The municipal market was largely unchanged yesterday, despite gains in the Treasury market, as details of the government's plan to support troubled Fannie Mae and Freddie Mac became more concrete.

"The market is kind of just looking for its level right now. It's quiet," a trader in New Jersey said. "It seems like there's a little more supply than last week. Last week was kind of quiet as a whole summer doldrums every day. Then on Friday, the big move in the Treasury market kind of froze the market. It was tough to get a lot done."

"There's a bit of a firmer tone, but business is pretty spotty," a trader in Chicago added. "People are waiting for the pricings on the new issues set for this week."

The Treasury market showed gains yesterday on news of the government's bailout plan for Fannie and Freddie. The yield on the benchmark 10-year Treasury note, which opened at 3.96%, finished at 3.86%. The yield on the two-year note was quoted near the end of the session at 2.46% after opening at 2.60%.

However, munis did not follow the flight-to-quality buying Treasuries enjoyed, and instead were muted.

"The market is boring, there's not a lot of trading going on," a trader in San Francisco said. "We're not following governments. We're just at a standstill. There are not a lot of buyers, and there are not a lot of sellers. We're at a state of equilibrium."

The Treasury market made its gains after a sell-off yesterday morning.

"The punchline is stocks: Stocks were up 1%, and now they're down 1%," said Ian Lyngen, interest rate strategist at RBS Greenwich Capital.

The government intervention implemented in the wake of the savings and loans crisis of the early 1990s is the only comparable experience the economy has had, said Gary Thayer, a senior economist at Wachovia Securities. The decision to use taxpayer funds, but ultimately got the economy through the crisis.

"It shows [the government] is willing to do quite a bit to keep the market stable," Thayer said. "It's making an implicit guarantee explicit."

Freddie Mac shares finished at $7.23 on the New York Stock Exchange yesterday, down 6.71%. It traded in a range from $6.09 to $9.80. Fannie Mae shares finished at $9.64 on the NYSE yesterday, down 5.95%. It traded in a range from $9.24 through $13.50.

In a weekly report released yesterday, Matt Fabian, managing director at Municipal Market Advisors, wrote that "there are potential muni supply implications from problems at the government-sponsored enterprises like Fannie, Freddie, and the Federal Home Loan Banking System."

"Should these agencies need to raise capital, they could look to sell some portion of their aggregate $32 billion in municipals," he wrote. "And, because the GSEs would historically purchase whole offerings directly in the primary market, many of these securities have never been traded before, feature odd coupon-structure features, and are largely housing bonds that lack demand right now."

Fabian added: "Their selling of muni paper could thus be highly disruptive. However, munis represent only 1.01% of total GSE holdings, and the agencies have far better choices if they do need to raise cash. In fact, noting early media reporting, the broader market appears to be anticipating some evolution from an 'implicit' U.S. government guaranty of agency debt to an 'explicit' one. This should reasonably begin a rally in agency paper."

New York issuers will dominate the new-issue activity this week as both the Triborough Bridge and Tunnel Authority and the New York City Municipal Water Finance Authority come to the primary market amid an anticipated slate of $7.5 billion, according to Thomson Reuters.

Last week, a $1 billion North Texas Tollway Authority revenue sale was the largest deal to be priced, as part of $3.45 billion of new-issue volume.

The Texas deal, which was rated A3 by Moody's Investors Service and BBB-plus by Standard & Poor's, was priced by Lehman Brothers last Thursday with a 5 3/4% coupon in 2038 to yield 5.99% - 64 basis points higher in yield than the triple-B curve due in 2038 published by Municipal Market Data, and 146 basis points higher than MMD's generic triple-A GO curve.

This week, the bridge authority will bring a two-pronged sale of general revenue bonds to market totaling $1 billion. The deal is comprised of $650 million of senior bonds and $350 million of subordinate bonds, but both are structured to mature from 2009 to 2038 and will be priced by Citi today.

The 2008C senior bonds are rated Aa2 by Moody's, AA-minus by Standard & Poor's, and AA by Fitch Ratings, while Series 2008D subordinate bonds are rated Aa3 by Moody's, A-plus by Standard & Poor's, and AA-minus by Fitch.

The economic calendar was light yesterday.

In the new-issue market yesterday, Merrill Lynch & Co. priced $55.5 million of unlimited-tax school building and refunding bonds for Texas' Midway Independent School District in two series. Bonds from the larger $52.9 million series of current interest bonds mature from 2009 through 2026, with yields ranging from 1.70% with a 4% coupon in 2009 to 4.63% with a 4.5% coupon in 2026.

The bonds, which are callable at par in 2018, are backed by the Permanent School Fund guarantee program. The underlying credit is rated A1 by Moody's and AA-minus by Standard & Poor's. The deal also contains a $2.6 million series of capital appreciation bonds, which mature from 2013 through 2015.

Banc of America Securities LLC priced $39.6 million of toll revenue and limited tax bonds for Forney, Tex. The bonds mature from 2012 through 2028, with term bonds in 2031 and 2033. Yields range from 3.13% with a 3.5% coupon in 2012 to 4.96% with a 4.75% coupon in 2033. The bonds are callable at par in 2018, except bonds maturing in 2031, which are callable at par in 2012. The deal is insured by Assured Guaranty Corp., and the underlying credit is rated A2 by Moody's and A-plus by Standard & Poor's.

Minnesota's Independent School District No. 77 competitively sold $33.4 million of general obligation school building bonds to Piper Jaffray & Co. The bonds mature from 2010 through 2029, with coupons ranging from 3% in 2010 to 4.70% in 2029. None of the bonds were formally re-offered. The bonds, which are callable at par in 2019, are rated Aa2 by Moody's and AAA by Standard & Poor's.

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