Munis Firmer as Dow Plummets

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The municipal market was firmer in light trading yesterday, while Treasuries gained as the Dow Jones industrial average dropped to a 2008 low.

"The long end is performing really well, 2030 and out," a trader in New York said. "We're still underperforming Treasuries, but the market is feeling okay. Munis really underperformed the last week-and-half or so and now we're catching up a bit."

Another trader in New York agreed, saying, "munis are feeling better than they've felt in a while. There's decent buying on the long end. Somebody is out there."

But the trader said the threat of forced liquidations and other dislocations caused by insurer downgrades still weigh heavily on the market.

"We continue to wonder what's going to happen next week," he said. "Everyone's on their heels. Most desks have been told to play close to the vest, keep leverage and risks down."

Trades reported to the Municipal Securities Rulemaking Board yesterday showed gains. Bonds from an interdealer trade of Texas' Comal Independent School District 5s of 2034 yielded 5.03%, down four basis points from Wednesday. Bonds from an interdealer trade of California 5s of 2034 yielded 5.16%, down four basis points from Wednesday. Bonds from an interdealer trade of New York's Metropolitan Transportation Authority 5s of 2032 yielded 5.09%, down two basis points from Wednesday.

The Treasury market showed gains yesterday in the aftermath of Wednesday's Federal Reserve announcement on interest rates. The yield on the benchmark 10-year Treasury note, which opened at 4.10%, finished at 4.05%. The yield on the two-year note finished at 2.68% after opening at 2.81%. The yield on the 30-year finished at 4.61% after opening at 4.65%.

Equities dove yesterday, with the Dow Jones industrials off more than 3%, down 358.41 to 11,453.42.

The Federal Open Markets Committee Wednesday announced its decision to hold the federal funds rate at 2%. With the decision widely expected, markets instead looked to the Fed's statement for guidance on whether the threat of inflation or a weakening economy will guide the bank's policy for the rest of the year.

The statement appears to have increased doubts about the Fed's willingness to raise rates to fight inflation. Federal funds futures rates implied a 78% chance the Fed will hold interest rates at 2% at its August policy-setting meeting, up from 58% on Monday, according to the Chicago Board of Trade. Futures rates also implied a 44% probability the Fed will raise the target rate no more 25 basis points to end the year, up from less than 10% on Monday.

Although there was "a little bit of safe haven in buying going on," because of the losses in equities, according to Kevin Giddis, managing director of fixed income at Morgan Keegan, part of the gains in Treasuries were corrections following the Fed's statement. The perceived lower threat of a rate hike to fight inflation forced those who sold short leading up to the announcement to cover their positions, pushing down yields on the two-year note and steepening the curve.

In other economic news, the final gross domestic product figure for the first quarter came in at 1%, in line with expectations of economists polled by IFR Markets. Initial jobless claims for the week ending June 21 were 384,000, unchanged from the previous week and slightly higher than analysts' expectations.

Existing home sales rose 2% in May, after falling 1% in April.

In new-issue activity, Merrill Lynch & Co. received the verbal award for $1.3 billion in gas supply revenue refunding bonds from the Texas Municipal Gas Acquisition and Supply Corp. I.

Wisconsin competitively sold $800 million of one-year notes to multiple bidders. Net interest costs ranged from 1.7033% on a $200 million portion to 1.7211% on a $100 million portion. The notes are rated SP-1-plus by Standard & Poor's and F1-plus by Fitch Ratings.

Colorado competitively sold $350 million in one-year tax and revenue anticipation notes to multiple bidders. Net interest costs ranged from 1.712% on a $175 million portion to 1.7141% on a $15 million portion. The notes are rated SP-1-plus by Standard & Poor's and F1-plus by Fitch.

In addition, Merrill Lynchpriced and repriced $235.2 million in unlimited-tax refunding bonds for Port of Houston Authority subject to the alternative minimum tax.

The bonds mature from 2024 through 2026, with term bonds in 2029, 2033 and 2038. Yields range from 5.29% with a 6.25% coupon in 2024 to 5.71% with a 5.625% coupon in 2038. Yields were lowered two to three basis points at the repricing. The bonds, which are callable at par in 2018, are rated Aa1 by Moody's Investors Service and triple-A by Standard & Poor's.

Citi priced $202.4 million in tobacco settlement asset-backed bonds for the Michigan Tobacco Settlement Finance Authority in three series, some of which are taxable. Bonds from the $114.9 million, tax exempt Series 2008A mature in 2042, with a yield of 7.1% on a 6.875% coupon. The bonds, which are callable at par in 2018, have an expected final turbo redemption date in 2024 and underlying credit ratings of Baa3 from Moody's and BBB-plus from Standard & Poor's.

Bonds from the taxable $28.9 million Series 2008B mature 2046. Bonds from the tax-exempt $57.7 million capital appreciation bonds mature 2058. The bonds, which are callable at par in 2033, have a projected final turbo redemption rate of 2033 and a rating of BBB-minus from Fitch.

Finally, Wachovia Bank NA priced $194.6 million in public improvement refunding bonds for Puerto Rico. Bonds mature 2027 and 2028, with yields of 5.52% on a 6% coupon in 2007 and 5.58% on a 6% coupon in 2028. The bonds, which are callable at par in 2018, are insured by MBIA Insurance Corp., with underlying credit ratings of Baa3 from Moody's and BBB-minus from Standard & Poor's.

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