Wells Fargo settles bid-rigging case

Wells Fargo & Co. has agreed to pay at least $37 million to settle accusations that it and Wachovia Corp., which Wells acquired in 2008, paid kickbacks to win business from municipal governments.

In its regular quarterly filing with the Securities and Exchange Commission, made Tuesday, the San Francisco bank said it would pay the greater of the $37 million or "65% of the restitution amount of a future settlement, if any, with the various state attorneys general of their investigation of Wachovia."

The agreement, which Wells said was reached Oct. 21, stems from litigation with various municipal governments around the country and consolidated in a federal lawsuit in Manhattan.

The suit accused many investment banks of conspiring to rig the bidding process, “sharing their illegal gains through kickbacks to one another, and making other secret, undisclosed arrangements.”

A Wells spokeswoman said the case mainly involved events at Wachovia that occurred before Wells took over the Charlotte, N.C., bank.

Bank of America, JPMorgan Chase and UBS previously agreed to much larger settlements in the case.

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-- E. Scott Reckard

Photo: A Wells Fargo stagecoach in the bank's history museum in L.A. Source: Wells Fargo & Co.

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California housing agency forcing foreclosures

A state agency that provides low-interest mortgages is foreclosing on a small number of clients even though they are making their monthly payments, a state Senate watchdog group reported.

The California Housing Finance Agency is foreclosing on homes because their financially strapped owners temporarily rent them out and move into cheaper rental properties, the Senate Office of Oversight and Outcomes said Monday.

The agency, which finances the mortgages through the sale of tax-free bonds, allows borrowers to rent their homes only if they suffer a severe economic hardship, such as losing a job.

That tight restriction was recommended to the agency by its bond counsel prior to the collapse of the state's housing market and the deep recession of 2007-09.

About 350 Housing Finance Agency borrowers rented their homes without permission and 21, so far, have been foreclosed on. Another 186 are being threatened with foreclosure despite staying current on their monthly loan payments, the oversight office said.

According to the report, the agency said it didn't know how many borrowers were denied permission to rent.

The agency did not respond to requests for further comment.

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Home loan program to get easier under revised U.S. program 

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A health crisis follows mortgage foreclosure crisis

-- Marc Lifsher

Photo: A "for sale" sign on a foreclosed Glendale house in September. Credit: Kevork Djansezian / Getty Images

California boosts yields on muni bond sale to lure investors

California was forced to boost interest rates on a sale of $1.8 billion in tax-free muni bonds on Wednesday, as institutional investors demanded higher yields to close the deal.

The state set a yield of 3.70% on the 10-year bonds in the offering, up from a preliminary estimate of 3.51% on Monday. The five-year bonds in the sale will pay a yield of 2.28%, up from an initial estimate of 2.10%. The bonds were sold in maturities of three to 30 years.

Interest on the bonds is exempt from state and federal income taxes for California residents. The proceeds from the sale will fund voter-approved infrastructure projects.

Treasurer Bill Lockyer had to pay higher yields after the bonds got a lukewarm reception from individual investors on Monday and Tuesday. Those investors put in orders for $387 million of the debt, or about 21.5% of the total deal.

By contrast, individual investors ordered almost 28% of the $2.37-billion bond offering the state sold on Sept. 20. And at the sale before that, last November, individuals sought nearly 80% of the deal -- when yields were substantially higher. The 10-year bond in that offering paid 4.23%.

The relatively low level of demand from individuals this time around meant that institutional investors, such as mutual funds, had more leverage to push for higher returns when the state took their orders on Wednesday. That will benefit individuals who ordered the bonds on Monday and Tuesday, because all buyers get the same final yields.

It also means taxpayers will foot a bigger bill for interest costs than Lockyer had hoped.

Some muni bond market analysts say individual investors balked at the offering because they’re unhappy with the relatively low interest rates on tax-free bonds in general, even though yields have risen over the last few weeks.

“Retail investors are deeply ambivalent about bonds at these yields,” said Matt Fabian, an analyst at research firm Municipal Market Advisors in Concord, Mass.

Interest rates on high-quality bonds have dropped across the board this year as the Federal Reserve has tried to put more downward pressure on all rates to help the economy.

The tax exemption on muni bonds means their returns are more attractive than yields on many taxable securities. A five-year U.S. T-note pays just 1.04%, and that interest is federally taxable.

