Tax-exempts were again firmer yesterday after Tuesday’s large rally due to the Federal Reserve slashing the federal funds rate target 75 basis points to 3.50%, which caused short-end municipal yields to dip as much as 15 basis points.

Short-end yields were lower by as much as eight to 10 basis points yesterday, intermediate bonds are roughly three to five basis points firmer, and paper on the long end is showing gains of up to two basis points, traders said.

“The short end is still ridiculously expensive, and I’m trying to talk my guys out of buying a lot of it. Surprisingly, I bought some 15-year paper and got four basis points out of them,” a trader in New York said. “I was surprised by that, but I think people ultimately want to move bonds. It all depends on what kind of insurance names you own, too. If you own [Financial Security Assurance Inc.], you’re doing fine. If you own [Ambac Assurance Corp.] or [XL Capital Assurance Inc.], you’re not doing so well.”

Trades reported by the Municipal Securities Rulemaking Board yesterday showed sizeable short-end gains, and little to no movement in bonds maturing in excess of 20 years. A dealer sold to a customer Minnesota Agricultural and Economic Development Board 6.375s of 2029 at 2.65%, down one basis point from where they were sold Tuesday. A dealer sold to a customer insured Texas’ Chico Independent School District 4.5s of 2038 at 4.59%, even with where they traded Tuesday. However, a dealer sold to a customer Gwinnett County, Ga., 5s of 2011 at 2.35%, down seven basis points from where they were sold Tuesday. And a dealer bought from a customer insured New York State Thruway Authority 5.25s of 2010 at 2.58%, 11 basis points lower from where they traded Tuesday.

Also echoing the massive short-term rally, The Bond Buyer’s one-year note index dipped to 2.08% this week, its lowest level in three years, down from 2.57% last week, a 49 basis point decline. This is the fourth-largest one-week decline on record for the index, which began on July 12, 1989. The last time it declined more in one week was Jan. 10, 2001, when it fell a record 90 basis points, to 2.79% from 3.69%. The index was 2.92% as of Jan. 2, so it has dropped 84 basis points so far this year.

The Treasury market, however, showed some losses yesterday, after the stock market turned around later in the session. While the turnaround did put pressure on the muni market, it was not immediately reflected in trading.

“We didn’t see a carry-over from this in munis so much at the end of the session, mostly because no one wanted to trade anything after that happened,” a trader in Los Angeles said. “However, I fully expect to see the effects of this [today].”

The yield on the benchmark 10-year Treasury note, which opened at 3.44%, finished at 3.54%. The yield on the two-year note was quoted near the end of the session at 2.10%, after opening at 2.00%. Additionally, the 30-year Treasury bond, which opened at 4.19%, closed at 4.24%. However, Treasuries had been significantly firmer earlier in the session, before stocks rebounded. The two-year note was quoted as low as 1.87% yesterday, along with the 10-year reaching 3.34%, and the 30-year bond dipping to as low as 4.14%.

The turbulence in the market began Tuesday morning, when the Fed announced an emergency cut to the fed funds rate target of 75 basis points. The cut, which brought the target rate to 3.50% from 4.25%, marked the first monetary policy action taken by the Federal Open Market Committee between scheduled meetings since Sept. 17, 2001, the first trading day after the Sept. 11 terrorist attacks. It also marked the first 75 basis point lowering of the rate in more than 23 years, since October 1984.

In the new-issue market yesterday, UBS Securities LLC priced $1.1 billion of mobility fund bonds for the Texas Transportation Commission. Pricing information was not released by press time. The bonds were slated to mature from 2009 through 2033, with a term bond in 2037. The credit is rated Aa1 by Moody’s Investors Service, AA by Standard & Poor’s, and AA-plus by Fitch Ratings.

JPMorgan priced $518.6 million of advanced funding program notes for the Indiana Bond Bank. The notes mature in Jan. 2009, yielding 2.10% with a 3% coupon. The credit is rated SP-1-plus by Standard & Poor’s.

Mecklenburg County, N.C., competitively sold $148.5 million of general obligation public improvement bonds to Banc of America Securities LLC with a true interest cost of 3.80%. The bonds mature from 2009 through 2028, with yields ranging from 2.64% with a 5% coupon in 2013 to 4.12% with a 4% coupon in 2028. Bonds maturing from 2009 through 2012, in 2016, from 2018 through 2020, and in 2023, 2025, and 2026 were not formally re-offered. The bonds, which are callable at par in 2018, are rated triple-A by all three major credit rating agencies.

Merrill Lynch & Co. priced $125.7 million of mortgage revenue bonds for the Dormitory Authority of the State of New York. The bonds mature from 2008 through 2024, with yields ranging from 2.53% with a 4% coupon in 2008 to 4.27% with a 5% coupon in 2024. The bonds, which are callable at par in 2018, are rated Aa2 by Moody’s and AAA by Standard & Poor’s.

First Southwest Co. priced $38.4 million of unlimited tax school building bonds for Texas’ Teague Independent School District. The bonds mature from 2009 through 2023, with yields ranging from 2.58% with a 3.5% coupon in 2010 to 4.15% at par in 2023. The bonds, which are callable at par in 2018, are insured by the Permanent School Fund guarantee program. The underlying credit is rated A3 by Moody’s and BBB by Standard & Poor’s.

The economic calendar was largely inactive yesterday, as it will be all week. Today, initial jobless claims for the week ended Jan. 19 will be released, along with continuing jobless claims for the week ended Jan. 12, and December existing home sales. No other major economic data will be released this week. Economists polled by IFR Markets are predicting 321,000 initial jobless claims, 2.700 million continuing jobless claims, and 4.95 million existing home sales.

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