Buy side

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.

Weekly reporting municipal bond mutual funds had a net outflow of $54 million during the period ending Nov. 28, AMG Data Services reported.

The Bond Buyer’s weekly yield indexes declined this week, as the municipal market was firmer more frequently than it was weaker in a mixed-bag week. “Muni yields in general haven’t been moving that much because there’s a lot of uncertainty in the market, as there’s no definitive positive trend to evoke trading,” said Matt Fabian, managing director at Municipal Market Advisors. “With the lack of a convincing positive price trend, secondary volume has fallen off. Price discovery has trailed off, so there’s overall less activity, and yield motion slows down.”Fabian said that this is caused in part by uncertainty over bond insurers, risk aversion due to nearing year end, and the current difficulty in hedging municipals.“It’s near impossible to fully hedge against interest rate risks in the current environment, and at the same time, we have massive interest rate risks at the long end of the muni curve,” Fabian said. “It’s hard to expect anyone to want to buy long munis right now.”He added that “the muni market right now is the ideal place if you are a total return, unhedged buyer who is looking for low returns and high risk.”Before last week’s holiday-shortened session, the municipal market was slightly firmer, following Treasuries, as investors sought quality. This week, Monday found munis were firmer by two or three basis points, though the market continued to lag behind the Treasury market, which showed sizeable gains.On Tuesday, tax-exempt yields did an about-face, declining by about one basis point across the board, following Treasuries, which experienced a correction on the heels of Monday’s sizeable gains. Munis were then weaker again Wednesday, by one or two basis points, again reflecting the movement of Treasury yields.Yesterday, however, municipals were firmer by about three basis points, as Treasuries reversed course again and showed improvement. The Bond Buyer 20-bond Index of GO yields fell six basis points this week to 4.39%, which is the lowest since 4.33% on Oct. 25.The 11-bond index dropped seven basis points to 4.32%, which is the lowest since 4.27% on Oct. 25. The revenue bond index fell three basis points to 4.77%, which is the lowest since 4.73% on Nov. 1.The 10-year Treasury note fell 14 basis points to 3.95%, which is the lowest since 3.93% on June 30, 2005.The 30-year Treasury bond fell 15 basis points to 4.35%, which is the lowest since 4.29% on Sept. 1, 2005.The Bond Buyer one-year note index fell five basis points to 3.28%, which is the lowest since 3.28% on Feb. 8, 2006.The weekly average yield to maturity on The Bond Buyer 40-bond municipal bond index finished at 4.80%, down six basis points from last week’s 4.86%.

