 2022 improved 10 basis points versus Treasurys, and Morgan Stanley 5.5% bonds due 2021 improved 5 basis points.

LPL's Valeri said low borrowing costs resulting from Fed measures have allowed corporate borrowers to replace high-interest debt with low-interest debt, and extend out maturities. This saved money and reduces near-term reliance on the capital markets, so the Fed's continuation of the policy made fixed-income assets more attractive.

Junk Bonds

Three deals priced in the high-yield market Wednesday.

Units of meat processing company JBS USA and JBS USA Finance sold $700 million of 8.25%, eight-year debt at a yield of 8.5% in a sale upsized from a planned $400 million transaction.

Investor relations director Jeremiah O'Callaghan said in a statement that the company was encouraged by the "strong demand, which surpassed $3.7 billion--a clear gesture of confidence."

Proceeds from the sale will be used by its parent, JBS SA, in Brazil to pay down more expensive, existing debt. The company estimates this will save it $200 million on an annualized basis.

The debt was rated B1 by Moody's Investors Service and BB by Standard & Poor's, and it cannot be called for the first three years.

Separately, mobile broadband company Clearwire sold $300 million of 14.75%, five-year debt for a yield of 14.75%. The debt was rated B3 by Moody's and CCC by S&P, and it cannot be called for the first five years.

Finally, Petrobakken Energy sold $900 million of eight-year, 8.625% notes for a yield of 8.713%, increased from a planned $750 million sale. The debt was rated Caa1 by Moody's and CCC-plus by S&P.

Municipal Bonds

Low new-issue supply and reports the Fed would keep interest rates low bolstered municipal bonds Wednesday, according to a widely watched benchmark of top-rated bonds from Thomson Reuters Municipal Market Data.

Debt maturing between 2025 and 2042 performed the strongest, with yields falling 6 basis points. Yields fell for about two weeks to kick off the year, but the market reversed itself last week and suffered three days of losses before steadying Tuesday.

Michael Pietronico, chief executive of Miller Tabak Asset Management, said the market started off strongly Wednesday morning before any news came from the Fed. He noted the 30-day visible supply is trending lower, which could be pushing prices up. Several medium-sized deals came to market Wednesday, but nothing major, he said.

"The market's going to have to take 24 hours to figure out what the Fed is trying to communicate today," he said. "From that perspective, I would expect the market to be volatile in both directions."

The New York State Dormitory Authority dropped yields up to 12 basis points on $122 million of Memorial Sloan-Kettering Cancer Center revenue bonds, according to a repricing. The University of Oklahoma also dropped yields 3 basis points on a 2041 maturity of a $70 million offering, another repricing said.

-By Patrick McGee, Dow Jones Newswires; 212-416-2382;

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Where Will Muni Rates Go Next?

Wednesday, January 25, 2012
By Robert Slavin

Investors may be wondering where municipal bond yields are headed after they reached 45-year lows last week.

Interest rates as reflected by The Bond Buyer 20-Bond Index have fallen nearly 10 percentage points since January 1982, when they reached record high levels. After such a steep decline, it may seem to some that yields could not possibly go lower.

However, a historical view of muni bond yields suggests the market has not hit an impenetrable floor (see story on page 6).

While the 20-bond index closed at 3.60% Friday, the all-time low yield was reached in February 1946, when the index hit just 1.29%.

The 20-bond index is based on a selection of general obligation bonds maturing in 20 years. The average rating of the 20 bonds is roughly equivalent to a double-A.

As of the end of Monday, Municipal Market Data's generic 10-year triple-A bond was paying 1.87%, the 20-year was 2.96%, and the 30-year was 3.37%.

Are yields finally going to start rising? Or could they possibly fall further?

The Bond Buyer asked a selection of muni research analysts for their predictions.

Loop Capital Markets expects the 30-year triple-A to be 3.90% by the end of the year.

Yields will increase slightly by the end of the year, said Chris Mier, Loop's managing director. Most of the increase should take place in the second half of 2012, Loop predicts.

The increase will mainly be due to the ebbing of the investor flight to quality that characterized 2011, according to Mier. The European debt problem will not improve soon, he said, adding that over time, U.S. investors will become less sensitive to Europe's problems.

Currently, yields are unusually tight to the inflation rate, he noted. (See graph above.) Eventually, investors will demand a better premium.

