Buy side

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.

With the trading week abridged for the Christmas holiday, and the end of the year rapidly approaching, the primary new-issue market is nearly inactive this week, as just $110 million of bonds and notes are scheduled to sell in the week’s three remaining sessions. This estimate is down sizably from the $1.4 billion of bonds priced last week, which in itself was a steep drop from weeks prior. Next week looks like being in holiday mode as well, with the market open for half a day Monday and closed Tuesday due to New Year’s Day. As of Friday afternoon, just $485 million was slated to price next week.“The market just wants the year to be done,” said Matt Fabian, managing director at Municipal Market Advisors. “It is doing what it can to close out the year as positively as possible, but it was a very difficult year. And now with the bond insurance situation, and the January reinvest, among other things, there’s a lot of uncertainty as to where next year will begin. At this point, the best scenario is to not be in the market.”In the week’s largest scheduled transaction, Indiana’s Merrillville Community School Corp. tomorrow will competitively sell $15.7 million of temporary loan warrants. The notes mature in December 2008.New York’s Cattaragus, Allegany, Erie, and Wyoming Counties Board of Cooperative Educational Services tomorrow will competitively sell $13 million of revenue anticipation notes. The notes mature in December 2008.Bergen Capital will price $12 million of multi-jurisdictional, multifamily housing revenue bonds in two series for Shalimar, Fla.Dyer, Ind., will competitively sell $11.4 million of taxable and tax-exempt warrants tomorrow. The $7.2 million of tax-exempt warrants mature in December 2008. The $4.2 million of taxable warrants mature next month.Hightstown, N.J., will competitively sell $7.3 million of bond anticipation notes tomorrow. The Bans mature in February 2008.In the week’s only scheduled competitive bond sale, Avon, Ind., will competitively sell $3.6 million of general obligation bonds tomorrow. The bonds mature from 2009 through 2028, and are callable at par in 2017. The credit is rated A3 by Moody’s Investors Service.

After 10 consecutive weeks of record inflows into municipal money market funds, outflows of $286.6 million were reported for the week ending Dec. 17. The decrease in assets puts the total in tax-free money market funds at $474.45 billion, according to the Money Fund Report. The report monitors 550 funds. Average seven-day yields over the same period were 2.67%, down 24 basis points from the week before, and down 40 basis points from two weeks ago. The average maturity is 32 days, the same when compared to the week that ended Dec. 10. This week’s data is the first outflow in some time, but it was very small. Last week, tax-free money funds had inflows of $12 billion and the week before had inflows that totaled roughly $5 billion. “I believe the outflows were due to corporate tax payments, it is something that we see around the Dec. 15,” said Connie Bugbee managing editor of the report. “So corporations that have money in tax-free funds can pull money out to pay taxes. I wouldn’t be surprised if we get it back next week.”Taxable funds had outflows of $28.10 billion, putting total net assets at $2.612 trillion. The combined total is $3.086 trillion of assets under management.