The fallout from the credit crunch in the United States has made its way across the Atlantic Ocean and is impacting the coffers of eight small Norwegian communities, which since June may have lost up to half of their initial investment into a municipal tender-option bond trust. Hattfjelldal, which has a population of 1,562 people according to a 2004 census, invested 103 million Norwegian kroner, or roughly $18.9 million, into a Citigroup Alternative Investments off-shore focused TOB. Narvik, a community of fewer than 20,000 residents located north of the Arctic Circle, incurred enough losses through the same investment that it was planning to borrow money to pay municipal employees their December wages. Six other municipalities have come forth saying they were sold the same product and are facing similar losses. According to a Citigroup performance summary of TOB Capital Offshore obtained by The Bond Buyer, total returns in 2007 through September were negative 15.24%. August returns alone were negative 23.46%. The TOB was sold to the towns by Terra Securities ASA, an investment banking arm of Terra Gruppen. Terra Securities Wednesday filed for bankruptcy and had their license withdrawn by the Norwegian Financial Supervisory Authority, an equivalent to the Securities and Exchange Commission. “Terra Securities ASA has failed to provide information about significant risks in advance of the townships investments and has offered products to a target group that the products were not suited for,” the NFSA said in a statement when it withdrew the license. The bankruptcy voids Terra’s initial offer to repay four of the municipalities’ losses incurred after June 2007. Terra had made the repayment offer Tuesday with a statement saying it has discovered problems in the way the TOB was sold to the four towns. “Our internal investigations have discovered clear errors in the information given to the municipalities,” said Svein Erik Nordang, chief executive at Terra Securities, in a prepared statement. Terra did not return calls for comment. Payments to Hattfjelldal, Narvik, Rana, and Hemnes would have been $27.5 million plus $18 million of capital calls that were a result of losses during the period. Since June, the four towns have lost $45.5 million, which amounts to $990.16 for every man, woman, and child in each town. Total investments by the towns in the TOB have been reported as low as $96 million and up to as high as $850 million. Earlier in the week, Norwegian Finance Minister Kristin Halvorsen said at a press conference that the government would not act as safety net for municipal governments and did not plan on aiding them financially. In a statement to The Bond Buyer yesterday, Citigroup said that it “is concerned to read of the losses that investors have suffered on their investment. Losses on the investment are due to market conditions that have affected many investments around the globe, and the risks were fully disclosed to Terra Securities.” “Citi has announced that it will exercise its contractual rights to terminate the fund-linked notes that Citi sold to Terra in June 2007. Citi has the right to terminate because the market value of the transaction fell below certain trigger levels. The process of unwinding the transaction will include the mandatory early redemption of the notes and the sale of the underlying assets. The redemption proceeds of the notes will be paid to the trustee under the notes once the process for determining the final values of the assets is completed, and the trustee will then distribute them as provided in the notes.” This summer, the municipal market experienced a significant weakening and increased volatility during the first round of credit reassessment resulting from the defaults in the subprime mortgage market. Volatility peaked in August, when the yield scale for triple-A-rated general obligation bonds jumped 27 basis points from 4.51% on Aug. 13 to 4.78% on Aug. 24, according to Municipal Market Data. Earlier this week, the mayor of Hemnes provided evidence that Terra had given the municipality two prospectuses for the Citi investment, one in English and one translated into Norwegian. The Norwegian prospectus was claimed to be missing a portion of the prospectus titled “Significant Investment Consideration” that went on to detail the risk characteristics of Citi’s TOB. In a copy of the prospectus in English, the portion states “risks of the investment can include loss of all or a substantial portion of the investment due to leveraging, short selling, or other speculative investment practices.” It also notes a severe lack of liquidity for the product and that it does not expect one to develop. On this topic, Citi said that Terra Securities was advised by Citi that the product should be sold only to a similarly sophisticated counterparty. In agreements with Terra going back to 2006, the four municipalities bought into the Citi TOB with cash earned through energy sales from their hydroelectric plans. The investments would also be secured, in a contract with Terra, by the municipalities with future energy revenues. To make matters worse, the towns invested more in June this year, just as the municipal market began to falter. After the volatility of August, the communities were required to post extra capital to honor contracts made with Terra, or they would have had to lose their entire investments, according to the Norwegian newspaper Aftenposten, an English-language publication. “This is the first time that the tabloids are picking up what is normally just financial news,” said Jørn Jensen, of Jensen Asset Management LLC in Oslo. “So all of a sudden we get a human face to a complicated financial problem. Subprime impacts everyone, but this case is especially ugly after what came to light of Terra’s actions. On the bigger picture, though, this is only the beginning, and we will likely see more stories like this all over the world.” The Citigroup municipal investors TOB capital municipal portfolio is a sub-fund of Citigroup Alternative Investments. It is domiciled in Ireland. The investment strategy is that of a standard tender-option bond fund. It seeks to capture arbitrage by purchasing long-dated municipal debt, in this case between 20 and 40 years with a minimum rating of AA-minus or Aa3. It then sells short-term debt to money market funds. It is hedged on the London Interbank Offered Rate. The prospectus states that it aims to be leveraged between eight and 10 times. Eligible investments are municipal bonds, residual certificates of a TOB, or a forward-delivery municipal bond. The fund is managed by Craig Henick and Edward Sun. Jensen, who is also the former investment manager for fixed-income at KLP Asset Management, the largest life insurance and pension fund manager in Norway, said it is likely these towns did not even know the TOB was leveraged. He did express some shock, however, that the product came out of the U.S. municipal market. “It just goes to show you how far these problems reach and that no one is safe from subprime right now,” Jensen said. The prospectus is a typical one for tender option bonds, two TOB managers confirmed after reviewing the documents. The management fee is 2% per annum on capital and there is an incentive allocation. A minimum investment is $5 million. Of the other Norwegian municipalities, Rana invested the most in Citi’s TOB at $54.7 million. Four other municipalities are not part of the initial lawsuit and have yet to take action. Two of them are Helgesen, which invested $40 million, and Bremanger, which invested $31 million. The other two towns have not gone public yet, but the NFSA has confirmed that there are two more. All exchange rates used in this article are from Nov. 28.

Asset levels in municipal money market funds have reached record levels for the last eight consecutive weeks. That’s the news this week as the muni funds experienced inflows of $3.03 billion for the week ending Nov. 26.The increase in assets has accelerated after a slow start to October and puts total assets in tax-free money market funds at $456.78 billion, according to the Money Fund Report. The report monitors 550 funds.Average seven-day yields over the same period were 3.04%, up four basis points from the week before and up 11 basis points from two weeks ago. The average maturity is 31 days, an increase of one day compared to the week that ended Nov. 19. This week’s data continues the trend set during the previous week but at a slower pace. Two weeks ago, tax-free money funds had inflows of over $9 billion. Taxable funds had inflows of $31.46 billion, putting total net assets at $2.563 trillion, also a record level. The combined total is $3.031 trillion of assets under management.