Still, many investors are put off by the low nominal returns on munis compared with what they remember in recent years, said Marilyn Cohen, head of money management firm Envision Capital Management in Los Angeles.

“Given the market we confronted, we’re satisfied with the results,” said Tom Dresslar, a spokesman for Lockyer in Sacramento. “We’re confident we got the best deal possible for taxpayers.”

Besides the $1.8 billion in tax-free bonds, the state also sold $205 million in taxable bonds Wednesday.

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California sells $2.4 billion in bonds as yields fall

Investing: Is the bond market at a crossroads?

-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno

Photo credit: Makaristos

California bond sale draws relatively light demand on first day

Individual investors on Monday placed orders for about 14% of a $1.8-billion sale of tax-free bonds by California, a relatively low turnout for a state debt sale.

Treasurer Bill Lockyer said the state’s brokerage network took in $250 million in orders on the first day of a two-day retail sale period, when the state gives preference to individuals over institutions.

By contrast, Lockyer had $459 million in orders on the first day of last month’s bond sale. That was about 18% of the total offering of $2.5 billion in securities.

The state took in a lower level of orders this time around despite offering significantly higher interest rates on the bonds than at last month’s sale, which was the first offering of 2011.

As bond yields in general have rebounded over the last month, the state was offering a preliminary yield of 2.10% on the five-year bonds in its latest sale, up from 1.61% in the September deal.

The 10-year bonds in the latest sale were offered at a preliminary yield of 3.51%, up from 3.17% at the last sale.

The bonds, known as general obligation issues, are being sold in maturities of three to 30 years.  Interest on the securities is exempt from state and federal income tax for California residents, so the returns can be worth substantially more than similar fully taxable yields, depending on an investor’s tax bracket.

 “We’ve got another day to go. Let’s see where we’re at when it’s all over,” said Tom Dresslar, a spokesman for Lockyer, when asked about Monday’s order level.

California has the lowest credit rating of any state, reflecting the weak economy and the state’s history of budget struggles, but that has been the case for years. The bonds are rated A1 by Moody’s Investors Service and A- by Standard & Poor’s. Those ratings are considered “upper medium grade.”

Proceeds from the bonds will finance a backlog of voter-approved infrastructure projects.

Individual investors can submit orders for the bonds through Tuesday. Orders must be placed with brokers; the state doesn’t sell its bonds directly to investors.

Institutional investors will bid for the remaining bonds on Wednesday, which is when the final yields will be set. Individual investors who don’t like the final yields can cancel their orders.

The bonds are sold in minimum blocks of $5,000. For more information on the sale, go to Lockyer’s website, buycaliforniabonds.

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California sells $2.4 billion in bonds as yields fall

Investing: Is the bond market at a crossroads?

-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno

California launches $1.8-billion muni bond offering

California on Monday offered tax-free yields as high as 4.87% on long-term general obligation bonds, hoping to attract substantial demand from individual investors.

The state is trying to raise $1.8 billion in the bond sale, its second offering in less than a month. The proceeds will be used to finance a backlog of voter-approved infrastructure projects.

Treasurer Bill Lockyer set preliminary yields on the bonds at levels above what the state paid in the last sale -- reflecting the rebound in market interest rates in recent weeks as U.S. economic data have pointed to slow growth but not recession. Higher yields are good for investors but more costly for taxpayers.

The bonds are being sold in maturities of three to 30 years. The state is offering 2.10% on the five-year bonds, up from 1.61% in the September deal. Ten-year bonds are offered at 3.51%, up from 3.17% at the last sale; the 30-year issue is offered at 4.87%, up from 4.80%.

The interest on the bonds is exempt from state and federal income tax for California residents, so the returns can be worth substantially more than similar fully taxable yields, depending on an investor’s tax bracket.

California still has the lowest credit rating of any state, reflecting the weak economy and the state’s history of budget struggles. The bonds are rated A1 by Moody’s Investors Service and A- by Standard & Poor’s. Those ratings are considered “upper medium grade.”

Individual investors can submit orders for the bonds Monday and Tuesday. Orders must be placed with brokers; the state doesn’t sell its bonds directly to investors.

Institutional investors will bid for the remaining bonds on Wednesday, which is when the final yields will be set. Individual investors who don’t like the final yields have the option of canceling their orders.

