Buy side

Some banks are taking a detour around the complicated and expensive process of guaranteeing a municipal government’s bonds by just buying the bonds themselves.

According to survey results released Wednesday, when RBC Capital Markets asked 100 state and local government experts at The Bond Buyer Texas Public Finance Conference last month whether they would buy municipal bonds for their own portfolios, all 100 said yes.

The pressure on municipal bond mutual funds is fading rapidly as a much less panicked tone in the state and local government debt market has stemmed the exodus of cash from the industry.

An already-skimpy municipal market is expected to see volume levels plummet even further this week when a paltry $1.79 billion of new issuance trickles into the primary, according to Ipreo LLC and The Bond Buyer.

Tax-exempt money market funds rose $1.14 billion to $325.79 billion in total net assets for the week ending Feb. 21, according to the Money Fund Report, a service of iMoneyNet.com.

The recent bout of panic selling by investors in municipal bond funds reflects several factors, including headline risk due to predictions of widespread defaults, rising interest rates, the extension of the Bush-era tax cuts, and rallying equities.

Two state-specific municipal bond portfolios managed by BlackRock Inc. were slated to be closed to investors effective Wednesday, a day after the firm began liquidating the funds' investments, according to a Feb. 18 addendum to the funds' prospectuses.

For all the headlines about the budget woes of state and local governments, banks see them as good clients. Most market experts say there are plenty of investment-grade municipalities to court.

Business as usual, in a market where banks have been complacent about their seemingly safe municipal bond holdings, would be big mistake, experts say.

The tide of cash washing out of municipal bond mutual funds continued to ebb last week as more and more of the “hot money” that flooded the industry the last two years seems to have escaped by now.

Illinois’ $3.7 billion general obligation bond issue that was postponed last week will return to the calendar this week, the highlight of an otherwise bleak primary market.

Nearly all The Bond Buyer’s weekly yield indexes declined this week as long-end yields fell with each passing session and prices strengthened, mostly on the back of a light primary market.

After recouping recent losses last week, tax-exempt money market funds saw $1.75 billion slip away in the week ended Feb. 14.

Issuers paid less to borrow in the tax-exempt market in 2010, with a more pronounced decline in underwriting fees on bond issues authorized as part of the American Recovery and Reinvestment Act compared to the decline of combined tax-exempt and stimulus debt.

The Obama administration’s proposal to renew the Build America Bond program may suffer from the same problem it had the first time around, when the federal government didn’t think municipalities would use BABs that much.

Municipal bond mutual funds in the period ending Feb. 9 saw heavy withdrawals for the 13th consecutive week.

A $3.7 billion taxable Illinois general obligation sale this week is the largest single deal to test the fickle and fiscally challenging waters of the municipal market so far this year. It will be the standout offering in an otherwise lifeless primary.

Tax-exempt money market funds recouped most of last week’s losses, adding $2 billion and finishing with $326.39 billion in total net assets for the week ended Feb. 7, according to the Money Fund Report, a service of iMoneyNet.com.

Low short-term interest rates continue to erode the investment income of state and local governments.

The Bond Buyer’s long-term weekly yield indexes increased this week, reflecting losses in the Treasury market.