Municipal Fixed Income Commentary 4Q2007

Reviewing recent economic data, which included weaker housing and employment data, softer consumer sentiment indicators and only modest holiday retail sales, points to an economy that struggled to the finish line in 2007. This is likely to be reflected in a below trend reading for fourth quarter GDP (around 1.5%). The continuation of volatility in both equity and fixed income led to a repricing of risk across all asset classes. Despite the high credit quality of municipals bonds, the Treasury sector outperformed all other areas of the fixed income market. Liquidity concerns also contributed to the lack of interest for municipal securities, which can be a common occurrence for the municipal market during economic turmoil. During 2007, the Municipal Arbitrage market that consists of Tender Option Bond (TOB) programs managed by hedge funds was down 20% to 40%, on average.