Weekly Market Update: February 25, 2010

Medium/Long-Term Rates: The BBI-20 decreased by 2 bp to 4.36. The 20-year AAA MMD decreased by 2 bp to 3.81%. The 10-year Treasury decreased by 15 bp to 3.64% and the 30-year Treasury decreased by 16 bp to 4.58%.

Short-term Rates: The SIFMA Index reset at 0.20%, a decrease of 3 bp from the previous week. The 1-month LIBOR Index reset at 0.23%, unchanged from the previous week. The spread between the 1-month Treasury and 1-month LIBOR narrowed by 2 bp to 14 bp for the week.

Commentary: Treasury yields decreased between 5 bp and 16 bp progressively from the 1-year to the 30-year maturity, with a flattening bias. Tax-exempt Municipal yields decreased between 2 bp to 5 bp primarily in the 5-year to the 15-year maturity range. The 10-year Municipal to Treasury yield ratio increased to 78% from 76%, and the 30-year ratio increased to 91% from 88%.

Municipal new issue volume was moderate, and well distributed to retail, traditional and bond fund buyers. Economic data signaling some uncertainty in the quality of economic recovery contributed to a lower and flatter Treasury curve. While tax-exempt Municipals responded to a limited extent with slightly lower yields by 3-5 basis points, absolute low yield resistance remains, evidenced by higher ratios to Treasury market yields. The limited high-grade supply and BABs alternative issuance that has kept downward pressure short maturity yields, has extended to the long end of the Municipal yield curve, and to some narrowing of lower underlying rated credit spreads. While the Wyden/Gregg introduced bill calling for the phasing-out of tax-exemption among other initiatives has received strong and effective opposition, comparing state and local governments support costs by financial instrument and program is a subject of assessment and considerable discussion in respect to managing the federal deficit.

The new issue calendar for the coming week is light to moderate. The Bond Buyer 30-day visible supply indicates $4.07 billion in negotiated sales and $1.34 billion in competitive sales. Economic release data for the week include Construction Spending, Factory Orders, Jobless Claims, and the Employment Situation.

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