Buy side

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.

With volatility and concerns that shook the municipal industry in 2007 — from Federal Reserve Board easings to deterioration in the subprime mortgage sector and its flow-on effects in the bond insurance market — retail investors are likely to be much more demanding and discriminating this year when it comes to the quality, yield, and structure of the bonds they add to their portfolio, according to several muni market specialists.

Municipal money market funds started 2008 with a boost, reaching record assets under management with inflows of $10.713 billion for the week ending Jan 7.

Municipal bonds are a relatively inexpensive buy when compared to other taxable bonds, but absolute yield levels are quite low by historic standards.

Christopher “Kit” Taylor has joined the advisory board of the Rockwater Municipal Advisors LLC fund of funds after a six-month hiatus from the municipal market.

Van Eck Global launched its second municipal bond exchange-traded fund yesterday that will focus on bonds that mature 17 years and longer.

Weekly reporting municipal bond mutual funds had a net outflow of $573 million during the period ending Jan. 3, AMG Data Services reported.

The primary market will pick up significantly this week, with more than $3 billion of bonds set to price as demand for new deals looks to increase as market participants return from the holiday break. This week’s expected issuance marks an increase of 360% over last week’s $650 million, with the market enjoying the first full week of trading since the holidays began. This week’s volume stands as the most since the second week of December, when $6.4 billion was sold. However, January is often a slow month, and the situation is not helped by the questions in the market surrounding bond insurers. “The calendar starting off the year is relatively thin and it doesn’t look to pick up until later in the month,” said Richard Ciccarone, managing director and chief research officer at McDonnell Investment Management LLC. “This gives everybody a pause to see if the insurance company thing is a temporary situation or not, and then make the choice of whether to go alone or go with insurance.”For issuers coming to market this week and going forward, questions of whether to use credit enhancement or not will be on the forefront of discussions. In the week’s largest scheduled transaction, the state of Washington Tuesday will competitively sell $921 million of general obligation bonds in two series. Bonds in the larger series, $546.2 million, are various purpose, while bonds in the smaller series, $375 million, are motor vehicle fuel-tax bonds. The state will offer maturities from 2009 through 2033, with the winning firm deciding on any term bonds. The winning bid will also choose whether to use insurance or not. “We will allow for insurance but it is entirely up to the underwriter,” said Svein Braseth, the director of the state’s bond program. “We will leave it up to the market to decide, and we expect the bonds to be very well received.”Seattle-Northwest Securities Corp. is the financial adviser. Foster Pepper PLLC is bond counsel. The bonds are rated Aa1 by Moody’s Investors Service, AA-plus by Standard & Poor’s, and AA by Fitch Ratings. Proceeds from the sale of the larger series will pay for projects at the state capital, for colleges throughout Washington, and for other environmental preservation and protection efforts. Proceeds from the fuel tax bonds will be used for transportation