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Market Close: Slowly But Surely, Traders Get Back to Work

The tax-exempt market ended on a steady to stronger note Monday as traders slowly made their way back to work after a long Thanksgiving weekend.

Trading was slow in the morning but slowly picked up speed as the day progressed. Most traders agreed the market was steady ahead of the primary set to price Tuesday.

“It hasn’t been super active,” a San Francisco trader said. “We are getting the dust off from the long weekend. We are seeing a few bumps out there but we are also getting color from the Street that said some things look softer. Some desks are bringing in stuff easier than they expected. But it’s quiet.”

Overall, the trader said the market is in a waiting period until the primary hits later in the week. “I think there will be decent appetite but that remains to be seen.”

He added he focuses more on the secondary to find higher coupons and has been participating less in the primary. “We don’t like the primary because it’s not a structure we like. We like higher coupons and it’s a needle in a haystack and takes effort and sometimes we are buying smaller pieces than we’d like but we are looking for the higher coupons in the secondary.”

Activity did not pick up much from the morning trading session. Traders appeared to be too full from turkey to get any work done. “It’s pretty slow,” a New York trader said, adding that not a lot was going on the market. “It’s trading steady.”

In the primary market later this week, municipals can expect $7.92 billion to be issued, up from last week’s revised $2.29 billion. On the negotiated calendar, $5.82 billion is expected to be priced, up from last week’s revised $2.01 billion. In competitive deals, $2.10 billion should be auctioned, up from last week’s revised $276.4 million.

In the secondary market Monday, trades compiled by data provider Markit showed mostly strengthening.

Yields on Honolulu City and County 2.812s of 2023 dropped four basis points to 2.42% while New York State Thruway Authority 5s of 2037 fell three basis points to 2.84%.

Yields on Austin, Texas, Community College 3.25s of 2037 fell two basis points to 3.37% while New York’s Metropolitan Transportation Authority 5s of 2042 dropped one basis point to 3.13%.

Yields on California 5s of 2023 and Dallas-Fort Worth International Airport 5s of 2042 each fell one basis point to 2.05% and 3.65%, respectively.

The Municipal Market Data scale continued to strengthen Monday, setting fresh record lows. The 30-year MMD yield fell two basis points to 2.52%, setting a new record low. It beat the previous record of 2.54% set Nov. 16.

The 10-year yield also fell two basis points to 1.51%, hovering just one basis point above the record low of 1.50% set Nov. 16.

The two-year finished steady at 0.30% for the 41st consecutive trading session.

Yields have fallen dramatically since the beginning of the month. Over the course of November, the 10-year MMD yield has fallen 21 basis points from where it started at 1.72% while the 30-year yield has fallen 30 basis points from where it started the month at 2.82%.

Treasuries finished stronger Monday. The benchmark 10-year yield and the 30-year yield fell three basis points each to 1.66% and 2.80%, respectively. The two-year finished steady at 0.28%.

Most expected last week’s Thanksgiving holiday-shortened trading week to be slow and with yields at record lows, trading volume was almost certain to be subdued. But retail-sized trades from BondDesk Group show trading volume was up during the Thanksgiving week compared to previous weeks.

For the week ending Nov. 21, there were 59,707 buy trades, the highest in five weeks and much more than the 48,736 buy trades for the week ending Nov. 14, BondDesk Group said. There were also much more sell trades for week ending Nov. 21, with 32,167. That figure was higher than the previous five week’s sell trades and much higher than the 28,649 sell trades for the week ending Nov. 14. Overall, the ratio of buys to sells was 1.9 for the week ending Nov. 21, more than the ratio of 1.7 for the previous week but less than the 2.0 ratio for the week ending Nov. 7.

The dollar volume of trades was also up, with $1.69 billion in par amount of buy trades, and $948 million of sell trades. Dollar volume for the week was higher than the previous five weeks and much higher than the $1.3 billion in buys and $845 million in sells for the week ending Nov. 14.

Looking to the end of the year, munis are trading on worries over the fiscal cliff. “We have seen the muni market scream upward in the month of November,” said Dan Heckman, fixed-income strategist at US Bank. “People are certainly considering the muni bond market similar to Treasuries as a safe haven place to put assets until the fiscal cliff is resolved.”

And even if the fiscal cliff is resolved by the end of the year, Heckman said munis may still benefit and trade higher from an increase in tax rates. “We are of the opinion that tax rates are moving higher. That will act as a drag on economic growth which will keep us in a positive environment for bonds and with tax rates going higher, people are finally starting to realize the attractive relatively value of municipals.”

Relative to Treasuries and investment grade corporates, Heckman says municipals are still attractive despite muni-to-Treasury ratios falling well below 100%. “We were in an abnormal market environment for the last two to three years and muni-to-Treasury ratios were well above 100%,” he said. “Now that was worked back down to a normal level. But if you apply the tax equivalency there are few alternatives that match munis. So are munis as attractive as they were? No. But on a relative basis to other competitors, yes.”

Indeed, investors have flooded the muni market lately with inflows again last week and MMD yields hitting record lows. And that demand isn’t likely to let up soon. “As we move forward, supply will pick up dramatically this week and we think there is a huge tide of cash that will easily consume that additional supply,” he said. “We think some issuers will take advantage of the all-time low rates in the form of refundings. So we still think supply and demand dynamics favor issuers and frankly there are not enough bonds to go around.”

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