Munis are also expensive relative to corporate bonds right now. While the average 10-year muni-to-corporate ratio going from the present back to October 2002 is 62.9%, on Jan. 20 it was 38.8%.

Munis are also expensive relative to Standard & Poor's 500 stock dividends. While the average ratio between 20-year munis and S&P 500 stock dividends going back to June 1981 has been 246%, the current ratio is about 170%.

Both of these factors will also push yields up in the coming year, Mier said.

Bank of America Merrill Lynch expects that by the end of this year, the 10-year will rise to 2.30% and the 30-year will rise to 3.80%.

The Federal Reserve said that interest rates are on hold until 2013, noted John Hallacy, head of municipal research at Bank of America Merrill. That will eliminate one potential source of upward pressure on muni yields.

However, a modest U.S. economic recovery and increased supply in the second half should push yields up, Hallacy said.

Trident Municipal Research expects the 10-year to decline to 1.50% by mid-year and then remain about there for the rest of the year. It also expects the 30-year bond to decline to 2.75% by the end of the year.

Two major factors will push yields lower, said Bart Mosly, co-president of Trident. Europe and China's economic problems are keeping inflation risks in check, while the credit picture for state governments is improving.

Evercore Wealth Management expects little change in the next few months, followed by a possible 50 to 75 basis point increase in yields by year-end.

In six to 12 months, there may be some improvements in the European debt situation and in euro zone growth, said Gary Gildersleeve, fixed-income manager at Evercore. In addition, the U.S. economy should improve.

These factors may lead to higher bond yields in the second half of the year.

If a Republican is elected president in November, investors will expect more economic growth and that may push bond yields higher, he said.

Envision Capital Management expects the 10-year to trade in a range between 1.85% and 2.60% for the rest of the year.

Envision expects 15% more new issuance in 2012 compared to 2011, said Marilyn Cohen, Envision's chief executive officer. However, she said the market should be able to absorb such amounts.

Yields will rise only modestly this year, she said, unless there is some sort of external event. Examples of this could be a troubled bank, a development in the euro zone, or fiscally troubled Illinois having a hard time rolling over its debt.

Miller Tabak Asset Management expects 10-year and longer bonds in 2012 to trade in a range from 25 basis points lower to 50 basis points higher than the present.

Mike Pietronico, chief executive officer of Miller Tabak, pointed to three main factors that will keep yields at their current fairly low levels.

First, a strengthening U.S. dollar will keep the cost of imported goods low. In turn, this will keep inflation low.

Second, a weak European economy will mean limited global economic growth. This will contribute to the preservation of low U.S. interest rates.

Third, a weak U.S. housing market will encourage the Fed to keep interest rates low. Ultimately, this should affect both short- and long-term rates, Pietronico said.

McDonnell Investment Management says that depending on conditions, yields could increase by 50 basis points or remain where they are.

Richard Ciccarone, managing director at McDonnell, said there are a variety of fluid conditions that will affect bond yields this year.

Three factors led his firm to believe that interest rates would rise modestly — how low they are presently, an expected increase in muni bond supply, and a retreat from the flight to quality that has pushed muni yields down. If the federal government puts a cap on the feder_al tax-exemption for muni interest, that could also contribute to higher rates, Ciccarone said.

However, there are other factors that might keep yields roughly where they are now, he said. Chief among these would be unsettled conditions with the European debt crisis. Also, if the tax cuts enacted under former President George W. Bush are allowed to expire, that would encourage people to buy munis as tax havens.

Richard Sylla, an economist and economic historian offered thoughts about where muni yields are headed. He expects yields to decline for the next 12 months, but then increase somewhat in the following year.

There is a "decent chance" that yields will continue to decline in 2012, said Sylla, professor of economics at New York University's Stern School of Business.

"The economy is still pretty sluggish and the Fed has promised to keep its target fed funds rate close to zero into 2013, if not longer," he said. "And the Obama administration seems to want to raise marginal tax rates on 'the rich,' however defined; that by itself would make munis more appealing to investors."

Next year the rate decline should be halted by an improving economy.

"Long-term bond investors need to be very careful in the period ahead, lest they suffer once again the negative returns, nominal and real, that they experienced by holding bonds from 1965 to 1981," Sylla said.