Fitch Ratings announced yesterday it was placing MBIA Insurance Corp. on negative watch after a comprehensive review of its residential mortgage-backed security portfolio found that the financial guarantor’s capital model falls below the guidelines needed to hold a triple-A rating by $1 billion. Fitch said in a press release that it would return MBIA to a stable outlook if, in the next four to six weeks, the company was able to “obtain further capital commitments and or put in place reinsurance or other risk mitigation measures.” Fitch said this is in addition to the $1 billion investment promised to MBIA by private-equity firm Warburg Pincus LLC on Dec. 10. “If MBIA is unable to address its capital shortfall in the noted timeframe, Fitch would expect to downgrade MBIA’s insurer financial strength ratings by one notch to AA-plus,” Fitch said. Fitch's announcement comes a day after Standard & Poor’s gave the firm a negative outlook, while affirming its triple-A rating. Late Wednesday, MBIA announced that it had $30.6 billion of exposure to collateralized debt obligations potentially tied to subprime mortgages. Standard & Poor’s said it knew about the CDO exposure, and would not alter the company’s triple-A rating as a result. “I think the most important thing to realize was that all of this was known by the rating agencies when they came out [with updates of credit ratings for the financial guarantors] over the last couple of weeks,” said Morningstar Inc. analist Jim Ryan, who covers the stock of Ambac Assurance Corp. and Security Capital Assurance in addition to MBIA. Last week, Moody’s Investors Services issued a much-anticipated review of the bond insurers, and also gave MBIA a negative outlook. The latest news comes in the aftermath of the Standard & Poor’s credit rating report on Wednesday. In addition to moving MBIA to negative outlook, the agency also affirmed the triple-A rating for Ambac and XL Capital Assurance, while moving their outlooks to negative from stable. Standard & Poor’s also downgraded ACA Financial Guaranty Corp. to CCC from A, and placed triple-A rated Financial Guaranty Insurance Co. on negative watch. Equity investors reacted to the disclosure by selling MBIA stock, sending it down $7.07, or 26.2%, from an opening price of $23.63, at the close of trading yesterday on the New York Stock Exchange. The stock price opened the year at $73.10, but has lost 73% of its value since then. This is the latest activity in a tumultuous six-month period in the bond insurance industry, as the collateralized debt obligations insured by the financial guarantors have lost billions of dollars in mark-to-market values. It all began on July 31, when Fitch placed Radian Group Inc., including the financial guarantor subsidiary Radian Asset Assurance Inc., on negative watch after market dislocations caused the collateralized debt obligations that the company insures to lose value. In early September, Fitch went ahead and downgraded the company to A-plus from AA, citing worsening market conditions for CDOs backed by subprime mortgages and the failed merger of the company with MGIC Investment Corp. At the time many analysts discounted the Radian downgrade because it was the market’s second lowest-rated bond insurer, and because many felt certain that losses on subprime backed debt instruments would not be severe enough to challenge the large capital reserves held by the triple-A bond insurers. However, in the past month, Fitch, along with Moody’s and Standard & Poor’s, have announced internal studies of the balance sheets of the market’s bond insurers. On Dec. 12, Fitch placed the parent of XL Capital, Security Capital Assurance, on watch for possible downgrade below triple-A. Two days later, Moody’s issued a comprehensive analysis of the market’s financial guarantors, affirming bond insurers’ triple-A ratings, while putting XL Capital Insurance and FGIC on review for downgrade. Moody’s also changed the outlook for CIFG Guaranty, as well as MBIA, to negative from stable. Then, like a bombshell, Standard & Poor’s issued its report on Wednesday, sending ACA to below investment grade. The credit rating agency also said that 2,400 of the 3,000 credits insured by ACA would be rated CCC. Perhaps surprisingly, while the news did impact equities markets, it had little effect on the municipal market. Traders and portfolio managers said the market had already priced in ACA’s situation, along with the other insurance companies somewhat tenuous financial position. “For ACA you have to break it down to the underlying project and nothing else matters,” said Troy Willis, portfolio manager at OppenheimerFunds in Rochester, N.Y. “For the other insurers, they are definitely still worth something, you aren’t just looking at the underlying project.”Willis went on. “There is a market sentiment that the triple-A insurers are going to do what they have to do to keep that rating, they are going to get the injection of capital for the most part,” he added. As for why the difference in action between equities and munis, one portfolio manager put it this way. “Stock holders of a bond insurance company have completely different interests than I do,” he said. “I am holding their triple-A rating, that is what I look at and I don’t think that is going to change, whereas a stock holder probably is not holding on to the stock for as long as I am holding onto the bond, so they are going to sell it off.” As the picture gets more clouded, one area of the market that may feel the effects most acutely is in the municipal auction rate market. Such bonds typically reset on a weekly or monthly basis, and big news can sometimes move the resets dramatically. “If you go back a few months to when Radian was downgraded by Fitch, there was huge fall-out on the Radian auction-rate bonds that were outstanding to the point that a lot of those issues have been wrapped by letters of credit over Radian,” said Don Carlson, vice chairman and senior managing director at B.C. Ziegler & Co. However, it is still unclear how the market would respond if one of the credit rating agencies issued a downgrade that was not followed by the others. In other words, how would the market value a split rating? For Security Capital Assurance that could soon be a reality. In issuing their ratings review, Fitch and Standard & Poor’s have varied widely in the amount of capital they say SCA must raise to adequately cover the triple-A rating of XL Capital. Fitch said the company would need to raise $2 billion, while Standard & Poor’s on Wednesday said it was closer to $250 million. “One thing I’m trying to come to grips with is what happens if we get split ratings,” Morningstar’s Ryan said. “It appears that Fitch is taking a harder line on SCA than Standard and Poor’s or Moody’s. If we start getting split ratings I’m not sure where that leaves us.”