The bonds are sold in minimum blocks of $5,000. For more information on the sale, go to Lockyer’s website, buycaliforniabonds.

RELATED:

California plans $2-billion bond sale amid rising yields

California sells out $5.4-billion short-term note sale

California sells $2.4 billion in bonds as yields fall

Investing: Is the bond market at a crossroads?

-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno

California plans $2-billion bond sale amid rising yields

California will sell $2 billion in bonds next week, and the state probably will have to pay significantly more to borrow than it did three weeks ago.

That may lure more yield-hungry individual investors to the securities.

Treasurer Bill Lockyer plans to offer $1.8 billion in tax-free bonds and $200 million in taxable issues to raise cash for voter-approved infrastructure projects. The general obligation bonds typically are sold in maturities ranging from one year to 30 years.

The state borrowed $2.4 billion via bonds on Sept. 20, its first sale of 2011. That turned out to be near the recent low point for muni bond yields, which had been falling for much of this year in tandem with the decline in yields on other types of bonds, including U.S. Treasury issues.

But the rush into Treasury bonds as a haven has ebbed since mid-September, as worries about Europe’s debt crisis have eased somewhat and as U.S. economic data have pointed to slow growth but not recession.

The result: Treasury bond yields have rebounded, pulling other interest rates up as well.

California sold five-year bonds at a tax-free yield of 1.61% in the Sept. 20 sale. Now the market yield on five-year California debt is about 2.08%, said Joe Lee, a muni trader at De La Rosa & Co. in Los Angeles. Ten-year California bonds are yielding around 3.5%, up from 3.17% at the Sept. 20 sale.

Chris Ihlefeld, who manages the Thornburg California Limited-Term Municipal bond fund in Santa Fe, N.M., said yields may have to rise further to get the deal done next week. The muni market “is very sensitive to an uptick in issuance,” he noted.

The state still will be paying much less than it shelled out to borrow late in 2010, when muni bond yields were soaring on fears of widespread defaults by cash-strapped state and local governments in 2011. That default wave never came. (Remember Meredith Whitney?)

California paid a yield of 2.66% on five-year bonds in November 2010 and 4.23% on 10-year bonds.

Even at today’s lower yields, California bonds are attractive relative to other kinds of debt because the interest paid is exempt from state and federal taxes for California residents. The higher your tax bracket, the more appealing muni yields are -- assuming you don’t expect a dramatic surge soon in interest rates in general, or that President Obama will succeed with his proposal to limit the tax break on muni bonds for high-income investors.

For the California sale, the state will give preliminary yield estimates on Monday, and individual investors will be allowed to place orders with brokers that day and on Tuesday (the state doesn’t sell its bonds direct to investors). Institutional investors will place orders on Wednesday, which is when the yields on the bonds will be set.

Individual investors who don’t like the final yields have the option of canceling their orders.

The bonds are sold in minimum blocks of $5,000. For more information on the sale, go to Lockyer’s website, buycaliforniabonds.com.

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-- Tom Petruno

California sells $2.4 billion of bonds amid falling yields

California on Tuesday wrapped up its first long-term debt sale of 2011, paying interest rates substantially below what it paid on bonds last November -- a savings for taxpayers.

The drop in yields curbed demand for the bonds from individual investors, but buying by institutional investors such as mutual funds allowed Treasurer Bill Lockyer to issue nearly the full amount planned.

The state said it sold $2.37 billion of tax-free general obligation bonds to refinance previously issued bonds and pay off other debt.

Individual investors put in orders for $655 million of the bonds on Friday and Monday. Institutions bought $1.74 billion of the deal on Tuesday, which is when final yields on the securities were set.

When it issued bonds in November the state paid an annualized tax-free yield of 4.23% on 10-year securities in that offering. This time around Lockyer set the yield on 10-year bonds at 3.17%, more than a full point less. Yields were lower across the board on bonds of other maturities as well.

Although California’s credit rating remains the lowest of any state, the budget passed by the Legislature in June has given investors more comfort about the state’s fiscal outlook, Lockyer spokesman Tom Dresslar said. “We believe the budget has helped constrain the price” of borrowing, he said.

Credit rating firm Standard & Poor's in early July raised its outlook for the state’s rating to “stable” from “negative,” saying the state's plan to balance its budget was "largely realistic."

