The municipal market was weaker yesterday, following Treasuries, as California came to market with $3.2 billion of bonds, the week's largest transaction.

Lehman Brothers priced the California economic recovery bonds in two series. Bonds from the $1.3 billion Series A mature from 2008 through 2011, with a term bond in 2023. Yields range from 2.07% with a 3% coupon in 2009 to 4.10% with a 4% coupon in 2023. Bonds maturing in 2008 and a portion of bonds maturing in 2009 were decided via sealed bid. Bonds from the $1.9 billion Series B contain seven different maturities in 2023, with yields ranging from 2.60% to 2.83%, and coupons ranging from 3% to 5%.

The institutional pricing follows a two-day retail order period, during which nearly $1.5 billion of bonds were sold to retail investors. In an e-mail, Tom Dresslar, spokesman for Treasurer Bill Lockyer, said the state is "extremely pleased with the results" of the retail order period.

The credit is rated Aa3 by Moody's Investors Service, AA-plus by Standard & Poor's, and AA-minus by Fitch Ratings.

Traders said tax-exempts yields were higher by three to five basis points after the Treasury market weakened following the Treasury Department's 30-year bond auction.

The Treasury auctioned $9 billion of 30-year bonds with a 4 3/8% coupon at a 4.449% high yield, a price of about 98.78. The bid-to-cover ratio was 1.82. The Fed banks also bought $4.3 billion for their own account in exchange for maturing securities.

"The market's been a moving target since the auction results came out," a trader in New York said. "It looks like it had a little bit of trouble, which sent the bond market reeling. Munis were unchanged earlier, and now they're off probably three to five basis points, just because the Treasury market and the taxable swap markets are off so much. The auction had a big tail, and a lot of people got bonds who probably weren't expecting to get bonds at the high bid. It came at a 4.449%, and the old bond is trading at a 4.49% now, so it looks like people are a little underwater on this."

The Treasury market showed losses yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.60%, finished at 3.75%. The yield on the two-year note was quoted near the end of the session at 2.00%, after opening at 1.93%.

"We were seeing a bit of firmness in the morning, though it was mostly unchanged, but once the Treasury market went down, we followed right with it," a trader in Los Angeles said.

Trades reported by the Municipal Securities Rulemaking Board yesterday, however, were flat to slightly improved. Bonds from an interdealer trade of University of North Carolina at Chapel Hill5s of 2036 yielded 4.30%, even with where they were sold Wednesday. A dealer sold to a customer Washington's Central Puget Regional Transit Authority 5s of 2036 at 4.41%, down one basis point from where they traded Wednesday. Bonds from an interdealer trade of insured New York City Industrial Development Agency Yankee Stadium project 5s of 2046 traded at 4.97%, even with where they traded Wednesday. Bonds from an interdealer trade of insured New Jersey Transportation Trust Fund Authority 5s of 2032 went at 4.49%, down one basis point from where they were sold Wednesday.

In economic data released yesterday, initial jobless claims for the week ended Feb. 2 came in at 356,000, after a revised 378,000 the previous week. Also, continuing jobless claims came in at 2.785 million in the week ended Jan. 26, after 2.716 million the prior week. Economists polled by IFR Markets had predicted 343,000 initial jobless claims and 2.700 million continuing jobless claims.

In other new-issue market activity, Morgan Stanley priced $247 million of local highway and bridge service contract bonds for the New York State Thruway Authority. The bonds mature from 2008 through 2015, with a term bond in 2017. Yields range from 1.75% with a 4% coupon in 2008 to 3.50% at par in 2017. The bonds, which are not callable, are rated AA-minus by Standard & Poor's and A-plus by Fitch.

JPMorgan priced $88 million of student fee bonds for the Trustees of Indiana University. The bonds mature from 2008 through 2030, with a term bond in 2032. Yields range from 1.80% with a 4% coupon in 2009 to 4.41% with a 5% coupon in 2032. The bonds, which are callable at par in 2018, are rated Aa1 by Moody's and AA by Standard & Poor's.

Unified School District No. 233 in Johnson County, Kan., competitively sold $50 million of general obligation school bonds to Morgan Stanley, with a true interest cost of 4.02%. The bonds mature from 2010 through 2028, with yields ranging from 2.15% with a 3.25% coupon in 2010 to 4.35% with a 4.25% coupon in 2028. The bonds, which are callable at par in 2018, are insured by Financial Security Assurance Inc. The underlying credit is rated Aa3 by Moody's and AA-minus by Standard & Poor's.

Finally, Volusia County, Fla., competitively sold $41.8 million of subordinate lien sales tax refunding revenue bonds to UBS Securities LLC, with a TIC of 3.28%. The bonds mature from 2011 through 2018, with yields ranging from 2.42% with a 3% coupon in 2011 to 3.49% with a 5% coupon in 2018. The bonds, which are not callable, are insured by FSA. The underlying credit is rated A1 by Moody's. q

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