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Rally's End Seen as Low Yields Conspire With Supply: Muni Credit

Monday, January 23, 2012
By Michelle Kaske and Brian Chappatta
of Bloomberg

Jan. 23 (Bloomberg) -- The biggest rally for municipal bonds in at least 20 years may be derailed by the largest jump in supply in four months and as tax-exempt interest rates fall toward the level of equity yields and inflation.

The yield on 10-year AAA rated debt plummeted 136 basis points in 2011, the biggest one-year drop since at least 1992, according to a Bloomberg Fair Value index. It fell 17 basis points this month to 1.91 percent Jan. 19, the lowest in the index's 20 years and less than half the 4.15 percent average during that time. A basis point is 0.01 percentage point.

Lower costs drove borrowers from Washington state to Puerto Rico to plan bond sales of $8.3 billion in the next 30 days, up from $1.3 billion a month ago and the largest gain in expected supply since September, according to data compiled by Bloomberg. As more resume issuance after the longest recession since the 1930s, they'll have to lift interest rates to attract buyers.

"The market had gotten to a point where it was way overbought," Michael Pietronico, who manages $630 million of municipals as chief executive officer at Miller Tabak Asset Management, said in a telephone interview. "It's prudent for investors to step back and let the correction occur."

Top-rated Fairfax County, Virginia, with household income twice the U.S. median, had to increase yields as much as 15 basis points from preliminary levels to complete its $192 million general-obligation sale Jan. 19, according to data compiled by Bloomberg. Bonds due in 2022 priced to yield 1.82 percent, seven basis points above a 10-year benchmark yield, Bloomberg data show.

Market Turn

"There's starting to be some resistance to these low levels of rates," said Daniel Solender, who manages $14 billion of munis at Lord Abbett & Co. in Jersey City, New Jersey. Fairfax "had to react to a market that was turning."

Ten-year municipal yields equaled 88.6 percent of Treasuries on Jan. 19, the lowest since July 21. The ratio was 123.4 percent on Oct. 6, the highest since April 3, 2009, according to Bloomberg data.

Municipals due in 30 years yielded 109.4 percent of equivalent federal debt on Jan. 20, the lowest since Oct. 28, Bloomberg data show. The ratio was 137.7 percent on Nov. 24, the highest since April 15, 2009.

The difference between 20-year municipal yields, at 3.4 percent on Jan. 19, according to a Bloomberg Fair Value index, and the annual rate of consumer price inflation excluding food and energy is about 1 percentage point, the smallest difference since 1981, Chris Mier, a managing director at Chicago's Loop Capital Markets LLC, wrote in a Jan. 19 report.

Seeking Reward

So-called core inflation, unadjusted for seasonal variations, was 2.2 percent in December, according to data compiled by Bloomberg.

"Investors will not buy fixed-income instruments for long if they don't get some kind of reward for investing over and above the correlated inflation," Mier said in a conference call.

The yield on 20-year tax-exempts is about 170 percent of the 2.04 percent dividend yield of shares in the Standard & Poor's 500 Index.

"Other than a short period in 2008, there has been no time since 1981 where municipal yields have been so close to the dividend yield on the S&P 500," Mier said on the call.

The low real yields of munis "indicates that most fixed-income products are overvalued," Chris Ryon, who manages $7.5 billion of municipal assets at Thornburg Investment Management in Santa Fe, New Mexico, said in a telephone interview.

Rising Month

Interest rates will rise for all maturities over the next month, Pietronico said. Bonds due in 20 to 30 years will gain 25 basis points, testing investors' appetite, he said.

Individuals added $1 billion to U.S. municipal-bond mutual funds in the week through Jan. 18, according to Lipper US fund Flows data. It was the seventh consecutive week of additions and the second week of $1 billion or more, the data show.

"There's been some performance chasing," Pietronico said. "We're interested in seeing if those inflows continue as the market weakens over the next month."

