The municipal market was slightly firmer yesterday, and JPMorgan began retail pricing on an $8.8 billion California revenue anticipation note sale.

Traders said tax-exempt yields were lower by two or three basis points overall.

“It’s a bit of a slow start, but we’re doing a little bit better,” a trader in New York said. “We saw pretty decent gains out long last week, but right now the long end is pretty flat and the gains you’re seeing are mostly in the 10- to 20-year range. We should see some decent activity this week, though right now it’s somewhat quiet. But overall, I’d say we’re better a good two or three basis points.”

In what is the single-largest note deal so far this year, California will issue $8.8 billion of Rans this week, more than double the estimated $4.37 billion of long-term volume expected to be priced in the primary market, according to Ipreo LLC and The Bond Buyer.

California’s mammoth Ran deal arrives with a split rating and on the heels of the state’s lengthy cash-flow dilemma, which culminated in the issuance of IOUs to creditors and vendors for two months.

While the Ran deal garnered the top short-term ratings of MIG-1 from Moody’s Investors Service and SP-1 from Standard & Poor’s, Fitch Ratings last week issued its F2 rating, two notches below its top rating of F1-plus.

JPMorgan will price the two-pronged offering for institutions tomorrow, though it began pricing the deal for retail investors yesterday. The $3.5 billion piece maturing in May 2010 yields from 1.25% to 1.50% with a 3% coupon, while the June 2010 $5.3 billion piece yields 1.50% to 1.75% with a 3% coupon.

The state will use a portion of the proceeds to repay JPMorgan, which lent California $1.5 billion in August to allow the state to begin redeeming the IOUs.

The Treasury market was mixed yesterday. The yield on the benchmark 10-year note, which opened at 3.46%, was quoted near the end of the session at 3.47%. The yield on the two-year note was quoted near the end of the session at 0.98% after opening at 0.99%, and the yield on the 30-year bond, which opened at 4.22%, finished at 4.23%.

Also yesterday, the Municipal Market Data triple-A scale yielded 2.69% in 10 years, extending its historic lows, and 3.64% in 20 years, matching its historic low, after yields of 2.70% and 3.64% on Friday, respectively.

As of Friday’s close, the triple-A muni scale in 10 years was at 77.6% of comparable Treasuries, according to MMD, while 30-year munis were 96.0% of comparable Treasuries. Thirty-year tax-exempt triple-A general obligation bonds were at 98.5% of the comparable London Interbank Offered Rate.

In a weekly report, Bank of America-Merrill Lynch’s Phil Fischer wrote that, for the month, “munis have returned 2.618% versus 0.215% for Treasuries, and 1.302% for corporates.”

According to their data, municipals 22 years and out returned 1.211%, munis 12 to 22 years returned 0.907%, tax-exempts seven to 12 years returned 0.647%, municipals three to seven years returned 0.293%, and munis one to three years returned 0.083%.

Fischer also wrote in the report that “munis experienced another week of frenzied buying in spite of an active primary market.”

“Retail demand, especially for mutual funds, continues to be the primary impetus,” he wrote. “Build America Bond issuance continues at a steady pace, incrementally reducing supply of tax-exempt bonds in longer maturities. Money market fund holdings continue to shrink at a rapid pace. A significant portion of the approximately $27 billion that left the money market funds in second quarter 2009 can be expected to have gone into municipal bonds, especially short maturities. We suggest that investors not try to time the market. Nevertheless, conservative structures, like premium bonds seem reasonable. However, investors should stay within their own risk parameters and not chase rallies either.”

In his weekly report, Morgan Stanley Smith Barney’s George Friedlander wrote that “market observers tend to think of markets as 'difficult’ or 'challenging’ when yields are high, risk premiums are enormous, prices are volatile, and liquidity is limited to nonexistent, as was the case in the fourth quarter of 2008.”

“However, there is another environment where a given market can be at least equally difficult or challenging: when yields are relatively low, credit spreads and risk premiums have declined sharply, and paper is scarce,” he wrote.

“In the municipal bond market, we are now deeply into the second environment, and frankly, we are hard pressed to see a way out any time soon. Once again this week, the municipal bond market rallied sharply, despite a neutral to weak Treasury market.”

Matt Fabian, managing director at Municipal Market Advisors, wrote in a weekly report that “the municipal market continues to run strongly, in tune with broader credit markets.”

“In part, this follows generic expectations of improvement, low short-term financing rates that encourage more risk taking, and a resolutely range-bound Treasury market,” he wrote.

“With respect to tax-exempts, our market has seen huge mutual fund inflows and retail inquiry. In addition, issuers are simply not providing much new issue supply, and large portions of recent weekly sales have been in the form of taxable BABs which, being relatively underpriced versus the exceptional corporate bond market, are highly attractive to domestic and foreign buyers.”

In economic data released yesterday, the composite index of leading economic indicators gained 0.6% in August. The LEI increased a revised 0.9% in July. Economists polled by Thomson Reuters predicted the index would be up 0.7% in the month.

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