projects, namely road widening and intersection construction. The state last came to market in September with two series of bonds totaling $900 million. Moody’s rates the bonds Aa1, while Standard & Poor’s and Fitch each assign a rating of AA. JPMorgan won the larger series, $512.9 million of GOs, with a true interest cost of 4.64%. Bonds in the series mature from 2013 through 2032. Among all 5% coupon paper in the deal, bonds maturing in 2016 through 2025 were tightest to that day’s Municipal Market Data triple-A yield curve, with yields 11 basis points over the curve. Bonds maturing from 2030 through 2032 were widest to the scale, with yields 13 basis points over.JPMorgan also won the smaller series, $387 million of motor vehicle fuel tax GOs, with a TIC of 4.61%. Bonds in the smaller series mature in 2009 through 2030 with a term bond in 2032. Financial Security Assurance Inc. insures bonds maturing in 2016, 2017, 2024, and 2025; Ambac Assurance Corp. insures bonds maturing in 2018 through 2023; and MBIA Insurance Corp. insures bonds maturing in 2029, 2030, and 2032. Of the deal’s uninsured, 5% coupon paper, bonds maturing in 2010 were tightest to that day’s MMD triple-A yield curve, with yields five basis points over the curve. Bonds maturing from 2026 through 2028 were widest to the scale, with yields 13 basis points over.In the week’s second-largest scheduled deal, Citi on Wednesday will sell $550 million of personal income tax bonds for New York’s Empire State Development Corp., following a retail order period tomorrow. The bonds are slated to mature serially from 2009 through 2027, though Frances Walton, the chief financial officer for ESDC, said “there is likely to be a mix” of serials and term bonds. Standard & Poor’s rates the debt AAA, while Fitch assigns a AA-minus. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC is bond counsel.The proceeds of the sale will go to a variety of projects and programs administered by the ESDC, such as economic development projects, university projects, and the empire opportunity program. The slow pace of this time a year, and the generally low level of issuance, make it a good time for some issuers to come to market, according to Walton.“There hasn’t been a huge amount of issuance and January is generally a pretty good time to issue,” she said. “This market is so volatile you never know what will happen, but historically this will be a good time.”Issuers will often decide on an insurer ahead of time with negotiated deals, but the “upheaval in the insurance market” will make it difficult to know whether to use insurance, Walton said. As a result, the ESDC will wait until the day of sale to decide on an insurer, as many other issuers are also likely to do in the future until the cloud over the industry is resolved. Lehman Brothers will price two large issues next week, the first being $297.8 million of GOs for the University of California Regents. In the second, Lehman will price $261 million of revenue bonds for the Maryland Health and Higher Educational Facilities Authority. The bonds will go to finance the construction and expansion at several hospitals run by Lifebridge Health Inc., a health care system headquartered in Baltimore. The deal was originally scheduled for last week. The bonds will mature serially in 2008 through 2022, and term bonds will be offered in 2027, 2037, and 2047. Killarney Advisors Inc. is financial adviser, and McKennon, Shelton & Henn LLP is acting bond counsel. The bonds are rated A2 by Moody’s and A by Standard & Poor’s.

