Munis Finish Firmer in Light Trading

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The municipal market was firmer in light trading yesterday, even as Treasuries were largely unchanged.

"It's quiet and firm, up a couple basis points," a trader in New York said. "Munis have gotten cheap. I think people are just seeing it as an attractive investment."

Even with gains on Thursday and Friday, municipal bonds cheapened significantly compared to Treasuries last week. The ratio between triple-A rated, 30-year general obligation bonds and 30-year Treasury bonds reached 105.41 on Friday, its highest level since April, according to Municipal Market Data.

But coming off a week of gains, the Treasury market showed little movement yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.97%, closed at 3.97%. The yield on the two-year note closed at 2.62% after opening at 2.63%. The yield on the 30-year closed at 4.52% after opening at 4.52%.

Meanwhile, equities finished mostly unchanged after posting gains most of the day. The Dow Jones industrial average closed up 3.50 to 11,350.01. Last week, the index hit its lowest level since September 2006.

In yesterday's economic news, the Chicago Purchasing Managers' index rose to 49.6 in June from 49.1 in May. Although the number still represents a contraction, it came in higher than the 48.0 expected by economists polled by IFR Markets.

A slate of economic data will be released during the holiday-shortened week. Today, the June ISM manufacturing index will be released, with economists polled by IFR predicting a 48.7 reading. Tomorrow, May factory orders data will be released.

The week finishes on Thursday, with the June employment report. Economists polled by IFR expect unemployment to remain at 5.5%, unchanged for the month, while non-farm payrolls are expected to slide 50,000.

Although some traders might be tempted to end the week early ahead of Friday's July 4 holiday, the employment data should bring them to the office Thursday, wrote Kevin Giddis, Morgan Keegan & Co. head of fixed income, sales, trading, and research in his daily market comment. The Securities Industry and Financial Markets Association has recommended a 2 p.m. close on Thursday.

In addition, the European Central Bank will set its interest rate on Thursday. It is widely expected to raise rates.

"This is a short week and likely accompanied by a shorter attention span for those who want to end the quarter and head to the beach after a not so memorable first half of the year for Wall Street," Giddis wrote. "But the 'market players' will have to hang around long enough to see the employment report."

The municipal market benefited from perceptions of a weakened U.S. economy at the end of last week, George Friedlander, managing director and fixed-income strategist at Citi, wrote in his weekly report. Economic uncertainty decreased investors' fears that the Federal Reserve will raise the federal funds rate to fight inflation, helping both Treasuries and the municipal market.

Friedlander said municipal yields "may now very well be at or near interim peaks." He noted that some sectors and maturities now have "magical" 5% yields and that an increasing ratio compared to Treasuries may attract crossover buyers.

"Given these factors, we would not wait for another muni yield spike that might not arrive before putting cash to work," Friedlander wrote. "The yields available now are attractive in our view. We do not, however, recommend moving into the muni market all at once. Given the thinness of demand for munis away from the household sector and the fact that many yields are being 'priced to sell' in the absence of dealer balance sheet capacity, there are likely to be relative bargains available from time to time."

In yesterday's new issue market, JPMorgan received $75.8 million in orders from retail investors on $518.3 million mental health revenue bonds for the Dormitory Authority of the State of the New York, the largest deal of the week. Bonds from the $38.5 million Series C, subject to the alternative minimum tax, mature from 2009 through 2018, with term bonds in 2028 and 2033. The bonds were priced at par to yield from 2.5% in 2009 to 4.65% in 2018, except those maturing in 2028 and 2033, which were not offered for retail. Bonds maturing from 2015 to 2018 are insured by Financial Security Assurance Inc.

Bonds from $197.8 million Series D mature from 2009 through 2019, with yields ranging from 1.9% with a 4% coupon in 2009 to 4.21% with a 5% coupon in 2019. A portion of the 2009 maturities were decided via sealed bid. The bonds maturing from 2015 through 2019 are insured by FSA. Bonds from the $40.97 million Series E mature from 2009 through 2019, with yields ranging from 1.9% with a 4% coupon in 2009 to 4.21% with 5% coupon in 2019. A portion of the 2009 bonds were decided via sealed bid. Bonds maturing 2015 through 2019 are insured by FSA.

Bonds from all series, which are callable at par in 2018, have underlying credit ratings of AA-minus from Standard & Poor's and A-plus from Fitch Ratings. Bonds from $163.6 million Series A and $81.3 million Series B were not offered to retail investors.

Finally, the Nevada System of Higher Education competitively sold $60.5 million in universities revenue bonds to Piper Jaffray & Co. at a true interest cost of 4.8892%. Bonds mature from 2009 through 2031, with a term bond in 2038. None were reoffered. The bonds, which are callable at par in 2018, have ratings of Aa3 from Moody's Investors Service and AA-minus from Standard & Poor's.

New-issue activity will be light for the rest of the holiday-shortened week. Just $1.67 billion in new-issue volume is expected to enter the market, according to Thomson Reuters.

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