Week Starts With a Firmer Tone

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The municipal market was slightly firmer yesterday. Traders said tax-exempt yields were lower by about two or three basis points overall.

"We're starting the week off a little better here," a trader in New York said. "There isn't a ton of activity out there right now, but there's definitely a firmer tone, and we're seeing some gains. I'd say we're better by two or three basis points overall, maybe one basis point on the short end."

The Treasury market showed gains yesterday. The yield on the benchmark 10-year Treasury note, which opened at 2.85%, finished at 2.72%. The yield on the two-year note was quoted near the end of the session at 0.89% after opening at 0.94%. The yield on the 30-year bond, which opened at 3.60%, was quoted near the end of the session at 3.47%.

After a lull in supply during the last two weeks, the first week of February will kick off with noticeably more vigor thanks to at least two significantly sized deals - a $950 million California school deal and a $614 million Georgia general obligation sale.

The offerings are part of an estimated $3.86 billion in total new-issue volume expected in the competitive and negotiated markets this week, compared with a revised $3.38 billion last week, according to Thomson Reuters.

In the new-issue market yesterday, Merrill Lynch & Co. priced $613.9 million of general obligation bonds for Georgia in two series. Bonds from the $61.8 million Series A mature from 2010 through 2014, with yields ranging from 1.18% with a 2.5% coupon in 2011 to 1.84% with a 3% coupon in 2014. Bonds maturing in 2010 were not formally re-offered. These bonds are not callable.

Bonds from the $552.1 million Series B mature from 2010 through 2029, with yields ranging from 1.18% with a 3% coupon in 2011 to 4.64% with a 4.5% coupon in 2029. Bonds maturing in 2010 were not formally re-offered. The bonds are callable at par in 2019. The credit is rated triple-A by all three major rating agencies.

As of yesterday, the Los Angeles Unified School District was considering holding a retail order period today for the week's largest deal - $950 million of GOs - ahead of institutional pricing by Barclays Capital tomorrow.

The deal is structured to mature serially from 2010 to 2024 with term bonds expected in 2029 and 2034, and is rated Aa3 by Moody's Investors Service and AA-minus by Standard & Poor's.

The LAUSD issue is among the five out of six largest deals whose issuers are using retail order periods to capitalize on the strength of retail demand in recent months.

Elsewhere in the new-issue market yesterday, RBC Capital Markets priced $171.3 million of refunding and improvement bonds for the Texas Tech University System Board of Regents. The bonds mature from 2009 through 2028, with term bonds in 2033 and 2038. Yields range from 1.60% with a 4% coupon in 2011 to 5.41% with a 5.25% coupon in 2038. Bonds maturing in 2009 and 2010 will be decided via sealed bid. The bonds, which are callable at par in 2019, are rated Aa3 by Moody's and AA by both Standard & Poor's and Fitch Ratings.

Morgan Stanley priced $145.1 million of water assistance bonds for Texas. The bonds mature from 2009 through 2029, with yields ranging from 0.70% with a 3% coupon in 2010 to 5.01% with a 5% coupon in 2029. Bonds maturing in 2009 will be decided via sealed bid. The bonds, which are callable at par in 2018, are rated Aa1 by Moody's, AA by Standard & Poor's, and AA-plus by Fitch.

In economic data released yesterday, personal income fell 0.2% in December, after a revised 0.4% drop the previous month. Economists polled by Thomson Reuters had predicted a 0.4% decline.

Personal consumption dipped 1.0% in December, after a 0.8% drop the previous month. Economists polled by Thomson had predicted a 0.9% decrease.

The core personal consumption expenditures deflator showed no change in December, after no change the previous month. Economists polled by Thomson predicted no change.

Spending on construction projects fell 1.4% to a seasonally adjusted annual rate of $1.054 trillion in December as private construction decreased 1.7%, and public construction slid 0.8%. The overall decrease, which was larger than the 1.2% decrease projected by Thomson Reuters, followed a revised November level of $1.069 trillion, a 1.2% decline from the prior month.

The overall economy failed to grow for the fourth straight month after 83 months of expansion, while the manufacturing sector was contracted for the 12th month in a row, according to the Institute for Supply Management's monthly report on business. The ISM index gained to 35.6 in January from 32.9 in December. Economists polled by Thomson Reuters predicted the index would rise to 32.6.

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