It also has helped California that muni bond interest rates in general have tumbled this year, along with yields on U.S. Treasury bonds, as the economy has weakened and many investors have favored bonds over stocks for safety. The 10-year Treasury note yield was at 1.94% on Tuesday, down from 3.30% at the start of the year.

But falling yields have pushed some individual investors to the sidelines because they believe the returns aren’t high enough to justify the risk, analysts say. Small investors are “deeply unhappy” with muni yields now, said Matt Fabian, analyst at research firm Municipal Market Advisors.

Orders from individual investors in Tuesday’s California bond sale were well below the nearly $1 billion they put in for the November sale, although this time around bonds of certain maturities were available only to institutions. The state said it raised yields on bonds maturing between 2013-2016 and 2022-2028 by as much as 0.05 percentage points from its initial estimates to get the deal done.

With the steep drop in muni yields this year “the market is not very conducive to doing a bang-up retail business,” Dresslar said. Still, he said, the state was “very pleased” with the demand it saw.

The state plans another general obligation bond sale in mid-October, although the amount hasn’t been determined, Dresslar said.

Some investors may be shying away from muni bonds because of President Obama’s proposal to limit the amount of muni bond interest that high-earners can exclude from their taxable income beginning in 2013. The proposal would help pay for the economic-stimulus program in the jobs bill Obama sent to Congress earlier this month.

But Congress could quash the idea. Lockyer and other state officials already have raised objections, warning that the move could mean investors would demand higher yields on muni bonds, driving up state and local governments' cost of issuing debt.

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-- Tom Petruno

Inset photo: Treasurer Bill Lockyer. Credit: Armando Arorizo/Bloomberg News

California muni bond deal sees light demand from individual investors

A steep drop in interest rates on tax-free municipal bonds this year has curbed individual investors’ appetite for a new California debt offering.

The state’s brokerage network took in orders Friday and Monday for $640 million of a $2.5-billion general obligation bond deal offered by Treasurer Bill Lockyer, his office said late Monday.

By contrast, individual investors put in orders for nearly $1 billion of bonds at the last such offering, in November.

The difference between then and now: Market yields on California muni bonds have fallen sharply, pulled down by the slide in U.S. Treasury bond interest rates this year and by the relative calm in the muni market after a major sell-off last fall and winter fueled a spike in yields.

When it issued bonds in November the state paid an annualized tax-free yield of 4.23% on 10-year securities in the offering. This time around the state set the preliminary yield on its 10-year bonds at 3.17%, more than a full percentage point less.

The state is offering 4.80% on the 30-year bonds in this week’s deal, down from 5.50% on 30-year bonds it sold in November.

The decline in rates is good news for taxpayers who will foot the bill for the bonds, which will refinance previously issued debt. But individual investors “are very wary of these yields being so low,” said Joe Lee, a muni trader at bond firm De La Rosa & Co. in L.A.

Because of its protracted budget woes, California has the lowest bond ratings of any state, at A1 from Moody’s Investors Service (tied for last place with Illinois) and A- from Standard & Poor’s.

The relatively light demand from individual investors means the state is more dependent on institutional investors, such as mutual funds, to buy the bonds. Those investors will put in orders on Tuesday, which is when final yields on the securities will be set.

Some investors may be shying away from muni bonds because of President Obama’s proposal to limit the amount of muni bond interest that high-earners can exclude from their taxable income beginning in 2013. The proposal would help pay for the economic-stimulus program in the jobs bill Obama sent to Congress earlier this month.

It’s not at all certain that Congress will agree to limit the muni tax exemption. Lockyer and other state officials already have raised objections, warning that the move could mean investors would demand higher yields on muni bonds, driving up state and local governments' cost of issuing debt.

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Muni bond market was a big winner as stocks dived

Fed expected to launch new program to push long-term interest rates lower

-- Tom Petruno

Photo credit: Makaristos

 

California sells out $5.4-billion debt deal at low end of yield estimates

Investors’ scramble to earn a reasonable return on their cash helped California sell out an offering of $5.4 billion in short-term notes earlier than expected -- and at the low end of expected yields.

The state said it completed the debt sale on Wednesday, one day ahead of schedule.

The notes were sold in two maturities: The $4.9 billion of securities maturing June 26, 2012 will pay an annualized yield of 0.40%; the $500 million in notes maturing May 24, 2012 will pay 0.38%.

