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Municipal bond investors are piling into Treasuries as state and local government finances worsen and the yield advantage for tax-exempt securities evaporates.

Local government bonds due in three years with AAA ratings yielded 66 percent of similar maturity Treasuries last month, about the lowest level since Bloomberg began compiling the data in 2001. If the ratio moves closer to 60 percent, investors in the 38.3 percent federal tax bracket would lose all the benefits of sheltering income that comes from municipal debt.

Muni bonds are losing favor as state and local governments raise taxes to fund the record $18.5 billion in budget gaps estimated in a National Governor’s Association survey. Increased buying by tax-exempt investors would sustain a rally in short- term Treasuries, already benefiting from demand for a refuge from sovereign credit concerns and rising purchases by banks.

“Treasuries are safer and more liquid investments, especially given the quality issues with many municipalities of late,” said Jeffrey Schoenfeld, partner and chief investment officer in New York at Brown Brothers Harriman & Co., which manages $33 billion in assets. “In this low-rate environment Treasuries can be huge pickup and very good value on an after- tax basis in the shorter-end.”

The Build America Bond program, an Obama Administration plan that subsidizes 35 percent of interest expense for state and local issuers when they sell taxable debt, is also making municipal securities less attractive relative to Treasuries.

Build America Bonds

Almost $80 billion in Build America Bonds have been sold since the program began in April 2009, and taxable bond sales totaled $97 billion, or about 28 percent of long-term, fixed- rate municipal issuance during the last 11 months, data compiled by Bloomberg show. During the six years through 2008, taxable sales made up an average 5 percent of issuance.

More tax-exempt bonds may be replaced with Build America debt, because the federal budget for the fiscal year starting in October calls for an expansion of the program to allow refunding. It also calls for making the stimulus initiative permanent with a lower interest subsidy of 28 percent for new issues beginning Jan. 1, 2011.

Treasuries due in one to three years have returned 0.78 percent since December, after gaining 0.79 percent in 2009, according to Bank of America Merrill Lynch index data. Similar maturity state and local securities returned 0.57 percent this year, extending 2009’s 4.2 percent gain.

Relative Returns

Government securities fell last week after a Labor Department report showed payrolls dropped by less-than-forecast 36,000 in February. Two-year note yields increased 4 basis points to 0.85 percent.

Municipal debt became more expensive as investors bought longer-maturity debt with money stored in short-term tax free money market accounts that yielded as little as 0.02 percent. Assets in the funds dropped by $148.76 billion from the record $528.36 billion in August 2008, according to iMoneyNet of Westborough, Massachusetts.

“Demand for munis is mostly coming from retail investors who have been sitting on a mountain of cash and wondering what to do with it,” said Christine Todd, a managing director and head of the group that oversees $26 billion in tax-sensitive fixed-income portfolios at Standish Mellon Asset Management Co. in Boston. “AAA munis are rich versus Treasuries.”

Baltimore County, Maryland’s AAA rated general obligation bond due in three years yielded as little as 58 percent of comparable Treasuries last week, according to Bloomberg data. The ratio of AAA rated Arlington County, Virginia, debt due in three years dipped as low as 50.7 percent last week, according to Bloomberg data. That means that buyers would be better off buying Treasuries even if they’re in the highest tax bracket.

‘Great Opportunity’

“Most people with wealthy clients think about taxes first, and that usually means munis, even when munis are overvalued,” said Jonathan Lewis, founding principal of New York-based Samson Capital Advisors LLC, which manages more than $4 billion. “Right now there is a great opportunity to go up in quality and increase liquidity by building allocation in Treasuries.”

Municipal bonds may get even more expensive with a proposal in Congress by Oregon Democrat Ron Wyden and New Hampshire Republican Judd Gregg seeking to replace the tax exemption for state and local bonds with a more limited tax credit.

“Supply concerns will continue to be the major issue, even as quality concerns are not emerging to be real issues,” said George Friedlander, municipal strategist for Morgan Stanley Smith Barney in New York. “Add to that the prospect of the possibility for Congress ending tax exemption and it points to more demand for munis going forward. There is still room for munis to get richer.”

Economic Outlook

Even if municipal yields fall, investors can still benefit by switching into U.S. government debt given the relative low level of interest rates and slow economic recovery, said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth management unit in New York.

Federal Reserve Chairman Ben S. Bernanke, who slashed the central bank’s target rate for overnight loans between banks to a range of zero to 0.25 percent in December 2008, has flooded the economy with more than $1 trillion in the largest monetary expansion in U.S. history.

