Buy side

A generous $6.67 billion of assets flowed into tax-free money market funds for the week ending Feb. 4, according to the Money Fund Report.

With ongoing problems in the bond insurance market, large institutional investors say they continue to find value on A-rated bonds - with insurance - in the secondary market now that spreads between generic triple-A and single-A paper have widened by approximately 30 basis points versus where they were before the subprime mortgage crisis unfolded over eight months ago.

Current problems in the credit markets are now undercutting the short-term municipal market, as rising yields in variable-rate demand notes and auction rates and a handful of failed auctions show a market reeling from credit concerns and no longer protected by staunch triple-A rated bond insurance.

A $3.2 billion sale of economic recovery bonds by California will test the choppy waters of the municipal market this week, headlining an estimated $6.18 billion slate of new-issue volume in the primary market.

Weekly reporting municipal bond mutual funds had a net inflow of $468 million during the period ending Jan. 30, AMG Data Services reported.

Financial Guaranty Insurance Co. was downgraded by Standard & Poor’s yesterday to AA from AAA, based on the rating agency’s most recent downg ades of residential mortgage-backed securities, some of which are guaranteed by FGIC. The insurer remains on credit watch with developing implications.

Following the Federal Open Market Committee’s surprise cut in the federal funds rate by 75 basis points to 3.50% on Jan. 22, tax-free money market funds ended the first month of 2008 on a positive note, reporting inflows of $939.5 million for the week ending Jan. 29, according to the Money Fund Report.

The turmoil in the municipal market over bond insurers’ exposure to ill-fated products derived from subprime mortgages has continued, with recent downgrades of monoline insurers suffering from severe financial deficiencies. In addition, Democratic leaders are proposing federal oversight and uniform standards for insurers, and the affected guarantors are being closely scrutinized by the Senate Banking Committee and Treasury Secretary Henry Paulson.

In the absence of any billion-dollar deals this week, a handful of significantly smaller financings will be priced into a relatively quiet primary market where an estimated $3.29 billion in new issues is expected. The volume compares to last week when a revised $3.45 billion in total competitive and negotiated new issues came to market, according to Thomson Financial.

Weekly reporting municipal bond mutual funds had a net inflow of $513 million during the period ending Jan. 23, AMG Data Services reported.

Tax-free money market funds reported losses for the week ending Jan. 21 after posting record assets under management for the first two weeks of 2008.

The Bond Buyer’s weekly yield indexes were mostly higher this week, as a sell-off yesterday wiped out any lingering firmness in the long end and tempered the short-end gains tax-exempts had seen in the previous two sessions after the Federal Reserve’s 75 basis point cut of the federal funds rate.

Weekly reporting municipal bond mutual funds had a net inflow of $324 million during the period ending Jan. 16, AMG Data Services reported.

Of the estimated $3.92 billion expected to be sold in the negotiated market this week, a $1.1 billion deal from the Texas Transportation Commission will arrive tomorrow in the Lone Star State, where two other sizable deals are expected to focus investor’s attention during a relatively light, holiday-abbreviated week.

Credit is once again the story when it comes to municipal bond mutual fund performance in the fourth quarter, as those that stayed away from lower-rated paper performed the best, fund managers and analysts said.

Municipal money market funds continue on a roll in 2008 reaching record assets under management with inflows of $2.468 billion for the week ending Jan 14.

As the municipal market’s sensitivity towards underlying credit grows, particularly in light of the subprime mortgage crisis and its effects on bond insurance, analysts and portfolio managers say they are sharpening their skills more than ever to guard against future unexpected risks.

As the subprime mortgage crisis unfolded in the latter part of 2007 and took its toll on the municipal market — specifically the bond insurance industry — one sector of tax-exempt mutual funds was quietly outperforming all other categories.

Chicago will lead the way in the new-issue market this week, as Lehman Brothers will price an $876 million offering that was originally slated to hit the market last year.

Weekly reporting municipal bond mutual funds had a net outflow of $183 million during the period ending Jan. 9, AMG Data Services reported.