Based on traditional measures of value, the high-quality municipal bond has returned to something approaching normal. Not so for lower-grade bonds.

The ratio of the yield on the high-grade muni to the yield on the Treasury - while higher than usual - is somewhat normal compared to the ratio at its worst two months ago.

Comparisons of lower-rated munis to Treasuries remain nowhere near normal. The ratios remain in distress, especially for longer-term bonds.

While munis have enjoyed a well-publicized rally for the better part of two months, the rally has not lifted the high-yield, long-term bonds nearly as much as high-grade paper.

The single-A 30-year muni on the Municipal Market Data scale until last year never yielded more than 114% of the 30-year Treasury. The average since 2000 was 99% of the 30-year Treasury.

Yesterday, the 30-year Treasury yielded 3.52%, while single-A 30-year munis yielded 5.67%. That implies a yield ratio of 161.1%.

"It's all been a flight to quality," said Daniel Lennon, branch manager of the GMS Group LLC's main branch. "People are just running to short-term and to safety."

Lennon said much of the interest in munis lately comes from retail investors looking to stabilize their portfolios. Investors looking for more security are likely to buy top-rated bonds and not riskier, lower-rated paper, he said.

For that reason, the benchmark triple-A muni 10-year does not tell the whole story.

Long-term, low-grade paper continues to bear yields, relative to Treasuries, nobody would have predicted two years ago.

Munis traditionally traded in fairly narrow ranges relative to comparable-maturity Treasuries.

Forced selling and a flight to safety last year demolished that relationship.

The triple-A rated muni in 10 years, based on the MMD yield curve, yielded an average of 85.1% of the 10-year Treasury from the beginning of 2000 until the end of 2007.

The ratio between the two yields ranged between 80% and 90% most of the time.

Until last year, investors would have been bowled over at the sight of a triple-A 10-year muni yielding more than the 10-year Treasury.

A combination of a surge in Treasuries and a sell-off in munis pushed the muni yield higher than the Treasury yield for much of 2008, sometimes drastically so.

In December, triple-A 10-year yields reached 186.1% of the 10-year Treasury, by far the highest ratio ever.

That ratio has since calmed down. The yield on triple-A 10-years this month slipped below the 10-year Treasury yield for a few days. It has since jumped back above the Treasury and yesterday closed at 3.04%, or 108.2% of the 10-year Treasury.

The high-grade 10-year, though, never fell as sharply as low-grade or long-term debt. Further, a brisk rally in munis since mid-December has concentrated in large part on short-term, high-grade paper.

The explanation for this is simple: as the credit crisis unfolds, investors are distinguishing top-quality state and local government debt from lower-quality or long-term bonds.

"It's just a complete risk-aversion," said Terry O'Grady, senior vice president of municipal trading at "It seems like the market is infatuated and completely focused on the highest-grade GOs, or bonds insured by Assured Guaranty or Berkshire Hathaway [Assurance Corp.] ... Then, there's the rest of the market. There's a wide disparity between the two groups, and historically wide spreads."

The muni yield curve - which plots how much higher long-term muni yields are than short-term yields - has rarely been steeper.

Since 1980, the 30-year triple-A has yielded an average of 213.68 basis points more than the two-year, according to MMD.

The spread is currently 361 basis points, which is close to the highest since the early 1980s. Just two years ago, the spread was 40 basis points.

The steepening slope of the yield curve shows investor preference for short-term debt and the absence of tender-option bond program, that had been significant buyers on the long end.

Similarly, lower-quality paper is trading at historically high spreads to top-quality munis.

Since the early 1980s, single-A rated 10-year munis have yielded an average of 32 basis points more than triple-A's.

The spread now is 129 basis points, down not all that much from the all-time peak of 146 in December and well more than double the spread this time last year.

O'Grady said his firm sees "some great opportunities" for investors who can take the time to ferret out strong credits that have been unfairly heaped onto the high-yield pile.

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