July 31 (Bloomberg) -- Top-rated municipal bonds advanced the most in a week, trailing bigger gains in Treasuries, after the U.S. said the economy grew more slowly in the second quarter than economists forecast.

New Jersey's Higher Education Student Assistance Authority was among today's largest tax-exempt borrowers, selling $350 million of bonds to fund new loans. The deal, insured by Assured Guaranty Corp., included securities due in 2030 with a 6.125 percent interest rate, almost 1.3 percentage points more than top-rated debt tracked by Municipal Market Advisors.

The biggest backers of tax-exempt bonds sold this year, Financial Security Assurance Inc. and Assured, were placed under review for possible downgrades by Moody's Investors Service last week, leading investors to reduce the value of guarantees the companies provide.

``That's the major reason munis have underperformed lately, the turmoil the rating services seem to foster,'' said Robert MacIntosh, who helps oversee almost $19 billion as co-director of municipal investments at Eaton Vance Management in Boston.

Yields on AAA rated, 10-year general obligation bonds fell 2 basis points, or 0.02 percentage point, to 3.85 percent today, matching the reading on July 28, according to Municipal Market Advisors, a Concord, Massachusetts-based research firm.

Ratings Companies

Besides downgrading five of the seven bond insurers that had top financial strength ratings last year, Moody's, Standard & Poor's and Fitch Ratings have been under pressure by state officials to rate municipal bonds by the same likelihood-of- default standards applied to corporate and sovereign debt.

Fitch today announced a new ranking system that will lead to higher grades for many U.S. state and local debt issuers. As many as seven additional states, including Florida and Texas, may be rated AAA under the proposed changes. Nine already have that distinction.

Moody's will announce details of its own transition to global scale ratings for tax-exempt bonds in ``early August,'' according to John Cline, a company spokesman.

To contact the reporter on this story: Jeremy R. Cooke in New York at jcooke8@bloomberg.net.

Last Updated: July 31, 2008 17:06 EDT