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To: long-gone who wrote (86478)	6/5/2002 3:04:12 PM
From: marek_wojna	Read Replies (1) \| Respond to of 116779

<<As Bill Gross has pointed out, Corporate America has borrowing in the bond market and swapping this obligation for floating-rate exposure. If Greenspan hikes the funds rate, Corporate America's interest costs will rise significantly, perhaps precipitating even more bankruptcies. And, oh yes. Congressional elections are scheduled for November 5. If Greenspan raises rate now and the Republicans lose control of the House,>> What is going on in the States, Richard? <Low Yields Help Municipalities Cover Deficits: Rates of Return By Dennis Walters Los Angeles, June 5 (Bloomberg) -- States, counties and schools have started selling billions in debt to build up cash reserves and cover record budget deficits. Their consolation? Borrowing costs for the securities are close to record lows. More than 400 California school districts combined to sell $1.1 billion in one-year notes on Monday at a yield of 1.67 percent. The schools paid 2.65 percent a year ago. U.S. municipalities may sell a record number of such notes after a slowing economy and falling stock market cut tax revenue. They will benefit from ample demand from investors who fled declining stocks and are shunning longer-maturity bonds out of concern the Federal Reserve may raise interest rates this year, said Ken Winans, a financial adviser in Novato, California, who manages $120 million for wealthy individuals. ``They're scared to death of the Fed right now'' because rising rates would make existing bonds less valuable, Winans said. That makes investments with short maturities, including tax-free money market funds and notes maturing in a year or less, a popular refuge, he said. Investors will have plenty of choices. Municipal bond analysts say they expect states, counties and cities to sell the deficit-related securities -- known as tax and revenue anticipation notes -- at levels that match or exceed last year's record $56.2 billion. State shortfalls alone total more than $40 billion in fiscal 2002 and 2003, according to a May report from the National Governors Association and the National Association of State Budget Officers. Investor Dilemma Low yields and the threat of an increase in interest rates are also why not all investors are eager to buy tax-exempt notes. That's why Michael Carbuto, who manages three money market funds with more than $2 billion of assets at Centennial Asset Management, said he didn't buy the school notes in California and passed on other recent sales as well. ``You're really not getting paid a lot to go out a year,'' Carbuto said. ``The maturities are just a little too long for me,'' given the possibility of higher rates. Other investors said they're anticipating higher yields later this month when California sells a record $7.5 billion of securities to help pay bills amid the state's biggest one-year percentage decline in tax receipts since World War II. A sale that large has ``got to have some impact on the market'' by pushing yields higher to entice enough buyers, said Todd Pardula, who oversees about $720 million in two California tax-free money market funds for American Century Investments. Premium Prices The state's notes are expected to mature in a few months, Pardula said, so ``you wouldn't be locked in for a year'' in case interest rates start rising. Pardula said he bought some of the pooled school notes this week, though not ``nearly as much'' as last year given that interest rates may start moving higher. Investors also preferred higher coupons -- around 3 percent - - on the recent notes. In exchange, they paid a price that exceeds the debt's face value, reducing the actual yield closer to the current 1.7 percent. Paying a premium price makes sense because the higher coupon cushions the blow of rising rates, helping the investment retain its value, Pardula said. Most state and local tax notes carry top ratings. Some include financial guarantees for added security. While less risk means lower yields, it beats losing money in stocks, said Winans, the financial adviser. The Nasdaq Composite Index, for example, is down 19 percent this year. The investor retreat from stocks pushed assets of tax-free money market funds to an all-time high in early April, according to iMoneyNet Inc., even though the funds' average yield hovered around 1.1 percent. Municipalities continue to benefit from 11 Federal Reserve interest rate cuts in 2001, a major reason the Bond Buyer newspaper's index of one-year tax-free note yields dipped to a low of 1.45 percent in January before rising to 1.74 percent now. Treasury Comparison A tax-free 1.74 percent yield translates into a taxable yield of 3.12 percent for a California resident in the top federal and state income tax brackets. An investor has to tie up money for two years to earn a similar yield on a U.S. Treasury. Even in the best of years, municipalities manage their cash flow with notes that are repaid by future tax revenue. Public spending for salaries and other operating expenses remains roughly level month to month. Revenue varies for several reasons, including property tax collections that peak in December and April, and the note money smoothes out the valleys. The ``note season,'' as the heaviest sales period is known, hits its climax in June and coincides with fiscal years beginning July 1. Borrowers in California, the most populous state, often account for about one-sixth of the total muni note sales each year. Texas and New York City are among others considering billions in similar sales in coming months.