In his semi-annual testimony to Congress last month, Bernanke reiterated that rates will remain low for “an extended period” because the economy’s “nascent” recovery isn’t strong enough to bear higher borrowing costs.

Market Performance

Shorter-maturity Treasures are outperforming longer-dated debt with the Fed in no hurry to raise rates and investors’ concern increasing that inflation will accelerate because of the record borrowing and stimulus measures. Yields on 10-year notes rose to a record 2.94 percentage points more than two-year notes on Feb. 18, and were 2.79 percentage points higher on March 5.

For all the concern about a record federal budget deficit and the rising supply of Treasury debt, U.S. bonds are the place to be so far in 2010, with returns topping equities and commodities. Bank of America Merrill Lynch’s U.S. Treasury Master Index has increased 1.56 percent, compared with a gain of 0.17 percent for the MSCI World Index of stocks and a 0.33 percent increase in the Standard & Poor’s GSCI Index of 24 raw materials.

“Smart investors are doing the math by buying short-term Treasuries, which are giving more after tax returns and adding quality and liquidity to their portfolio,” said Deutsche Bank’s Pollack. “A combination of extremely low rates, lack of muni supply and the prospect of higher income taxes are making munis look extremely rich. If ratios go lower the after tax return will still be there.”

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The dollar slipped against other major currencies Wednesday after Greece announced measures to reduce its deficit by four percentage points this year.

What prices are doing: The dollar fell 0.6% against the euro to $1.3694, and dropped 0.8% against the pound to $1.5131. The greenback edged 0.4% lower against the yen to ¥88.47.

The dollar was first higher Tuesday but then lost steam and ended lower, as the euro rose on hopes that debt-choked Greece would make decisions about its deficit.

What’s moving the market: Greece announced plans to make steep cuts in civil servant salaries and raise taxes to save the debt-challenged country more than $6.5 billion this year, according to a report in the Wall Street Journal’s online edition.

Greek officials expect the cuts to lower Greece’s budget deficit to 8.7% of the country’s gross domestic product from its current level of 12.7%, according to the report.

Investors also digested some U free credit report and score.S. economic data ahead of Friday’s all-important February jobs release. Traders took in labor market reports from outplacement firm Challenger, Gray & Christmas and payroll data firm Automatic Data Processing, which showed job losses continue to slow.

The employment component of the Institute of Supply Management’s report on the service sector also rose to its highest level since April 2008 as the service sector expanded.

What analysts are saying: "The dollar is trading lower today as Greece’s austerity package lifts demand for European currencies," said Kathy Lien, director of currency research at Global Forex Trading, in a research note.

But the rally in the euro may be limited because there is still a lot of back and forth on whether Germany and other strong European countries will offer aid to Greece, she added. 

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Having reached capacity at their two St. Louis brewing facilities, the makers of Schlafly beer are finalizing arrangements to expand production through deals with two out-of-state breweries.

St. Louis Brewery Inc. has tentative agreements with brewing sites in Stevens Point, Wis., and Latrobe, Pa., company co-founder Dan Kopman told the Post-Dispatch. The brewer will begin making some lager-style beers in Wisconsin as early as this summer in an effort to keep up with booming craft-beer sales.

The arrangement allows Schlafly to act as a tenant, renting brewery equipment and space from the out-of-state beermakers. The move is more cost- and time-efficient than building a third local brewing site, Kopman said.

"Even if we acquired land today, it would be five years before we were brewing on a new site," he said. "We needed something a little sooner than that."

The brewery has reached its production ceiling in St. Louis.

On Friday, cranes lowered four stainless-steel, 200-barrel fermenting tanks into the company’s Bottleworks brewery in Maplewood. The new tanks — where yeast ferments and beer develops alcohol and carbonation — cap a $500,000 project that will help increase Schlafly’s annual local production by nearly 30 percent to 45,000 barrels of beer.

"This is the end of how much we can squeeze into Bottleworks," Kopman said. "Nothing else will fit in the building."

St. Louis Brewery will send raw ingredients as well as personnel and lab equipment to the Wisconsin brewery to keep standards in line with its St. Louis operations. The Pennsylvania facility will be used only if additional production is needed, Kopman said. Both out-of-state locations specialize in lager brewing and have canning lines should the brewery decide to put its beers in cans — a move several craft brewers have recently made.

Many start-up and regional breweries have turned to arrangements with outside producers as the credit market tightened and demand for craft beer climbed, said Paul Gatza, director of the Colorado-based Brewers Association payday loans with no fax.

It’s a good way to quickly fill expansion needs, Gatza said, but it "can create more work and travel for brewing staff … to ensure brand consistency over multiple brewing systems."