Following are descriptions of coming sales of municipal debt:

NEW YORK CITY MUNICIPAL WATER FINANCE AUTHORITY, which provides drinking water to 8 million residents, is set to sell $400 million of tax-exempt revenue bonds as soon as this week for capital upgrades. Ramirez & Co. will lead banks on the deal. The bonds are rated Aa2 by Moody's Investors Service, its third-highest investment grade. (Added Jan. 20)

JEA, which provides water and electricity to Jacksonville, Florida, will sell as soon as tomorrow $402 million of water and sewer-system revenue bonds to refund debt, according to sale documents. The transaction is rated Aa2, Moody's third-highest investment grade. Goldman Sachs Group Inc. will lead banks on the sale. (Added Jan. 23)

INDIANA FINANCE AUTHORITY is set to issue as soon as Jan. 25 $174 million of revenue bonds to refund debt. Bank of America Merrill Lynch is the underwriter. The bonds are rated AAA, Fitch Rating's top investment grade. (Added Jan. 23)

--With assistance from Martin Z. Braun in New York.
Editors: Jerry Hart, Ted Bunker

To contact the reporters on this story:
Michelle Kaske in New York at +1-212-617-2626 or;
Brian Chappatta in New York at +1-212-617-0698 or

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or

Top Of Page 

Troubled Vernon Issues With Ease
Calif. City's Deal Is Oversubscribed

Friday, January 13, 2012
By Keeley Webster

LOS ANGELES — Selling $74.3 million of electric system revenue bonds for Vernon, the scandal-ridden California city that narrowly avoided being disincorporated last year, would seem to be an uphill battle.

But De La Rosa & Co, the underwriter selected to market the bonds, found it to be remarkably easy.

On Tuesday, De La Rosa priced the debt, shutting down sales in less than an hour after the bonds — with ratings split between high triple-B and low single-A — were oversubscribed.

Benjamin Stern, a principal in the investment bank's Los Angeles office, said the bank did not anticipate the level of interest the bonds would receive when it first began pre-marketing efforts in mid-December.

"The investors were able to wade through the noise and take a look at the underlying credit and make a decision to purchase the bonds," Stern said. "When we started the process last year, I didn't have high expectations that this many investors would look at the credit, but I felt they had good credit."

The bonds are a risky investment from an individual investor's point of view, because the city of Vernon lacks a population and residential tax base, said Michael Pietronico, chief executive of Miller Tabak Asset Management in New York.

"The city is only 5.2 square miles and it is mostly industrial," Pietronico said. "It makes for a risky investment since industry can change quickly. Residential tends to be more stable."

The industrial city is home to 1,200 businesses but just 112 residents.

The bonds are split into two series. Series A, $39.5 million of new-money tax-exempt bonds, will be used to pay for improvements to the city's electric system. The taxable $34.8 million Series B bonds will refund 2009 bonds that mature later this year.

The response received enabled the underwriter to lower the yield by 10 basis points to 5.4% on the 30-year taxexempt bonds at close, Stern said.

"I'm sure they had a lot of people lined up before the sale. The bonds are attractively priced," said a San Francisco bond trader, who declined to be identified. "The market is strong and new issuance supply is thin for January."

The market for the Vernon bonds is institutional investors, who are always searching for high yields, according to Pietronico.

"Institutional investors tend to be more sophisticated and can track investments like this better than individual investors can," he said.

The preliminary offering statement contains an in-depth explanation of the controversies that have rocked the city.

Over the past two years, three of Vernon's former senior officials have been convicted of crimes relating to city activities — the mayor for voter fraud and conspiracy, the city administrator for misappropriation of funds, and the director of light and power on a felony conflict-of-interest charge related to the hiring of his wife as a contractor.

None are currently employed by the city, and salaries of Vernon officials have been adjusted to levels comparable to other California cities.

State legislators introduced a bill in December 2010 that would have disincorporated the city after years of complaints from neighboring communities about corruption and pollution from Vernon's power generating station.

Concerned about potential job losses in the city that employs 50,000 people, Sen. Kevin De Leon, D-Los Angeles, one of the disincorporation bill's original co-authors, agreed to work with Vernon to defeat the bill if officials agreed to a series of reforms.

Among the changes was an agreement that the city spend an amount equivalent to what neighboring cities spend annually on parks and recreation by creating a community benefits program to create parks in the city. The amount agreed to was $60 million.

Vernon officials are considering a bond issue to pay for the parks fund, but city spokesman Fred MacFarlane said money from this week's electric revenue bond offering will not be used for that purpose.

The disincorporation bill was defeated in September. Simultaneously, De Leon recommended a series of reforms to improve oversight and transparency that were approved by Vernon voters in two separate referendums held in November.