The interest is exempt from state and federal income tax for California residents, so it’s equivalent to a higher taxable return, depending on an investor’s tax bracket.

When Treasurer Bill Lockyer launched the note sale on Tuesday he estimated that the final yield on the June notes would be between 0.40% and 0.55%. Investor demand was strong enough to allow Lockyer to pay the lower rate.

With short-term interest rates in general scraping rock-bottom, a 0.40% tax-free yield beats many of the alternatives for investors looking for a haven for their cash. One-year U.S. Treasury bills pay less than 0.10%.

Individual investors bought $3.55 billion of the notes, or almost two-thirds of the deal. Lockyer said. Institutional investors such as mutual funds bought the rest.

California and many other state and local governments issue so-called revenue anticipation notes, or RANs, at this time of year to bridge the gap between their cash needs and the arrival of tax revenue later in the fiscal year.

Lockyer had planned to sell RANs in August. But fearing that the debate in Washington over the federal debt ceiling might rile financial markets, he chose to borrow first from major banks to have the money in hand, and sell notes later to retire the bank loan.

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-- Tom Petruno

Photo: The Capitol in Sacramento. Credit: Los Angeles Times

California short-term debt deal more than half sold on first day

Yield-hungry individual investors on Tuesday put in orders to buy more than half of the short-term notes that California is selling this week to raise cash.

Brokerages handling the deal for state Treasurer Bill Lockyer said they had orders for $3.05 billion of the notes, or 56.5% of the planned $5.4-billion deal, by late afternoon.

The brokerages will continue to take orders from individual investors on Wednesday. Institutional investors will bid for what’s left on Thursday, which is when final interest rates will be set.

The state is preliminarily estimating that the nine-month notes will pay an annualized tax-free yield of between 0.40% and 0.55%. Because that interest is exempt from state and federal income taxes it’s equivalent to a higher taxable yield, depending on an investor’s tax bracket.

The yield range on the notes also is above what some other state and local borrowers have paid to borrow via short-term securities recently. Last month, Texas sold $9.8 billion of notes at an average annualized tax-free interest rate of just 0.27%.

Still, California is paying much less than it did on the $10 billion of notes it sold last November, when the muni bond market nationwide was rocked by worries about state and local governments’ finances. The state paid an annualized 1.75% on the notes that matured in June.

This time around the muni bond market is relatively calm, and short-term interest rates in general are well below their levels of last fall. One-year U.S. Treasury bills pay a yield of less than 0.10%.

California and many other state and local governments issue so-called revenue anticipation notes, or RANs, at this time of year to bridge the gap between their cash needs and the arrival of tax revenue later in the fiscal year. California's notes will mature on June 26, 2012.

Lockyer had planned to sell RANs in August. But fearing that the debate in Washington over the federal debt ceiling might rile financial markets, he chose to borrow first from major banks to have the money in hand, and sell notes later to retire the bank loan.

The state on Tuesday also launched a sale of $432 million in longer-term muni bonds for the California State University system. Individual investors put in orders to brokerages for $208 million of the bonds, or 48%, Lockyer said. Institutional orders will be taken on Wednesday. Preliminary tax-free yields on the bonds range from 0.32% on one-year debt to 4.56% on 31-year bonds.

On Friday the state will begin offering $2.6 billion in general obligation bonds to investors, the first such sale since November. Proceeds will be used to refinance debt previously issued to finance voter-approved infrastructure projects.

Because of its protracted budget woes, California has the lowest bond ratings of any state, at A1 from Moody’s Investors Service (tied for last place with Illinois) and A- from Standard & Poor’s.

But both Moody’s and S&P gave the state’s short-term notes their highest possible ratings. Credit rating firms typically grade short-term debt based on the amount of cash the borrowers are expected to have on hand when the securities mature.

Lockyer’s website, buycaliforniabonds, has more investor information on the state’s debt sales.

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Legislators vote to audit controversial bond agencies

California's long-term-debt rating outlook raised to "stable" by S&P

-- Tom Petruno

California gets top ratings on planned debt sale

California on Thursday got the highest possible credit ratings on the short-term debt it plans to issue the week of Sept. 12. That’s should be good for taxpayers, at the expense of the investors who are expected to buy the securities.

Standard & Poor’s rated the debt SP-1+, the first time California has received that top-rung rating from S&P since 2007, Treasurer Bill Lockyer said.

