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To: Clappy who wrote (15284)	3/23/2003 10:18:23 AM
From: Jim Willie CB	Respond to of 89467

Long War or Short, Bond Investors May Face a Surprise (NYTimes) March 23, 2003 By JONATHAN FUERBRINGER MUNICIPAL bond investors are doing well this year. But these investors, particularly those with bonds issued by New York and other states with big budget deficits, may be in for an unhappy surprise. This is not a warning that investors will leave the haven of bonds for stocks - causing interest rates to rise - if the war in Iraq ends in a quick victory for the United States. In fact, rates have already been rising, with the yield on the Treasury's 10-year note up four-tenths of a point in two weeks, to 4.10 percent. Nor is this a cautionary note that the economy is likely to get back on track after an American victory, pushing interest rates higher as business investment rebounds and demand for credit rises. Both these postwar outcomes have been considered for months by money managers and smart investors, so any resulting spurt in interest rates, and an associated decline in bond prices, should be no shock. But not all investors have focused on state budget deficits - which are forecast to total more than $80 billion in the 2004 fiscal year. These deficits have yet to be reflected in the pricing of some states' municipal bonds. When the gravity of the problem sinks in, these bonds should falter. With a total return of 0.74 percent this year through Thursday for Lehman Brothers' municipal bond index, investors are not worrying yet. That return beats Treasuries, which have a negative return of 0.10 percent, and is better than the 0.45 percent return for mortgage-backed securities. It is just a quarter of a percentage point less than the return for investment-grade bonds before accounting for munis' tax benefits, which would make the taxable equivalent return on the Lehman municipal bond index even higher. Bonds issued by troubled states like New York are doing relatively well right now, and that is the problem. According to a performance comparison by Peter J. DeGroot, a senior vice president in the Municipal Index and Strategies Group at Lehman, 10-year general obligation bonds for the state have a price return - from the rising price of the bonds alone - of 0.81 percent this year through February, which is not far off the price return of 1 percent for 10-year general obligation bonds nationwide. In the last six months, the price return on these same New York State bonds is 1.31 percent, versus the nationwide performance of 0.77 percent. (Using price return reflects demand for the bonds and weeds out states that have a better total return just because they pay higher interest rates to sell them.) New York State has been attractive to investors, despite a projected budget deficit of $2.2 billion for the fiscal year that ends on March 31, and $9.3 billion for the next year. Gov. George E. Pataki and the Assembly speaker, Sheldon Silver both want to borrow billions with new bonds to help bridge the budget gap but are deadlocked over how to borrow. And New York has the third-lowest credit rating among the 50 states, behind California and Louisiana. The strong performance of the state's bonds so far is partly attributable to the high yields the state has offered to sell them, because of its poor budget history and because it issued more bonds last year than any other state but California. Among the other nine states with the biggest projected budget deficits, six - Ohio, Illinois, Missouri, Texas, Wisconsin and Minnesota - have bonds that have outperformed the national average price return over the last six months. The three underperformers are California, Massachusetts and New Jersey. But a look at New York City and California bonds show what can happen when investors digest bad deficit news. Over the last six months, the price return on 10-year New York City bonds is a loss of 0.93 percent, while California 10-year bonds show a price loss of 1.21 percent. The budget problems of New Jersey are beginning to sink in with investors. The price gain is 0.42 percent over the last six months and just 0.09 percent for the first two months of 2003. So investors beware. There is more out there than the war with Iraq that could upset your expectations. nytimes.com ME: reality should be especially harsh this summer rising interest rates will be a horror story for an assortment of bonds the bigdaddy will be TENS Trez Bonds real fear could develop and spread over state muni bonds like when California threatens and openly discussed BANKRUPTCY / jim