Municipal money market funds ended 2007 on a bad note as they reported outflows of $6.613 billion for the week ending Dec. 31. The decrease in assets puts the total in tax-free money market funds at $469.72 billion, according to the Money Fund Report. This is down from the record of assets under management that was reached last week. The report monitors 549 funds. Average seven-day yields over the same period were 2.88%, up 18 basis points from the week that ended Dec. 24, but still down 21 basis points from the week that ended Dec. 17. The average maturity is 30 days, down two days from the week before.This week’s data marks a reversal of fund flows, as the previous week saw an inflow of almost $2 billion. Before that, tax-free money funds had an outflow of just over $250 million. Prior to these ups and downs, the funds saw 10 consecutive weeks of inflows, with each week setting a new record for assets. The report attributes the recent volatility in the short-term market to end-of-year accounting by many institutions. Taxable funds had outflows of $10.52 billion, putting total net assets at $2.613 trillion. The combined total is $3.088 trillion of assets under management.

Subprime concerns and a flight to quality in the Treasury market helped bring about the outflows in municipal mutual bond funds that the Investment Company Institute reported for November, marking only the second month in 2007 that losses were noted. During November, tax-exempt bond fund outflows totaled $969 million, making for total net assets $378.3 billion or down 0.4%. ICI, which reported the numbers earlier this week, tracks 682 municipal bond funds. The last time outflows were reported were in August, when subprime mortgage issues first began to surface in the muni market. Muni funds reported outflows of $1.18 billion that month. Before August, the last time outflows were reported was in April 2006.“We’ve had a credit crisis and the worst period was in August, and then a second shoe dropped in November, and actually it has continued through December as the pattern is continuing,” said Joseph Baxter, senior portfolio manager at Delaware Investments. “Now [with] the November sell-off, you did have some specific muni news.”“First the local government funds, like the Florida fund, came under pressure for holding so many [structured investment vehicles] and participants began to redeem,” Baxter added. “Then the monoline insurer news and the rating agencies began taking a look at their holdings. It wasn’t their exposure to the municipal bond market, but the problem is their exposure to the subprime market, and this was bad headline news for our market and scared investors.”Radian Group Inc. kicked off November by reporting a $704 million net loss for the third quarter, only to be shortly followed by ACA Capital Holdings Inc., parent of single-A rated bond insurer ACA Financial Guaranty Corp., reporting a net loss of $1 billion for the quarter. In response, all three major rating agencies announced they would review the holdings of all the monoline bond insurers and left the door open for potential downgrades. The result was market volatility.On Nov. 1, Municipal Market Data’s triple-A general obligation yield scale for 30-year bonds was at 4.39%, only to increase to 4.55% by Nov. 8, an increase of 16 basis points in eight trading sessions. The yield scale then dove back down to finish on Nov. 30 at 4.32%, a decrease of 23 basis points. “The story in November was the fallout from insurers and it made significant volatility during that month,” said Paul Disdier, director of the tax-exempt securities division at Dreyfus Corp. “The other side of that story was the firming in the second half that was Treasury-led.”Treasury bond prices increased during the month, as a significant flight to quality ensued on investor fears of fallout from subprime market woes. Treasuries maturing in 30 years yielded 4.64% on Nov. 1 and finished on Nov. 30 at 4.40%, a decrease of 24 basis points. Munis lagged Treasuries in the flight to quality because bond insurers play a large role in the tax-exempt market, and Disdier believes that part of the outflow story is investors moving into Treasuries for fear of the insurer implications. “Part of the story could very well be a tax-exempt to taxable change, perhaps people were concerned about the insured funds so they took their money out and invested into a Treasury fund,” he said.The ICI data paints this picture, as taxable bond mutual funds had inflows during the month that totaled $3.39 billion, putting total assets under management at $1.3 trillion.Baxter explained that one way to show retail buyers seeking shelter in Treasury bonds is the relative value between the two asset classes. According to MMD, on Nov. 26 the triple-A yield scale for 30-year muni bonds was 102.3% of 30-year Treasury bonds. The three-month average of this comparison is 94.0% and the one-year average is 87.9%. The higher the percentage, the cheaper munis are to Treasuries, meaning significantly more demand for Treasuries by the end of November.“As munis get cheap to Treasuries, it is the simple dynamic of more investors buying into those bonds or funds that buy those bonds instead of munis,” Baxter said. As subprime issues continued to affect the municipal market, the performance of muni funds also hurt. Lipper Inc. data shows that in November, the total reinvested performance of the category “general muni fund” was 0.17%. This category accounts for 247 funds with assets under management worth $83 billion. In October, when inflows were reported by ICI, this same category returned 0.28%, and in September it returned 1.43%.Tax-free money market funds increased assets under management by 3.3% to $448.9 billion. ICI monitors 260 muni money funds.Stock funds had outflows of $10.88 billion that put total assets under management at $6.60 trillion. ICI tracks 4,744 stock funds.

Weekly reporting municipal bond mutual funds had a net outflow of $614 million during the period ending Dec. 19, the largest net cash outflow from the sector since June 30, 2004, AMG Data Services reported. The results were down from a $477 million outflow the previous week, and represent the sixth straight week of outflows following three straight weeks of inflows, according to the Arcata, Calif.-based fund tracker. The category represents about 73% of all muni bond funds because it excludes those that report monthly. The four-week moving average for all muni bond funds — which includes the monthly reporters — fell to a $271.9 million outflow from a $164.9 million outflow. Taxable bond funds that report weekly had a $851 million net outflow, after a $679 million inflow the week before. Weekly reporting equity funds had an outflow of $204 million after a $14.1 billion inflow the previous week.