Moody’s Investors Service also gave the debt the highest possible rating, at MIG-1.

The state will raise $5.4 billion via the sale of so-called revenue anticipation notes, or RANs. Lockyer will use the money to pay off a bank loan the state took out in late July.

California and many other state and local governments issue RANs at this time of year to bridge the gap between their cash needs and the arrival of tax revenue later in the fiscal year. California's notes will mature in late spring of next year.

Lockyer had planned to sell RANs in August. But fearing that the debate in Washington over the federal debt ceiling might rile financial markets, he chose to borrow first from major banks to have the money in hand, and sell notes later to retire the bank loan.

Credit rating firms typically grade RAN debt based on the amount of cash the borrowers are expected to have on hand when the securities mature. Moody’s said in a statement Thursday that it expected the  state to have cash “sufficient to repay the notes with moderate additional cushion, even in the case of [budget] stress scenarios run by Moody's.”

Gov. Jerry Brown lauded the ratings decisions, calling them “a strong indication that our state’s finances are on the right track. Despite the uncertain economy, I intend to do everything possible to keep state revenues and spending in balance.”

California borrowed $10 billion via RANs last November and had to pay dearly because of upheaval in the municipal debt market at the time. Investors were dumping muni securities nationwide because of worries about state and local governments’ finances.

Lockyer was forced to boost interest rates on the notes to get the deal done. The state paid a hefty tax-free annualized yield of 1.5% on notes that matured in May and 1.75% on notes that matured in June. Because those yields are exempt from state and federal income taxes for California residents, they're equivalent to much higher taxable yields, depending on an investor’s tax bracket.

This time around, short-term interest rates in general are well below their levels of last fall, and the muni bond market is relatively placid. That backdrop, along with the top ratings from S&P and Moody’s, should mean the RANs will cost the state a fraction of what it paid last year.

Last month, Texas sold $9.8 billion of short-term notes at an average annualized interest rate of just 0.27%.

Historically, California’s RANs have been popular with individual investors. Lockyer will allow individuals to put in orders for the notes on Sept. 13-14. Orders must be placed with brokerages; the state doesn’t sell directly to investors.

Institutional investors will bid on Sept. 15, which is when the interest rates will be set.

-- Tom Petruno

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Muni bond market was a big winner as stocks dived

Legislators vote to audit controversial bond agencies

California's long-term-debt rating outlook raised to "stable" by S&P

Top photo credit: Makaristos

Inset photo: Treasurer Bill Lockyer. Credit: Armando Arorizo/Bloomberg News

Legislators vote to audit controversial bond agencies

California legislators voted to open an official probe of two controversial state agencies that channel money earned from issuing municipal bonds to private companies.

Assemblyman Mike Feuer (D-Los Angeles) in May requested the audit of the California Statewide Communities Development Authority (CSCDA) and the California Municipal Financial Authority (CMFA).

The Joint Legislative Audit Committee approved the request on an 8-to-3 vote Wednesday and will now conduct a full review of both agencies.

The CSCDA has grown over the last two decades into one of the largest issuers of municipal bonds in the country. It specializes in so-called conduit bonds, which allow public agencies to raise money through tax-free bonds and then channel that money to private businesses and nonprofit organizations.

At most public agencies the fees collected for issuing such bonds are used to fund other public projects and programs. The CSCDA is a public agency but it passes along most of the fees it collects -- $32 million in the last two years -- to HB Capital Resources, a private company in Walnut Creek, Calif.

A Los Angeles County staff report concluded in 2008 that the CSCDA was a "shell entity operated solely by a private contractor."

CSCDA has disputed that characterization and said it is run by a board of public officials.

The CMFA was created more recently on a similar business model with guidance from former HB Capital employees.

The business model has come under scrutiny from more traditional municipal bond issuers, The Times reported in May at the same time that Feuer issued his call for an audit.

"There are many unanswered questions about how these two joint-powers authorities operate and whether they adequately protect the public’s investment of scarce tax dollars," Feuer said Wednesday after the vote. "I am pleased that we are moving forward with a more extensive review today."

Neither agency responded to a request for comment.

The audit is expected to take several months.