The measures approved by voters included a requirement that officials fill vacancies on the City Council through a special election rather than by appointment.

Other voter-approved changes to the city charter included requiring competitive bidding on contracts, retaining an independent reform monitor for four more years, and maintaining a housing commission.

While de Leon's office is pleased with the progress being made by the city, the senator has assigned one of his deputies to meet with Vernon officials on a weekly basis to make sure the city adheres to the agreements made, said Greg Hayes, a de Leon spokesman.

The Internal Revenue Service closed an audit of the tax-exempt status of Vernon's electric revenue bonds on Dec. 22, finding favorably for the city, which continues to be the subject of two other audits.

The California Public Employees' Retirement System is conducting an examination of retirement benefits paid to public officials that is expected to be released in mid-February. A joint legislative audit will be released in April.

The benefits paid to Bruce Malkenhorst Sr., a former Vernon city manager convicted on charges of misappropriating funds, are considered to be among the state's most excessive, Hayes said. He collects a $500,000 annual pension.

De Leon is working on a bill that would prevent former city officials convicted of embezzlement from receiving pensions, Hayes said.

The IRS notified Vernon that it closed its audit of $360.75 million of electric system revenue bonds issued by the city in May 2009 without changes to their tax-exempt status.

The audits were disclosed in event notices the issuers filed with the Municipal Securities Rulemaking Board's online EMMA system.

"The close of the IRS audit with a 'no change' determination was not unexpected," city administrator Mark Whitworth said in a statement released in late December. "In fact, it was anticipated from the start of the Treasury Department's examination. Vernon fully cooperated with the IRS auditors, confident that our bond financial dealings have been legal and appropriate."

The IRS ruling was clearly helpful in selling the bonds, even though it was related to a different bond issue, Stern said.

"It cleared up some of the questions," he added. "It definitely helped the process, although taxability was never in question on the new bonds."

Another hurdle the bonds had to clear was the mixed ratings received from Standard & Poor's and Moody's Investors Service.

S&P affirmed its A-minus on the city's electric revenue debt on Nov. 23 with a stable outlook. But Moody's downgraded Vernon's electricity enterprise on Dec. 6 to Baa1 from A, mainly due to declining revenues, while also giving the credit a stable outlook.

"This downgrade is due to financial operations, which just deteriorated independently of the other issues," said Moody's Kevork Khrimian in an interview shortly after the bond downgrade.

The defeat and aftermath of AB 46, which would have disincorporated Vernon, had minimal affect on the rating, according to Khrimian.

The Moody's downgrade reflects weaker-than-expected operating results for 2011 and analysts' expectation that similar results are likely to persist at least through 2014, he said.

The Vernon utility's demand for power is stagnant and has fallen significantly short of projections, the Moody's report noted.

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Munis Continue To Rally

Thursday, January 12, 2012
By Kelly Nolan
Dow Jones Newswires

11:14 [Dow Jones] Low supply and January reinvestment cash are still buoying munis, with top-rated bonds poised to set fresh record yield lows once again Thursday. According to an initial read from Thomson Reuters Municipal Market Data, prices of triple-A rated bonds are flat to as much as five basis points higher, with the best performance in bonds maturing in 2024 through 2033. "The municipal market needs supply with a capital 'S' to knock this rally off the tracks," says Miller Tabak Asset Management CEO Michael Pietronico. MMD's Randy Smolik says at some point, buyers may resist low yields, but supply looks to be fairly light over the next couple of weeks. (

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Illinois Easily Sells $800 Million Muni Deal, Despite Downgrade
Investors shrug off Moody's decision to lower state's credit rating
Bonds reoffered at lower yields than where outstanding debt trades
Relative dearth of bonds, abundance of reinvestment money help sale

Wednesday, January 11, 2012
By Kelly Nolan
Dow Jones Newswires

Illinois had no trouble selling $800 million in debt Wednesday, just days after Moody's Investors Service downgraded the state's credit.

Investment-grade banks bid aggressively for the two-part, competitive sale. Wells Fargo placed the winning offer on $525 million in tax-exempt debt, while J.P. Morgan bought the $275 million taxable issue, said John Sinsheimer, director of capital markets for Illinois.

On the tax-exempt portion, the state achieved the lowest true interest cost, at roughly 3.91%, in recent history, he said.