As the Securities and Exchange Commission and other municipal bond industry organizations look to improve disclosure in the muni market, one small company is making strides with a step in this process — intraday bond pricing. Andrew Kalotay & Associates began work on a program to do this after an new client approached them in December of last year. Van Eck Global Securities was interested in creating a municipal bond exchange-traded fund and needed pricing throughout the day to do this. After months and many meetings, Interactive Data Corp. and the SEC have put the program in motion. It started running live in September, but there are still some flaws that need to be hammered out.“The difficulty today is that there is no live benchmark for municipal bonds,” said Andrew Kalotay, president of the company. “So we look at historical relationships between the muni yield curve and the end-of-day pricing of Interactive Data, and then we look at price movements throughout the day of the London Interbank Offered Rate swap curve.”Throughout the day, Kalotay’s software takes Interactive Data’s end-of-day price the prior trading session and then prices thousands of bonds every 15 seconds based on Libor movement. The data is simultaneously sent to Interactive Data and is packaged into baskets for municipal bond ETFs. All four companies offering ETFs — Van Eck, State Street Global Advisors, Powershares Capital Management LLC, and Barclays Global Investors — use the same software and Interactive Data’s programs in pricing their ETFs.“It is pretty revolutionary for the municipal market and the feedback to date has been very positive,” said Liz Duggan, vice president at Interactive Data. “It is a new concept out there and the service is expanding in the number of funds, the ETF sponsors, and we are going outside munis into using the service for Treasury bonds, corporate bonds, and preferred securities.”Historical data provided by Kalotay shows a very close correlation with Interactive Data’s end-of-day pricing. As he explained, the only way to back-test his software was by comparing their own end-of-day theoretical pricing to that of Interactive Data’s end-of-day price back in time. In 2006, tracking 10,875 different securities, the percentage of difference between Kalotay’s and Interactive Data’s end price was an average difference of $0.0022. Standard deviation was $0.1217. Over 90% of all prices inputted were within 0.10% of the price Interactive Data submitted.From January to August of 2007, the results are similar, but a little further off. In tracking the prices of 16,000 bonds, the average price difference was $0.0022, but the standard deviation grew to $0.2342. This was because of market conditions in August.Market volatility since beginning in August has exposed one flaw in the system. The pricing service is based throughout the day on a taxable curve. In August, November, and parts of December, the municipal bond market deviated from the taxable markets.“The muni market has moved in other directions from Libor,” Kalotay said. “Obviously, our software does not know this, so our program takes the taxable curve and comes up with a surrogate tax-exempt curve, and in some cases we end up with prices that are not accurate.”Thus, in the 2007 data, there are outliers that did not exist in 2006 that affected the standard deviation of the back-testing.To address this problem, Kalotay has been meeting with Municipal Market Advisors to “add color to our system,” as Kalotay puts it.In meetings over recent weeks with MMA, a company that provides market analysis and investment strategies, the two have found a way to work together.Tom Doe, president of MMA, sees Kalotay’s software as an excellent way to provide more transparent and accurate data to the ever-growing derivative segment of the muni market, and in turn, Kalotay is looking for intraday, muni-specific data that Doe’s company provides.“We’ll provide the spreads on the pricing of deal in the primary, provide flows in the marketplace throughout the day where there is heavy selling and where there is strength or not, and how that impacts the curve,” Doe said. “He has an incredible technology, or quantitative power, that allows him to do creative things and using our information will allow him to portray the changes in the muni market throughout the day.”In turn, Doe sees the benefit of a better live muni yield curve for the municipal derivatives market. He noted that in producing an options-free yield curve, as options are used heavily on the taxable side and distort a translation to the tax-exempt side, many big institutions doing business in the rate-lock market will benefit dramatically.“We’ve had conversations with some major dealers in the rate-lock market and during the market turbulence this fall, there were some problems with settlements because the prices were all over the place using traditional methods of providing a rate-lock, so with Kalotay’s data we can really create a premium, 5% coupon yield curve that is more accurate.”In a rate-lock agreement, a fund will sign a contract with another party — typically an established bank — that agrees to a future yield level on a certain maturity in a given amount of time. Once the time has elapsed, the contract must be settled, with one party paying the difference of actual yields at that time and what the agreed upon rate lock was. Thomson Financial’s Municipal Market Data yield curves and Lehman Brothers Municipal Index Swap curve are currently used for this.While these new developments are under way, users of the service appear to be satisfied in the meantime.“I’ve been very pleased with how everything on the ETF side of things has gone from the standpoint of the intraday price, the bid/ask spreads, and how we’ve been fairly tight form the standpoint of premiums and discounts,” said Tim Ryan, who manages State Street’s municipal bond ETFs. “Even during a very challenging time that we’ve been faced with, things are functioning fine. The pricing services are in a state of transition right now and we are entering a brave new world, but our products are trading efficiently.”Ryan also noted that State Street’s national muni bond ETF, ticker symbol TFI, has grown since its inception. It was seeded with $22 million and now has roughly $70 million of assets. It also has the highest three-month average of daily trading volume with 47,196 shares. Duggan also noted that interest in the intraday pricing has sparked abroad, as several European companies are in discussion with Interactive Data to use the system. When asked how and when Kalotay would be able to include MMA information and become less dependent on Libor, Kalotaysaid he would have a better idea next month.

