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Market Post: Munis Rally on Large Issuance

The tax-exempt market saw a huge rally Wednesday afternoon and buyers ate up new deals.

Traders said the large amount of new issues that priced did not faze the market and were gobbled up in a small amount of time.

"Everyone is buying," a Chicago trader said. "People are looking to buy before next week. And demand is still there. The dynamic hasn't changed. It's a vacuum."

The trader added he is buying across the curve. "We are buying sporadically. There is nothing specific but generally we are just all over the board. There's no hot range. People are just buying all over."

"The week started off slow with the election over and no shocks expected in the short-term, desks picked up roughly where they left off last week," wrote Dan Toboja at Ziegler Capital Markets. "Bids remain firm on new issues, mostly from dealer desks with focus on retail, and on the deals that are pricing this week. We continue to grind to lower yields with new or near all-time lows."

He added new deals are going well so far. "With so much demand not being met there is little chance of a supply forced sell-off in the short-term. With the majority of bid-sides on munis right now dealers [are] keeping shelves lined. There's not much appetite from larger funds to provide a support bid if the market begins to cheapen."

And while supply and demand are the main driving factors in the muni market right now, the fiscal cliff is about to play a big role. "As we get closer to the new year and the impeding tax increases, spending cuts, and debt ceiling, the muni market may become more volatile," Toboja said. "If lawmakers can get ahead of the issues and the market feels there's some sort of plan Q4 will close without drama. If a plan is pushed back or no progress appears to be made customers - both retail and institutional – will become more anxious. Market tone can change quickly."

In the primary market, Barclays priced $656.5 million of Minnesota State general fund appropriation refunding taxable and tax-exempt bonds, rated AA by Standard & Poor's and Fitch Ratings.

The first series, $54.6 million of taxable bonds maturing in 2014 and 2015, were offered via sealed bid.

Yields on the second series, $601.9 million of tax-exempt bonds, ranged from 0.45% with a 4% coupon in 2015 to 2.88% with a 3% coupon in 2030. The bonds are callable at par in 2022.

Bank of America Merrill Lynch priced $480 million of Dallas and Fort Worth International Airport joint revenue improvement bonds, rated A1 by Moody's Investors Service and A-plus by Standard & Poor's and Fitch. The bonds are subject to the alternative minimum tax.

Yields ranged from 2.98% with a 5% coupon in 2025 to 4.08% with a 4% coupon and 3.74% with a 5% coupon in a split 2045 maturity. The bonds are callable at par in 2021.

Citi priced $250 million of Orlando-Orange County Expressway Authority refunding revenue bonds, rated A2 by Moody's and A by Standard & Poor's and Fitch. B of A Merrill priced $207.5 million of additional Orlando-Orange County Expressway Authority refunding revenue bonds. Pricing details were not yet available for either deal.

In the competitive market, B of A Merrill won the bid for $140 million of Tennessee general obligation bonds, rated Aaa by Moody's, AA-plus by Standard & Poor's, and AAA by Fitch.

Yields ranged from 0.20% with a 4% coupon in 2013 to 2.66% with a 3% coupon in 2032. The bonds are callable at par in 2020.

On Tuesday, the Municipal Market Data scale posted gains for the sixth consecutive session and record low yields were set. The 10-year yield dropped two basis points to 1.55%, setting a record low as recorded by MMD. The 1.55% beat the previous record of 1.57% set Friday. Before that, the record low was 1.59% set Thursday.

The 30-year MMD yield also fell two basis points to 2.64%, also setting a record low as recorded by MMD. The 2.64% beat the previous record of 2.66% set Friday and 2.69% set Thursday.

The two-year finished steady at 0.30% for the 33rd consecutive trading session.

Treasuries were mostly steady Wednesday afternoon. The two-year and benchmark 10-year yields were flat at 0.25% and 1.59%, respectively. The 30-year yield rose one basis point to 2.73%.

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