The volatility of recent months will continue into 2008 but the municipal market will eventually find solid footing, said Steven Permut, senior vice president and portfolio manager at American Century Investments. Speaking at a roundtable discussion in New York yesterday, Permut said that what happened this summer and fall is a sign of a changing tax-exempt market, and one that has changed for good.“August was scary and fascinating at the same time depending on how you look at it,” Permut said. “It serves as an example of how our market has changed. We will eventually find stability but turbulence will continue through the end of 2007 and into next year.”He added: “While we will scale back volatility eventually, we now live in a new market because we have a crop of new buyers out there that change how business gets done.”Permut attributed market volatility in August to three forces, including the new nontraditional investor.“The unwinding of leverage put on by hedge funds, arbitrage funds, and tender-option bond programs; the credit default obligation exposure of insurers; and limited liquidity by the broker-dealer community are the principle reasons for the volatility,” he said.As a result, his funds have changed some of their investment strategies. He is also maintaining higher cash levels in his funds in order to be able to meet increased redemptions, should they occur.Permut said a strategy of steepening trades has paid off from American Century’s muni funds over this period.“We expect the economy to slow down and have adjusted our funds accordingly,” he said. “When this happens, you tend to see the yield curve steepen out and we look to take advantage of that.”One such steepening trade is done in the Treasury market, he noted. In this trade, the fund will buy on the short end, likely in two-year Treasury bonds, and then short on the longer end, likely in 10-year bonds. Thus, if the 10-year bond yields increase, the value of holding a short will increase. Buying on the short end will be advantageous as the bonds will appreciate as the curve steepens, assuming that short-term yields decrease.To offset the capital gains tax incurred by this transaction, the fund would enter into tax swaps.Permut said he did not expect municipal credit spreads to widen out as much as they have. He said that in his taxable debt funds, he had sold many weaker credits and bought high quality, but did not do this as much with his municipal funds. According to Municipal Market Data, the spread between triple-B and triple-A general obligation bond yields maturing in 30 years was 35 basis points on July 5. On Nov. 26, the spread was 72 basis points.Permut was quick to point to the relative cheapness of munis compared to Treasuries in today’s market, calling munis a very overlooked product. On Monday, MMD’s 30-year yields were 102.3% of 30-year Treasuries. Over the last year the ratio has averaged 87.9%. While this relative cheapness of munis to Treasuries is similar to the relationship between the assets in late August of this year, Permut said not to expect a rally similar to what occurred in September, when the market firmed on a strong retail bid.“We won’t see the rally in November because this time the problems in the market are linked to the perceived problems of the monoline insurers, and that is a big issue for retail,” he said. “This problem we have right now will take a longer time to work through the system.”American Century Investments maintains six municipal bond funds, and according to Morningstar Inc., the fund family has roughly $2.8 billion in municipal assets under management. That represents just under 3.5% of the company’s total assets.

