The municipal market was unchanged in light trading yesterday, as California began a two-day retail order period on its $4 billion general obligation bond offering with strong demand from individual investors.

As of press time, California said it had already taken $2.4 billion in orders for what is the largest new issue to enter the municipal market since 2007.

In the secondary market, though, activity was light with little movement as the market awaited new issues, traders said. Including the California deal, a total of $9.25 billion of new issues are scheduled to come to market this week, according to Thomson Reuters.

"Munis are really quiet just waiting for the supply to kick in later this week," a trader in Chicago said. "Obviously all eyes will be on the Cal deal. Nobody wants to buy bonds out the chute. The expectation is that once again underwriters will be pricing these deals to pretty attractive levels."

California's $4 billion deal marks the largest new issue to enter the market since Ohio's Buckeye Tobacco Settlement Financing Authority sold $5.53 billion in 2007. California has been out of the market since June; its budget and cash-flow crises created a backlog of projects requiring financing.

California yesterday also sold in a private placement $500 million of revenue anticipation notes to Golden 1 Credit Union at an interest rate of 2.20%, reducing to $1.5 billion the amount of Ran borrowing the state must do to meet its cash-flow needs for the 2008-09 fiscal year. The bonds mature June 23, 2009.

On the $4 billion GO deal, the bonds mature from 2013 to 2029, with term bonds in 2033, 2036, and 2038. Yields range from 3.25% on a 3.25% coupon in 2013 to 6% with a 6% coupon in 2038. The bonds are callable at par in 2019.

Bonds maturing in 2033 totaling $841 million, and in 2038 totaling $562 million, were not offered during the retail order period. Co-senior managers Citi and Merrill Lynch & Co. will price the deal for institutions tomorrow.

"I think [the reception has] been pretty good so far and would expect it to continue," a trader in California said. "I think it's priced appropriately."

California last week was hit by one-notch downgrades from Moody's Investors Service, which dropped it to A2, and Fitch Ratings, which lowered it to A. Last month, Standard & Poor's downgraded the state to A.

In his weekly report, Municipal Market Advisors managing director Matt Fabian wrote that "although the risk of default is remote, holders should expect both a steady stream of negative headlines and that the state's ratings will continue to fall over the next 18 months," so "investors looking for price performance in that period should evaluate new purchases as if the state were already BBB."

However, initial retail pricing suggested it could "be a very worthwhile consideration for income and longer-tenured total return buyers," Fabian wrote. He noted a 5.6% yield in 2024, for instance, represented a taxable equivalent yield of up to 10.3%, "assuming the rollback of the Bush tax cuts."

Sources indicated the deal appears to be drawing "strong interest" from crossover investors, Fabian wrote.

Following the downgrades, Citi fixed-income strategist and managing director George Friedlander wrote in his weekly report that "with bonds priced accordingly, we expect heavy national and in-state retail participation."

California's deal follows the pricing of Wisconsin's $1.54 billion appropriation financing last week. Friedlander said he expects the calendar to remain heavy with issuers that wait out this week due to the California deal "likely to be in shortly thereafter."

Also in the new-issue market yesterday, JPMorgan priced and repriced $166.9 million of Prairie State Energy Campus Project revenue bonds for American Municipal Power-Ohio Inc. The bonds mature 2017 through 2029, with term bonds in 2036 and 2039. Yields range from 4.05% on a 4% coupon in 2017 to 5.82% on a 5.75% coupon in 2039. The bonds, which have underlying ratings of A1 from Moody's, A from Standard & Poor's, and A from Fitch, are insured by Assured Guaranty Corp.

Morgan Stanley priced and repriced $122 million of revenue bonds for the Ohio Water Development Authority. The Series 2009A bonds mature from 2009 through 2016, with yields ranging from 0.87% on a 2% coupon in 2010 to 2.99% on a 5% coupon in 2016. The bonds are rated triple-A by Moody's and Standard & Poor's.

Raymond James & Associates Inc. priced $348 million of taxable rental housing bonds for the Virginia Housing Development Authority.

The municipal market enters the week after rallying as much as 15 basis points last Thursday. The municipal market jumped on the Treasury Department's Wednesday announcement that it would purchase $300 million of long-term Treasuries.

"As near as we can tell, the key logic is that Treasuries and some other taxable sectors are now an even less attractive choice for investors whose other alternative is the tax-exempt muni market," Friedlander wrote.

Following the Treasury rally Wednesday and before the muni rally Thursday, the yield on triple-A 10-year munis spiked to 134% of the yield on 10-year Treasuries according to Municipal Market Data. Just a day earlier, the ratio was 115%, and triple-A 10-years yielded less than 10-year Treasuries in early February.

The Treasury market was weaker yesterday. The yield on the benchmark 10-year note, which opened at 2.64%, was recently quoted at 2.68%. The yield on the two-year note was quoted recently at 0.91% after opening at 0.86%. The yield on the 30-year bond, which opened at 3.66%, was quoted at 3.70%.

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