RELATED:

'Conduit' muni bond defaults draw scrutiny

IRS panel recommends greater oversight of conduit bonds

Private firm HB Capital Resources has rich role in municipal bonds

-- Nathaniel Popper

 

Muni bond market a big winner as stocks dive

Turns out it was a good idea to keep the faith in tax-free municipal bonds last winter when so many investors were bailing out.

It was an even better idea to buy more munis at that point.

While the stock market has dived this week investors have been bidding up the value of many muni bonds, apparently hungry to lock in tax-free yields.

That demand has pushed muni market yields sharply lower, in tandem with the steep decline in yields on U.S. Treasury bonds.

The annualized tax-free yield on the Bond Buyer newspaper's index of 40 long-term muni bonds nationwide (charted below) sank to 5.02% on Thursday, down from 5.07% on Wednesday and the lowest since Nov. 8.

It was early last November that the muni market was slammed by a sell-off that lasted into January. The selling, spurred in part by deepening worries about the health of state and local government finances, was egged-on by Wall Street banking analyst Meredith Whitney.

In late-December Whitney made a now-infamous prediction that "hundreds of billions of dollars" of municipal bond debt would end up in default in 2011 as local-government finances crumbled.

As frightened investors dumped munis, particularly muni mutual funds, bond prices tumbled and yields rocketed. The yield on the Bond Buyer index reached a two-year high of 5.95% in January.

But the wave of defaults never came -- or at least, it hasn’t yet. Meanwhile, muni bond issuance is down sharply this year as state and local governments have curtailed borrowing.

The result: The muni market has been rallying steadily since mid-April. That shows up in share prices of popular muni bond funds.

Shares of the Franklin California Tax-Free Income fund have risen from $6.51 in mid-April to $6.97 as of Thursday, a gain of 7%. The price has jumped 10 cents a share, or 1.5%, just this week.

Year to date the fund’s total return, meaning share price gain plus interest earnings, is 6.9%. That beats the returns on many taxable bond funds. The Pimco Total Return fund is up 4.5% this year.

Interestingly, the muni market hasn’t been shaken this week despite two high-profile examples of exactly the kind of trouble Whitney warned about: The town of Central Falls, R.I. filed for bankruptcy protection, and Jefferson County, Ala. is considering doing the same.

For her part, Whitney is unrepentant. She continues to assert that muni investors are underestimating the severity of state and local governments’ funding shortfalls for employee pensions and health-care benefits, and how that could end up hurting many bond holders.

But so far this year, the big hurt has been on the investors who rushed to sell munis when bond prices were cratering in January and yields were soaring.

-- Tom Petruno

Investors pour into Treasury and muni bonds for safety

Sell everything else and buy Treasury bonds. And maybe some municipal bonds, too. Or just go to cash.

That's the overriding market strategy Thursday as investors everywhere seem desperate to quickly lower the risk in their portfolios amid soaring uncertainty about the global economy.

Stocks worldwide are plummeting as investors run for the door. The Dow Jones industrial average was down 331 points, or 2.8%, to 11,564 at about 11:40 a.m. PDT. European stock markets closed down more than 3%, while Brazilian shares are down 5% so far and Canada’s market is off 3.1%.

Commodities also are being hammered, led by crude oil, down $4.99 to $86.94 a barrel.

Even gold is being dumped, a sign that some people are taking profits wherever they have them to raise cash. Gold futures in New York ended down $7.20 at $1,656.20 an ounce after hitting a record $1,681.80 early in the session.

There was no single catalyst for Thursday’s market rout -- just more intense fear that the economic outlook is fading fast and that governments and central banks either can’t or won’t do much about it.

“We’re looking to a double-dip” recession, said David Ader, government bond strategist at CRT Capital Group in Stamford, Conn.

Many economists still say it’s too early to make that call, but looming recession is the loud-and-clear message from the Treasury bond market: Another rush of buying by haven-seeking investors has pushed the two-year T-note yield (charted at left) to a record low of 0.28% from 0.34% on Wednesday.

The 10-year T-note has dived to 2.46% from 2.62%, getting close to last year’s low of 2.39% in October.

Investors also are shoveling cash into tax-free municipal bonds, a trend that began to accelerate on Monday. The Pimco Intermediate Municipal Bond Strategy fund, a exchange-traded muni bond fund, is up 25 cents, or 0.5%, to $52.39 a share. It’s up 1.1% so far this week, while the Dow is down 4.7%.

-- Tom Petruno

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