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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (30452)	5/20/2005 7:13:25 AM
From: Square_Dealings	Respond to of 116555

Liquidation of assets dovebid.com amazing amounts of stuff, expensive and the YAHOO guys think TQNT is a great buy finance.messages.yahoo.com these auctions give an idea of how "robust" the economy just is imo m

To: mishedlo who wrote (30452)	5/20/2005 7:16:31 AM
From: Crimson Ghost	Read Replies (3) \| Respond to of 116555

Muni Market's Conundrum: Higher Supply, Lower Yields: Joe Mysak May 20 (Bloomberg) -- New York City paid 4.44 percent to borrow money for 30 years in the municipal bond market this week. New York City wasn't alone. Dozens of municipalities borrowed money in the municipal market this week. If that 4.44 percent yield is at all indicative of demand, hundreds more will, too, looking to do everything from patching up pension funds to building new bridges. So far this year, states and localities have borrowed almost $150 billion in the bond market, according to the Bond Buyer. Not too many years ago, $150 billion would have represented a pretty big year. ``It's a fantastic time to be borrowing money, if you're a municipality,'' says Joe Deane, a managing director at Citigroup Asset Management, who runs $20 billion in municipal bonds. ``I'm surprised they're getting this second opportunity to refinance. But the message for municipalities is, go borrow your brains out.'' Deane says he's not buying bonds at these yield levels, because he expects interest rates to go higher. He says hedge fund and arbitrage traders, or non-traditional buyers, are responsible for the demand. ``I wouldn't put any long money to work right now,'' says Deane. ``Two things can happen: Nothing happens, or you lose a lot of money. There's no upside. Unless this economy rolls over and dies, I expect interest rates to go higher later this year.'' Tale of Redemption The first quarter of this year was a record for a first quarter, and the sixth busiest ever, with almost $100 billion in municipal bonds sold. Analysts expected the pace of issuance to slow down, but that hasn't happened. With borrowing costs actually declining, there's no reason to think supply will slacken for the remainder of this half. What's the first half going to look like? Maybe volume won't approach the $205 billion sold during the first half of 2003, the market's record ($384 billion for the year), or the $191 billion sold during the first half of 2004 (the runner-up, at $360 billion for the year), but the $162 billion sold during the first half of 2002 (full year: $359 billion) is certainly within sight. More supply usually forces interest rates higher. Put another way, if you have a lot of something, the price goes down. That's not happening in the municipal market right now. Tax-exempt yields, as measured by the Bond Buyer 20-General Obligation Bond index, the oldest gauge of yields in the municipal market, began the year at 4.47 percent. They climbed to 4.63 percent in March, but stand at 4.25 percent today. Interest Rates That's a mere 4 basis points away from the recent record low for the index, the 4.21 percent it reached in June 2003. To find lower yields, you have to go back to the 1960s. The Fed has increased the overnight borrowing rate it charges to banks eight times since last summer in 25 basis point increments, from 1 percent to 3 percent, and meets again on June 30 and Aug. 9. Most observers expect the Fed to increase the so-called Fed funds rate again. The municipal market has a wild card, and that has to do with redemption. Add coupon payments and advance refundings to the bonds and notes that mature (and are redeemed) on June 1 and July 1, and you find that investors will get back more than $80 billion in June and July, according to the Bond Buyer yearbook. That's $80 billion that bondholders will probably want to reinvest in tax-exempt bonds. This may be a further moderating influence on the direction of borrowing costs for municipalities. Golden Age Higher supply and lower yields may produce a conundrum for investors, but not for issuers. They'll be going out there and selling more bonds. Don't be surprised to see just the hint of the return of the high-yield municipal market. There may not be a return to the late 1990s, or Golden Age of Public Finance, when all sorts of loony stuff was financed by municipal bonds, but just take a look at some of the notable items of the past fortnight: Virginia sold pure tobacco bonds (top yield: 5.78 percent), and San Antonio sold almost $200 million in bonds for a convention center hotel (top yield: 4.94 percent). Tobacco bonds. Convention center hotel bonds. Can municipal bonds for aquariums, golf courses, racetracks and recycling mills be far behind?