The Bond Buyer’s weekly yield indexes declined this week, as losses Wednesday and yesterday failed to wipe out early gains. “We had a streak of winning days, but the music stopped Wednesday,” said Fred Yosca, managing director and head of trading at BNY Capital Markets. “I think the cessation of the uptrade was caused by insurance concerns. There could be a big change in the muni landscape, where it begins to return to the way it was before everything was insured, where people were looking at underlying ratings.”The municipal market was largely unchanged Friday, heading into the weekend. On Monday, tax-exempt yields were lower by one or two basis points, following the Treasury market. The market was again firmer by about one or two basis points Tuesday, a day which was headlined by the failure of Pennsylvania’s $706 million competitive bond sale, due to technical problems with Grant Street Group’s MuniAuction electronic bidding system. The commonwealth has since rescheduled its sale for next Thursday, and will be switching to Ipreo’s Parity.On Wednesday, weakness entered the market for the first time this week, as munis ended the session mixed overall, with gains on the short end, but some losses on the long end. Also Wednesday, the week’s largest deals came to market. The Alabama Public School and College Authority competitively sold $1.1 billion of capital improvement bonds to Lehman Brothers. Lehman priced $745 million of bonds for the Puerto Rico Public Buildings Authority, and Siebert, Brandford Shank & Co. priced $527 million of debt for Connecticut.Yesterday, tax-exempts were slightly weaker, with yields up about two basis points.The Bond Buyer 20-bond index of GO yields fell one basis point this week to 4.38%, its lowest level since Oct. 25, when it was 4.33%.The 11-bond index also dropped one basis point to 4.31%, its lowest level since Oct. 25, when it was 4.27%. The revenue bond index fell three basis points to 4.74%, the lowest level since Nov. 1 when it was 4.73%.The 10-year Treasury note, however, rose seven basis points to 4.02%, but remained below the 4.09% it registered two weeks ago.The 30-year Treasury bond rose 14 basis points to 4.49%, but remained below the 4.50% it registered two weeks ago.The Bond Buyer one-year note index fell 24 basis points to 3.04%, its lowest level in more than two years, since when it was 3.02% on Nov. 2, 2005.The weekly average yield to maturity on The Bond Buyer 40-bond municipal bond index finished at 4.79%, down one basis point from last week’s 4.80%.