St. Louis Brewery currently sells about 90 percent of its Schlafly brands in the St. Louis metro area, though the company has expanded distribution into parts of Kentucky, Indiana and Tennessee. Any Schlafly beer brewed outside of St. Louis will say so on its packaging.

"In the long term, we’re committed to making all the beer that we sell in St. Louis in St. Louis," Kopman said. "We just need some breathing room right now."

St. Louis Brewery will be sharing the Wisconsin space with, among others, O’Fallon Brewery of O’Fallon, Mo., which last year outsourced production of its year-round beers to Stevens Point.

O’Fallon founders Tony and Fran Caradonna, who saw sales of their beers increase 36 percent in 2009, made the decision to contract-brew after reaching capacity at O’Fallon’s 3,000-barrel-a-year brewery northwest of downtown St. Louis.

Kopman also reported surging retail sales so far this year — up about 18 percent compared with January-February 2009. Schlafly set a company record last year by selling about 30,000 barrels of beer, which translates to about 10 million 12-ounce bottles.

Gatza expects the demand for craft beers to continue climbing, which means even more options for consumers. "There has never been a better time for beer drinkers in America."

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The Senate on Wednesday approved a $15 billion job-creation bill that would give businesses tax breaks for hiring the unemployed and states more money for infrastructure projects.

The four-prong bill would:

• Exempt employers from Social Security payroll taxes on new hires who were unemployed;
• Fund highway and transit programs through 2010;
• Extend a tax break for business that spend money on capital investments, such as equipment purchases;
• Expand the use of the Build America Bonds program, which helps states and municipalities fund capital construction projects.

The legislation, approved by a 70-28 vote, is a scaled-down version of an $85 billion bipartisan draft bill that was crafted by Sens. Max Baucus, D-Mont., and Charles Grassley, R-Iowa.

Some 13 Republicans, including newly elected Sen. Scott Brown, R-Mass., voted for the measure Wednesday.

"Today’s progress is a small step forward but an important one," said Senate Majority Leader Harry Reid, D-Nev., who surprised many lawmakers last week when he announced the slimmed-down measure. "This morning’s vote is a victory for hard-working Americans, especially those trying to find work. This will help our economy grow."

It now moves to the House, which may take it up as soon as Friday, said a Democratic aide at the House, which passed a more comprehensive $154 billion bill in December.

However, the bill does not extend the deadline to apply for unemployment benefits or the Cobra health insurance subsidy. Some 1.2 million people will run out of benefits after Feb. 28 if the deadline is not extended cash advance. Lawmakers are looking to pass a separate, shorter extension by the end of the week in order to give them time to enact a longer fix.

Also, unlike the House’s bill, the Senate’s jobs measure does not provide additional assistance for states. Many governors want the Obama administration to send more federal dollars so they can cope with yawning budget gaps.

The administration said on Monday that it strongly supports the $15 billion jobs measure but indicated it is only one step in the job-creation effort. The president wants lawmakers to take up a bill that would increase small businesses’ access to credit.

Reid said the Senate will vote on extending tax provisions and small business job measures in the near future. The majority leader also said lawmakers will consider providing additional Medicaid money for states, which governors have been requesting.

"We have other things in mind," Reid said. "Remember, we don’t have a jobs bill, we have a jobs agenda."

Still, labor leaders and left-leaning think tanks say the Senate must do more to spur job creation.

"We need to create 11 million jobs to get back to the level of unemployment we had before the recession began," said Lawrence Mishel, president of the Economic Policy Institute. "Yet the Senate jobs bill would create no more than a couple hundred thousand jobs."

CNN Radio Correspondent Lisa Desjardins contributed to this report. 

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The Federal Reserve raised the rate it charges banks that borrow from the central bank when they run short of funds.

The Fed said late Thursday it is raising its discount rate by a quarter percentage point, or 25 basis points, to 0.75%. The central bank said in a statement it made the move in response to improving financial market conditions.

The move is largely symbolic, because banks do little borrowing at the discount window.

The unanimous decision to boost the discount rate also has no effect on the more widely watched federal funds rate, which measures the rate banks charge each other for overnight loans. That rate is expected to remain between 0% and 0.25% for the foreseeable future, given the slack in the labor market and the still fragile state of the economy.

But raising the discount rate allows Federal Reserve chairman Ben Bernanke to take another small step toward normal monetary policy, after the past two-plus years were consumed in a financial firefight.

"The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," the Fed said in a statement.

The Fed also shortened the term of some discount window loans and raised the minimum bid in the term auction facilities it uses to supply overnight funds to banks. Those facilities were among the many innovations Bernanke introduced since the onset of the credit crunch in mid-2007 to supply U.S. banks with funding.