"We are very pleased with this sale, and we believe it reflects continued strong interest in Illinois bonds," Sinsheimer said.

Both Wells and J.P. Morgan reoffered bonds to investors at lower yields than where outstanding Illinois debt currently trades, reflecting how strong the sale was, market participants said.

Wells offered 10-year tax-exempt debt for Illinois with a coupon of 4% and a yield of 3.10%, for instance. That's around 0.20 percentage point less in yield than where comparable outstanding Illinois debt traded late last year, said Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York. It's also around 1.30 percentage point more in yield than what triple-A munis offer on Thomson Reuters Municipal Market Data's benchmark scale.

"The flavor of the muni market so far in 2012 has been investors reaching for [higher-yielding] product to generate excess total return and income," said Pietronico, whose firm manages about $625 million in muni assets. He said his firm would buy Illinois debt in the secondary trading market if it came at juicier yields than those offered in the deal Wednesday.

A relative dearth of new bonds in the muni market helped reception of Illinois' sale, too, said portfolio managers. States, cities and other so-called municipalities have sold $1.6 billion of municipal debt so far this year, according to data provider Thomson Reuters. That's less than one-third of the volume of a typical week in 2011.

"The timing couldn't be better for the state," said John Mousseau, managing director and portfolio manager at Cumberland Advisors, which has offices in Vineland, N.J. and Sarasota, Fla., and manages more than $1 billion in muni assets. Besides a lack of supply, investors may seek to reinvest billions of dollars from coupon payments and maturing debt, he said.

Randy Smolik, a senior market analyst MMD, estimated that at least $19 billion is available for reinvestment this month.

The positive reception for Illinois debt followed Moody's cutting the state's credit rating to A2 from A1, citing lawmakers' failure to address the state's "severe pension underfunding" and "chronic bill payment delays." Standard & Poor's and Fitch Ratings affirmed Illinois' their ratings of A-plus and single-A, respectively, last week.

According to bond offering documents, Illinois' fiscal 2011 funded pension ratio was about 43%. Its backlog of unpaid bills stood at $3.8 billion at the end of the third quarter last year, the state comptroller's office said.

"Failure to address these challenges undermines near-to-immediate-term prospects for fiscal recovery," Moody's said.

Eric Friedland, head of municipal research at Shroders Investment Management, said his firm won't be buying this Illinois debt. He's said he's concerned about the possibility of more downgrades for the state.

"I don't see any meaningful structural change made by the state," said Friedland, whose Philadelphia-based team oversees about $2 billion in muni assets. "The state has a diverse economy, good wealth levels, and the general obligation bonds have a strong priority of payment, but management has to make some tough changes for the credit to reverse course."

Wednesday's sale marks the first time Illinois has sold general obligation debt since February 2011, when it issued $3.7 billion, according to Thomson Reuters. Proceeds of the deal will fund school, transportation and other projects.

-By Kelly Nolan, Dow Jones Newswires; 615-679-9299;

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Treasurys Rally Despite Positive Jobs Report

Monday, January 9, 2012
By Mike Cherney
Dow Jones Newswires

NEW YORK -(Dow Jones)- Treasurys rallied Friday even though a report showed the U.S. added 200,000 jobs in December, and corporate debt continued to outperform while the honeymoon sentiment that accompanied the new year's opening begins to fade.

After a solid start, the year is on shaky ground, Societe Generale credit strategist Suki Mann wrote in a note. He said the upbeat tone that started 2012 has been marred by "renewed headline risk and event risk coming from the periphery" in Europe.

The euro is under pressure, default insurance costs on sovereign debt are up again and "risk on has turned to risk off like the closing of a tap," all of which puts downward pressure on markets, Mann wrote.

Meanwhile, a key barometer of bond-market health, the Markit U.S. North American Investment Grade index, was off by 0.1%, signalling that nerves may even spread to corporates.


Delivering a latest blow to bears, the price rally pushed down the key 10-year yield below 2% again.

The yield, or the rate the U.S. government pays to borrow in capital markets, shot up to 2.049%, the highest level since Dec. 13, right after the U.S. nonfarm payrolls report showed stronger-than-forecast growth of 200,000 jobs in December.

But uncertainty on the euro zone and supportive comments from a key maker turned the bond market around, wooing fresh buyers to scoop up bonds at cheaper levels.