Van Eck Global launched its first of several planned municipal bond exchange-traded funds yesterday that will track an index provided by Lehman Brothers. The Market Vectors Lehman Brothers AMT-Free Intermediate Municipal Index ETF will track an index that is composed of investment grade bonds with maturities between six and 17 years. “This is an exciting day for Van Eck as we are ringing the bell at the American Stock Exchange, but it took a lot of work to get to this point,” said James Colby, senior municipal strategist for Van Eck in a meeting yesterday morning at the exchange. “For a long time the municipal market has been in the back pages of market efficiency but now we are bringing it into the world of efficient electronic trading that is accessible to both the individual and the institution.” This ETF has an expense ratio of 0.20% with dividends paid monthly. It opened yesterday at $104.04 and closed at $104.05 with a trading volume of 200 shares. Barclays Global Investors iShares, State Street Global Advisors SPDR and PowerShares Capital Management LLC have also launched muni ETFs. Van Eck intends to launch five other ETFs shortly that will track the municipal market in the short-term, between one and six years maturity, the long-term market that will track maturities of 17 years and up, a New York-specific and California-specific ETF as well as a high-yield ETF. A spokesperson for the company said it expects to launch one more of the additional muni ETFs before the end of January. The company also has four more state-specific ETFs is registration with the Securities and Exchange Commission that will track debt from Massachusetts, Pennsylvania, New Jersey ,and Ohio. “It is extremely important to have a full family of funds that people can pick from,” said Harvey Hirsch, senior vice president at Van Eck. “The ability to one-stop shop and get all what you want from this asset class is what you will get with our family of funds.” Specifically, the intermediate ETF that is now trading under the ticker symbol ITM will track the Lehman Brothers AMT-Free Intermediate Continuous Municipal Index. To be included in the index, bonds must be rated by two of the major rating agencies. The threshold rating is Baa3 by Moody’s Investors Service or BBB-minus by Standard & Poor’s or Fitch Ratings. Bonds must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. They must be issued in the last five years.

Asset levels in municipal money market funds have reached record levels for the last nine consecutive weeks, as the funds experienced inflows of $5.69 billion for the week ending Dec. 3. The increase in assets has accelerated after a slow finish in September and puts total assets in tax-free money market funds at $462.48 billion, according to the Money Fund Report. The report monitors 549 funds. Average seven-day yields over the same period were 3.06%, up two basis points from the week before and up 15 basis points from mid-November. The average maturity is 31 days, the same maturity when compared to the week that ended Nov. 26. This week’s data continues the trend set during the previous week but at a faster pace. Last week, tax-free money funds had inflows of just over $3 billion. Taxable funds had inflows of $41.68 billion, putting total net assets at $2.620 trillion, also a record level. The combined total is $3.082 trillion of assets under management.

Municipal bond mutual fund flows continued to increase in October, the second straight month of inflows, according to an Investment Company Institute report released last week.

While still on pace for a record year of primary market volume, municipal bond issuers slowed way down in November, selling only 770 deals totaling $25.113 billion. That’s the least of any month this year and well below 1,287 issues totaling $42.671 billion sold last November, according to preliminary monthly volume data from Thomson Financial. The 41.1% drop in total volume in November compared to last year as issuers scaled back — or postponed — their debt sales largely in response to fears over general market volatility and widening credit spreads, and doubts over the credit strength and stability of triple-A bond insurers, market analysts said. The slow November followed a record October, which saw $43.4 billion of new issuance, and ended up beating the previous all-time high record for the month — $42.4 billion set in 2002. The year-over-year drop this month is magnified because last November had the highest volume on record over the past 10 years.November market volatility led to several high-profile deals to be put on hold. Chicago delayed its $961 million new money and refunding deal for O’Hare International Airport and Miami-Dade County postponed its $539 million refunding deal for its airport. Both deals remain on the day-to-day calendar.