As the recession deepened, the Fed moved to support the housing market by buying more than $1 trillion of mortgage-related securities. When buying those securities, the Fed credited the selling banks with reserves at the Fed. This huge sum of so-called excess reserves has led to worries that any upturn in the economy will be met with an inflationary lending spike from banks.

Bernanke has emphasized that the Fed will use multiple new tools to prevent the excess reserves from fueling inflation, including the payment of interest on reserves at the Fed and the sale of Fed assets.

But as eager as policymakers are to show that policy is on a track toward normalization — that is, a nonzero fed funds rate and a smaller Fed balance sheet — the process is clearly going to take time.

The Fed suggested as much Thursday, in explaining why it may be a while before the spread between the federal funds rate and the discount rate may return to its pre-crisis level of 1 percentage point. Following Thursday’s increase, the spread is now half a percentage point.

The central bank said Thursday’s increase should "encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility only as a backup source of funds" and added that it will "assess over time whether further increases in the spread are appropriate." 

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Senior living community The Place at Gallatin has a new name and a new owner.

Seattle-based Emeritus Senior Living announced today that it has purchased The Place at Gallatin, which will now operate under the name Emeritus at Gallatin.

Publicly traded Emeritus currently operates 316 residential and assisted living communities in 36 states serving about 32,700 residents.

In a news release, Emeritus President Granger Cobb said the company plans to bring “additional improvements” to its newest facility.

Mary Ellen Mayfield, executive director for Emeritus at Gallatin, said the purchase allows the community to maintain its independence while benefiting from the support of a national senior living company.

“It will be great for this community to be a part of the Emeritus family, such a forward-thinking company that is committed to the highest standards of quality care for seniors,” Mayfield said.

Emeritus is on of the country’s largest operators of freestanding assisted living communities providing Alzheimer’s and related dementia care services to seniors.

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Electronic Arts Inc. won't have a new March Madness NCAA basketball game for the first time since 2003, another sign of the company's recent struggles.

The game was missing from the product release list that Redwood City-based EA (NASDAQ:ERTS) announced last week but it wasn't until Saturday that it acknowledged that it was dropping March Madness.

"We do not have an NCAA Basketball game in development at this time, and we're currently reviewing the future of our NCAA Basketball business," an EA Sports rep told the GameSpot Web site. "This was a difficult decision, but we remain a committed partner to the NCAA and its member institutions."

In its most recent quarter, EA posted a third quarter loss of $82 million, or 25 cents a share, narrowed from a loss in the same period last year of $641 million, or $2 a share business cards design.

Its revenue was $1.24 billion, down from $1.65 billion in the year-ago quarter.

The company said it expects fourth-quarter adjusted earnings of between 2 cents and 6 cents a share, far below analyst projections of 13 cents a share.

It said fourth-quarter net revenue is expected to be $925 million and $1 billion. Adjusted revenue is expected to be between $800 million and $850 million, below Wall Street's projection of $851 million.

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Forestview Senior Village, the last phase of Woodlands Residential Village, has been completed and residents are moving into the three-story building.

Forestview, developed by Wheatfield-based Calamar, features 92 independent-living senior apartments. Calamar has developed more than 300 units in the 26-acre Woodlands complex, located off of Forest Parkway in Wheatfield.

Since starting Woodlands Residential Village five years ago, Calamar has seen virtually all of its apartments leased. Some 27 units of the 92 apartments in Forestview have been leased, officials said.

Calamar invested more than $30 million to develop Woodlands Residential Village, including $8.9 million on Forestview. The project was aided by incentives from the Niagara County Industrial Development Agency.

Forestview units offer one- and two-bedroom models, with monthly rents ranging from $1,095 to $1,295 and amenities such as private patios, central air conditioning and kitchen appliances payday loans. The units are smoke-free and pet-friendly. Rents also include heat and a Time Warner package that includes cable, telephone and Internet services.

The complex was designed with a central game room, 15-seat theater/media room, billiards room and fitness center.

The entire Woodlands Residential Village helps anchor the Woodlands Corporate Center East, which features a number of offices.

Woodlands Corporate Center East is expected to see more than 1,500 jobs retained or created, with an annual payroll of more than $28 million.

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SWBC’s LendingXpress subsidiary has teamed up with Equity National to offer home valuation and analytic products to lenders to process real estate loans.

LendingXpress focuses on helping financial institutions order all of the products necessary to close a real estate loan, including property valuations and lien position. Equity National is a East Providence, R.I.-based company that provides lenders with a full range of valuation services to process mortgages.