"It has been instructive that the recent spate of better-than-expected US data have been relatively ignored," said Kevin Flanagan, chief fixed-income strategist at Morgan Stanley Smith Barney.

In late-afternoon trade, the benchmark 10-year note was 9/32 higher to yield 1.961%. The 30-year bond was 18/32 higher to yield 3.030%. The two-year note was flat to yield 0.260%. Bond prices move inversely to their yields.

Investment-Grade Corporates

The U.S. new-issue market was dominated by Bank of Montreal (BMO, BMO.T). BMO sold $1.5 billion in new five-year notes Friday at 1.70 percentage points over comparable government debt, a yield of 2.544%, according to a person familiar with the offering.

That was in line with official guidance, but inside the whispered price earlier this session of 1.75 percentage points.

The offering caps a week in which $11.5 billion of bond issuance from financial institutions had already priced, putting it on track to be the busiest week for these issuers since the middle of July 2011.

BMO led the sale itself alongside Goldman Sachs Group Inc. (GS), J.P. Morgan Chase & Co. (JPM) and (MS), and proceeds will be used for general corporate and funding purposes.

The 2.5% notes are rated Aa2 by Moody's Investors Service and A-plus by Standard & Poor's.

Junk Bonds

Chesapeake Midstream Partners L.P. (CHKM) sold $750 million of new 10-year notes, pricing them at a risk premium of 4.18 percentage points over comparable government debt for a yield of 6.125%, according to a person familiar with the sale.

The sale, via funding arm CHKM Finance Corp., was increased by $150 million from a planned $600 million deal.

The senior unsecured notes come due for repayment on July 15, 2022, and were rated Ba3 by Moody's Investors Service and BB-plus by Standard & Poor's.

The notes can't be bought back by the natural-gas provider for the first five years of their life, and at their first call date can be redeemed at par, or 100 cents on the dollar, plus half of their 6.125% coupon--in other words, 103.063 cents on the dollar.

Proceeds will be used to repay borrowings under the company's revolver and for general partnership purposes, according to a company press release.

Separately, Icahn Enterprises LP sold $500 million of senior notes in an add- on of its series due January 2018 at 8%. The notes were rated Ba3 by Moody's and BBB-minus by S&P.

Municipal Bonds

Anemic supply and January reinvestment cash continued to push the prices of top-rated municipal bonds higher, with debt maturing between 2025 and 2031 gaining most, according to a benchmark scale from Thomson Reuters Municipal Market Data.

Bonds maturing between 2025 and 2031 saw yields fall 6 . Prices rose across the curve, except for debt maturing between 2013 and 2017, which held steady.

There were no major new deals Friday, said Randy Smolik, senior market analyst at Thomson Reuters. Janney put next week's new issue at about $4 billion, higher than this week's figure of about $500 milllion.

"The supply situation tends to lighten up in the second or third week of December and remains so until the end of January," said Michael Pietronico, CEO of Miller Tabak Asset Management.

On Ipreo's negotiated calendar for next week, Orange County, Calif., is set to sell $240 million in taxable pension-obligation bonds. Illinois will also competitively sell $800 million in general-obligation bonds.

Also, Moody's cut the general obligation bond rating of Illinois to A2 from A1.


Mortgage-backed securities supported by loans that have been difficult to refinance lagged Treasurys as investors continued to price in greater chances the U.S. will break down barriers to refinancings, which trigger return-damaging principal prepayments. The drumbeat of U.S. and Federal Reserve comments hasn't roiled the MBS market, but kept investors on edge, said an analyst at a primary dealer.

New York Fed chief William Dudley on Friday kept the speculation alive as he advocated "additional housing policy interventions," including ways to reduce obstacles to refinancing. Fannie Mae 5% MBS underperformed falling Treasurys by about 1/32, according to Credit Suisse.

MBS supported by new loans, such as bonds paying 3.5% interest, fared better as investors saw them as safe from refinancing and also the target of Fed purchases. This helped shrink the gap between Fannie Mae's current coupon MBS and 10-year Treasury note yields to by 7 basis points to about 84 basis points, the lowest since May.

-By Mike Cherney, Dow Jones Newswires, 212-416-3163,

--Katy Burne, Al Yoon and Min Zeng contributed to this article.

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