Munis Continue Firmer in Wake of FOMC Action

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The municipal market was substantially firmer again yesterday, with high-grade munis better by as much as 10 to 15 basis points, as tax-exempt yields continue to plummet in the wake of the Federal Open Market Committee slashing the federal funds rate target at least 75 basis points Tuesday, to a range of zero to 0.25%.

However, Evan Rourke, portfolio manager at MD Sass, said the language in the accompanying statement Tuesday that indicated the Fed will keep rates low for an extended period of time has been a bigger harbinger of the dramatic rallies of the ensuing sessions than the size of the cut.

"We're 10 to 15 basis points better, but actual cash seems to be even more volatile than the scale will say. Also, that's really a high-grade number," Rourke said. "So for example, if you have a Virginia GO, you're that much better. But if you have an A-rated piece of paper, you might not be much better at all. You're probably a little better, maybe two to four basis points, but you're not much better.

Trades reported by the Municipal Securities Rulemaking Board yesterday showed significant gains. Bonds from an interdealer trade of insured Golden State Tobacco Securitization Corp. 5s of 2035 yielded 6.22%, down 13 basis points from where they traded Wednesday. Bonds from an interdealer trade of Clark County, Nev., School District 5s of 2024 yielded 5.95%, 15 basis points lower than where they were sold Wednesday. A dealer sold to a customer Seattle 5.5s of 2022 at 5.20%, down 18 basis points from where they traded Wednesday. A dealer sold to a customer California 4.75s of 2035 at 7.10%, 22 basis points lower than where they were sold Wednesday.

A trader in Los Angeles said the market saw "an explosive rally" yesterday.

"We're just seeing tremendous gains again, particularly with high-grades," the trader said. "There is a lot of activity, more than you really ever see at this time of year, and we're still feeding off the Fed and the light calendar."

Rourke said that the timing of the Fed decision, being so close to the end of the year, impacted the extent of the current rally to a degree.

"If it happened a month ago, it'd probably be a little more muted, because it's probably exacerbated by the fact that people are closing their books, people are done for the year, and there's not a lot of incentive to take a lot of risk," Rourke said. "And a month ago, we probably would have had more of a calendar, which would have acted as a check maybe on some of the excess."

A trader in New York added that the rally was intensified by the fact that "people just want to get in there and do some business before the week ends and the market completely dies for the holidays."

"Really, when you think about it, this could be the last day, or one of the last days, that people are actually going to be doing anything, so business is getting done today," the trader said.

The Treasury market showed more sizeable gains yesterday. The yield on the benchmark 10-year Treasury note, which opened at 2.19%, finished at 2.05%. The yield on the two-year note was quoted near the end of the session at 0.67%, after opening at 0.74%. And the yield on the 30-year bond, which opened at 2.65%, was quoted near the end of the session at 2.53%.

In the new-issue market yesterday, Suffolk County, N.Y., competitively sold $310 million of tax anticipation notes to various bidders. JPMorgan won the largest chunk of the deal, worth $100 million, with a net interest cost of 0.83%. The notes, which mature in August 2009, have a 1.5% coupon and were not formally re-offered. They are rated MIG-1 by Moody's Investors Service, SP-1-plus by Standard & Poor's, and F1-plus by Fitch Ratings.

Indiana's MCCSC 1996 School Building Corp. competitively sold $40.7 million of first mortgage bonds to BMO Capital Markets, with a NIC of 5.16%. The bonds mature from 2009 through 2029, with yields ranging from 2.00% with a 4% coupon in 2009 to 5.63% with a 5.5% coupon in 2029. The bonds, which are callable at par in 2019, are rated AA-plus by Standard & Poor's.

Sterne, Agee, & Leach Inc. priced $26.2 million of special obligation bonds for the Mississippi Development Bank. The bonds mature from 2010 through 2024, with yields ranging from 2.96% with a 4% coupon in 2010 to 5.80% priced at par in 2024. The bonds, which are callable at par in 2019, are rated A1 by Moody's and AA-minus by Standard & Poor's.

In economic data released yesterday, initial jobless claims for the week ended Dec. 13 came in at 554,000, after a revised 575,000 the previous week.

Economists polled by Thomson Reuters had predicted 560,000 initial jobless claims.

Continuing jobless claims for the week ended Dec. 6 came in at 4.384 million, after a revised 4.431 million the previous week. Economists polled by Thomson had predicted 4.450 million continuing jobless claims.

The composite index of leading economic indicators fell 0.4% in November. LEI decreased a revised 0.9% in October. Economists polled by Thomson predicted LEI would be off 0.5% in the month.

Manufacturing activity in the Federal Reserve Bank of Philadelphia's region "continued to deteriorate" in December, although the general business conditions index increased to negative 10.4 in December from negative 39.3 in November. Economists surveyed by Thomson predicted a reading of negative 40.2 for the index.

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