Markets

A generous $6.67 billion of assets flowed into tax-free money market funds for the week ending Feb. 4, according to the Money Fund Report.

With ongoing problems in the bond insurance market, large institutional investors say they continue to find value on A-rated bonds - with insurance - in the secondary market now that spreads between generic triple-A and single-A paper have widened by approximately 30 basis points versus where they were before the subprime mortgage crisis unfolded over eight months ago.

Current problems in the credit markets are now undercutting the short-term municipal market, as rising yields in variable-rate demand notes and auction rates and a handful of failed auctions show a market reeling from credit concerns and no longer protected by staunch triple-A rated bond insurance.

A $3.2 billion sale of economic recovery bonds by California will test the choppy waters of the municipal market this week, headlining an estimated $6.18 billion slate of new-issue volume in the primary market.

Weekly reporting municipal bond mutual funds had a net inflow of $468 million during the period ending Jan. 30, AMG Data Services reported.

Financial Guaranty Insurance Co. was downgraded by Standard & Poor’s yesterday to AA from AAA, based on the rating agency’s most recent downg ades of residential mortgage-backed securities, some of which are guaranteed by FGIC. The insurer remains on credit watch with developing implications.

Following the Federal Open Market Committee’s surprise cut in the federal funds rate by 75 basis points to 3.50% on Jan. 22, tax-free money market funds ended the first month of 2008 on a positive note, reporting inflows of $939.5 million for the week ending Jan. 29, according to the Money Fund Report.

The turmoil in the municipal market over bond insurers’ exposure to ill-fated products derived from subprime mortgages has continued, with recent downgrades of monoline insurers suffering from severe financial deficiencies. In addition, Democratic leaders are proposing federal oversight and uniform standards for insurers, and the affected guarantors are being closely scrutinized by the Senate Banking Committee and Treasury Secretary Henry Paulson.

In the absence of any billion-dollar deals this week, a handful of significantly smaller financings will be priced into a relatively quiet primary market where an estimated $3.29 billion in new issues is expected. The volume compares to last week when a revised $3.45 billion in total competitive and negotiated new issues came to market, according to Thomson Financial.

Weekly reporting municipal bond mutual funds had a net inflow of $513 million during the period ending Jan. 23, AMG Data Services reported.