A $1 billion California general obligation offering leads the way in the primary new-issue market this week, as investors will digest $6.1 billion of bonds when a week of full sessions begins today following the Thanksgiving holiday. The estimate is higher than both the $5 billion of bonds and notes that came to market last week, which was dominated by a $3.8 billion North Texas Tollway Authority note sale, and also exceeds the $5.1 billion that was priced the week before. “The big deal [this] week is obviously the California deal. That’s going to dominate,” said Evan Rourke, portfolio manager at MD Sass. “Demand overall has been moderate. Individual investors have not been terribly active, and I think that’s probably due to the absolute level of yields.” “In the Treasury market, we have the 10-year note poised to break through a 4% [it went as low as 3.978% Wednesday and was quoted near the end of the session at 4.01%], and while munis are offering good relative value to Treasuries, the absolute level of yields is just keeping individuals out of it,” he added. “With institutionals, there’s a good bid for high grades, but away from that, I’d say the demand is soft.” Tom Spalding, senior portfolio manager at Nuveen Investments, said that the California deal will be a “bellwether issue” that should illuminate “what the true demand is out there.” “Demand is going to be not quite the flight to quality that we have seen in Treasuries, but it’s going to be an alternative investment for certainly retail, and property and casualty companies continue to have money, so I think the real buyers will be back in,” Spalding said. “The other part of the equation is that dealers don’t want to stock bonds at this stage of the calendar, this late in the year.” In the week’s largest scheduled transaction, UBS Securities LLC will price $1 billion of various-purpose GOs for California Thursday. The credit is rated A1 by Moody’s Investors Service and A-plus by Standard & Poor’s and Fitch Ratings. However, this follows Standard & Poor’s revising its outlook on the state’s credit rating to stable from positive Tuesday. The agency cited downturns in projected tax receipts and the state’s track record of failing to take corrective mid-year action when budget numbers prove soft. The bonds will be used to finance environmental protection projects, parks projects, construction of school and university facilities, housing projects, and children’s hospital projects. Orrick, Herrington & Sutcliffe LLP and Gibbs & Oliphant LLP are co-bond counsel. Public Resources Advisory Group is financial adviser. Tom Dresslar, spokesman for state Treasurer Bill Lockyer, said that no one can predict how the market will respond to the bonds this week, but that the state will “make sure our underwriters get the best possible price for taxpayers.” “We switched from competitive to negotiated to take advantage of the retail demand in the current market,” he said. Dresslar also said that the state will make a decision on the extent to which it insures any of the bonds on the pricing date. Just last week, Clark County, Nev., School District, rated AA by both Standard & Poor’s and Fitch, came to market with a $650 million GO sale, which it brought uninsured, in keeping with a growing trend over the past few weeks, where investors are looking more at underlying ratings. “General generic insured bonds are definitely lagging, so you’re really seeing a much more widened spread between the top credits and the lower credits,” Rourke said. “There’s a much more nuanced approach to credit here than we’ve had in years, where people are not just looking at the insurer, they’re looking at the underlying rating.” Rourke said the Clark County district deal is one that in the past would typically have come with insurance. “Normally for issues like this, the issuer would put insurance on the bonds, because it didn’t cost much, and they felt the value of the triple-A credit was worth it,” he said. “This week, that deal came and there was the sentiment that, 'Don’t put the insurance on it, it doesn’t matter.’ And the market is definitely in flux because of that, because everyone is trying to determine what that right spread is. I think the market is still trying to make that transition.” California last came to market with $2.5 billion of various-purpose GOs last month, priced by Goldman, Sachs & Co. in two series. Bonds from the larger, $1.5 billion new-money series, came to market mostly uninsured. Those bonds mature from 2008 through 2010 and from 2022 through 2027, with term bonds in 2032 and 2037. Yields range from 3.34% with a 3.3% coupon in 2009 to 4.75% with a 5% coupon in 2037. Bonds maturing in 2022 are insured by XL Capital Assurance Inc., and bonds maturing in 2023 are insured by Financial Guaranty Insurance Co., while all other bonds are uninsured. Also, bonds maturing in 2008 were not formally re-offered. Bonds from the $1 billion refunding series, however, featured a steady diet of insured paper. Bonds mature from 2009 through 2025, with yields ranging from 3.34% with a 3.3% coupon in 2009 to 4.52% with a 4.5% coupon in 2025. Portions of bonds maturing from 2014 through 2023 are insured by Assured Guaranty, Ambac Assurance Corp., FGIC, XL Capital, and MBIA Insurance Corp. All remaining bonds are uninsured, and bonds maturing in 2008 were not formally re-offered. Among uninsured 5% coupon paper in the deal, bonds maturing in 2012 were tightest to that day’s Municipal Market Data triple-A yield curve, with yields 21 basis points over the curve. Bonds maturing in 2032 and 2037 were widest to the scale, with yields 41 basis points over. Among insured 5% coupon paper in the deal, Assured Guaranty-insured bonds maturing in 2014 were tightest to that day’s MMD triple-A yield curve, with yields 17 basis points over the curve. MBIA-insured bonds maturing in 2020 and 2021 were widest to the scale, with yields 23 basis points over. The spread has since tightened by between four and 12 basis points among uninsured 5% coupon bonds, and by six basis points among insured 5% coupon paper in the $1.5 billion new money deal, according to Tuesday’s MMD triple-A yield curve. However, spreads in the $1 billion refunding have mostly widened, ranging from narrowing by two basis points to widening by 15 basis points among uninsured 5% coupon paper, and between narrowing by two basis points and widening by nine basis points among insured 5% coupon bonds. In other activity, the Los Angeles Unified School District will competitively sell $600 million of tax and revenue anticipation notes, which mature in December 2008. The notes are rated MIG-1 by Moody’s. Merrill Lynch & Co. will price $450 million of sales tax bonds this week for Washington’s Central Puget Regional Transit Authority. The underlying credit on the bonds, which will be insured by Financial Security Assurance Inc., is rated Aa3 by Moody’s.