Competitive offerings from Alabama and Pennsylvania lead the way in the primary new-issue market this week, comprising $1.8 billion of the roughly $10.1 billion of bonds and notes scheduled for sale. The estimate is 34% higher than the $7.5 billion of paper priced in the new-issue market last week, and mark the largest scheduled calendar in more than a month, since $15.8 billion of debt was brought to market the week of Oct. 22.“It is a little unusual in terms of size, but a lot of issuers are trying to get their last deals out before the end of the year,” said Jeffrey Timlin, portfolio manager and vice president at Sage Advisory Services. “Activity generally slows down during Thanksgiving, picks up a little bit for the first two weeks of December, and then the seasonality effect of Christmas takes hold, where you see a slowdown going into the end of the year, with people doing some final re-balancing going into year-end.”“Even though the size of the calendar this week might be unusual, you are still seeing year-to-date issuance at an all-time high,” Timlin said. “On top of that, you are seeing rates back to where we were back in 2003. You’re seeing a lot of issuers coming to market with a lot of debt that has been pending for a while, looking for attractive interest rate levels. We’re now finally in a market where it makes sense to pay for some of these [market] liabilities.”In the week’s largest scheduled offering, the Alabama Public School and College Authority Wednesday will competitively sell about $1.1 billion of capital improvement bonds. The deal represents both the bond market’s largest competitive tax-exempt new money offering of 2007, and the largest debt sale ever by an Alabama state agency.The bonds are slated to mature from 2008 through 2027, and are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s. Insurance will be available at the bidder’s option.“We are extremely excited about the opportunity to have this billion dollar sale next week,” said James Main, the state’s finance director. “It will upgrade facilities and educational opportunities in Alabama to the extent never before dreamed of.”Proceeds from the sale will provide funds for construction and repairs to city and county K-12 school systems, along with public two- and four-year colleges.Public FA Inc. is financial adviser. Bradley Arant Rose & White LLP is bond counsel.The Alabama Public School and College Authority last competitively sold capital improvement bonds in March 2006. Banc of America Securities LLC won that $52.5 million deal, with a true interest cost of 4.23%. The bonds mature from 2007 through 2026, with yields ranging from 3.48% with a 4% coupon in 2008 to 4.42% with a 4.25% coupon in 2026. Bonds maturing in 2007, and from 2020 through 2024 were not formally re-offered. The bulk of the deal came to market uninsured, though bonds maturing in 2018, 2025, and 2026 were backed by MBIA Insurance Corp.Among 5% coupon paper in the deal, all bonds were priced 10 basis points over that day’s Municipal Market Data triple-A yield curve.Pennsylvania will competitively sell $706 million of new-money and refunding general obligation bonds tomorrow in three series. Bonds from the first series — $565 million of Series A new-money GOs — mature from 2008 through 2027. Bonds from the second series — $23 million of Series B new-money GOs — also mature from 2008 through 2027. Bonds from the third series —$118.1 million of GO refunding bonds — mature from 2008 through 2011.Pennsylvania’s credit is rated Aa2 by Moody’s, and AA by both Standard & Poor’s and Fitch Ratings.“Pennsylvania paper is traditionally priced well in the market and we would hope to see anywhere from five to seven bidding syndicates, so we would expect to be well received in the market,” said Rick Dreher, director of the Bureau of Revenue Cash Flow and Debt in the commonwealth’s budget office.Eckert Seamans Cherin & Mellott, LLC is bond counsel. Public Financial Management Inc. is financial adviser.The commonwealth last competitively sold GOs in May in two series. Merrill Lynch & Co. won that $373 million deal, with a TIC of 4.28%. Bonds from the larger $346 million series mature from 2008 through 2027, with yields ranging from 3.75% in 2010 to 4.06% in 2020, all with 5% coupons. All remaining bonds were not formally re-offered. Bonds from the smaller $27 million series mature from 2008 through 2027, and were all not formally re-offered. Bonds from the larger series were uninsured, while bonds from the smaller series were insured by CIFG Assurance NA.Among 5% coupon paper in the deal, bonds maturing from 2014 through 2020 were tightest to that day’s MMD triple-A yield curve, with bonds eight basis points over the curve. Bonds maturing from 2010 through 2013 were widest to the scale, with yields nine basis points over.In other activity, Siebert Brandford Shank & Co. Wednesday will price $535 million of GOs for Connecticut, following a retail order period today and tomorrow. The bonds will be priced in three series — $300 million of new-money GOs, $188.7 of GO refunding bonds, and $46 million of taxable GO bonds.Moody’s rates the debt Aa3, while both Standard & Poor’s and Fitch rate it AA.Levy & Droney PC, Lewis & Munday, Nixon Peabody LLP, Pullman & Comley LLC, Robinson & Cole LLP, and Shipman & Goodwin LLP are bond counsel. P.G. Corbin & Co. and Acacia Financial Group Inc. are co-financial advisers for the deal. Merrill Lynch tomorrow will price $479 million of commercial paper for the New York City Municipal Water Finance Authority, following a retail order period today. The credit is rated Aa2 by Moody’s, AA-plus by Standard & Poor’s, and AA by Fitch. “This is a high-quality issuer, so we hope that we will have a good reception,” said Robert Lamb, president of Lamont Financial Services Corp., one of the issuer’s financial advisers. “This is a frequent issuer and it’s a reasonable size issue, so we are hoping it will get a good reception.”“Our view is that we are coming with a very strong AA credit to which we would expect investors to respond to given the market environment,” added Patrick McCoy, MWFA’s executive director.Lamont Financial Services and Ramirez & Co. are financial advisers. Orrick, Herrington & Sutcliffe LLP is bond counsel.