“There are a lot of appraisal management companies fighting for business today, and after exhaustive due diligence, we chose Equity National to be our strategic partner based on their focus on the customer, (Home Valuation Code of Conduct) orientation, and their management team, which is unmatched in the industry,” says Ted Robinson, senior vice president and general manager of LendingXpress.

San Antonio-based SWBC is a financial services company that provides insurance, mortgage and investment services to financial institutions, businesses and individuals nationwide.

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President Barack Obama’s “Volcker Rule” to ban proprietary trading at U.S. banks may not survive in Congress, hampered by criticism that the administration waited too long and offered too few details.

The proposal’s timing is viewed by some as “transparently political and not substantive,” Senate Banking Committee Chairman Christopher Dodd said on Feb. 2. It was “airdropped” into the Senate debate on legislation to overhaul U.S. financial rules, said Senator Richard Shelby, the panel’s top Republican.

“It’s tough to take on another issue at this point,” Dodd, a Connecticut Democrat, said at a hearing in Washington yesterday that included executives from Goldman Sachs Group Inc. and JPMorgan Chase & Co. “It was never my intention, or I believe the intention of this committee, to solve every issue surrounding the financial-services sector.”

Members of the Senate panel have been working for weeks to translate into legislation the plan Obama released in June to overhaul U.S. financial rules. The focus is on the Senate after the House passed its version of the legislation in December.

Obama named the Jan. 21 proposal after its chief proponent, ex-Federal Reserve Chairman Paul Volcker, now a White House adviser. Based on an idea circulated in a January 2009 report by the Volcker-led Group of Thirty, composed of former central bankers and finance ministers, it would force banks to stop the trading they do on their own accounts and give up their stakes in hedge funds and private-equity funds.

Citigroup Trader Quits

Some traders have already taken note. Matthew Carpenter, head of a Citigroup Inc. unit that trades U.S. stocks using the bank’s money, quit to join hedge fund Moore Capital Management LP, people briefed on the matter said yesterday. Leaving with him is his deputy, Matthew Newton, amid concern the government may order banks to exit such businesses, the people said.

Dodd and Shelby told reporters yesterday they hadn’t ruled out incorporating the plan into the bill. Dodd, who on Feb. 2 said he “strongly” supported the proposal, said he’d consider language empowering regulators to carry out the recommendations without having lawmakers write the rules, and Shelby said he wanted to see whether regulators already have the power.

The announcement came two days after a Republican victory in the Massachusetts Senate race that cost Democrats their supermajority in the Senate — timing that stoked speculation it was motivated by politics.

Volcker said Feb. 2 that the timing was “sheer coincidence.” Obama decided to back the proposal weeks before the Massachusetts election, he said. Volcker wasn’t available for comment yesterday, according to his assistant, Anke Dening.

Client Business

The White House defines proprietary trades as those not done for the benefit of customers, a senior administration official said when the Volcker plan was announced. Regulators would have the power to ask banks whether certain trades are related to client business, the official said. If they’re not, the regulators could order firms to exit the positions.

“We’re working closely with the Congress to rein in risky practices on Wall Street,” Treasury Department spokesman Andrew Williams said in an e-mailed statement. “The House passed a strong bill in December and now we’re working with the Senate to get the job done.”

Senator Michael Crapo, an Idaho Republican, pressed Deputy Treasury Secretary Neal Wolin at the Feb. 2 hearing to release details of the plan “so that we can understand specifically what we are talking about or what the proposal is with regard to proprietary trading.”

Wolin responded by telling Crapo the administration is working with regulators to prepare a draft legislative proposal that it will send to Congress “soon.”

Drawing a Line

Drawing a line between bank and customer trading won’t be easy, said Hal Scott, a professor at Harvard Law School who specializes in international financial systems.

A narrow definition probably won’t reduce risk, Scott said, while a broad one could “seriously impair the basic function of modern banks as market-makers” in government and non-government securities and as packagers of consumer debt into bonds.

Goldman Sachs’s E. Gerald Corrigan, who like Volcker is a past president of the Federal Reserve Bank of New York, said at yesterday’s hearing that banks should be allowed to own and sponsor hedge funds and private equity funds because any risks can be managed. Corrigan is chairman of the firm’s regulated bank subsidiary.

Barry Zubrow, JPMorgan’s chief risk officer, told the committee the activities the administration is proposing to restrict didn’t cause the financial crisis.

“Indeed, in many cases, those activities diversified financial institutions’ revenue streams and served as a source of stability,” Zubrow said in his prepared testimony. “Further, regulators currently have the authority to ensure that risks are adequately managed in the areas the administration proposes to restrict.”

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