Market Post: Munis Slow as Traders Await Primary

The tax-exempt market struggled to wake up Monday morning as traders noted activity was quiet.

Traders waited for what is expected to be a large week in the primary market to start pricing.

"It's kind of slow today," a New Jersey trader said. "New York City GOs are coming out for retail again. It looked full on Friday and was priced on the market or a tad on the offered side."

He added dealers are looking to loosen up inventory as the end of the year approaches. "There was not a lot of turnover in the market so it looks like people are heavy and that makes them nervous going into the end of the year."

In the primary market, $11.61 billion in municipal bonds are expected to be issued, up from last week's revised $8.99 billion. On the negotiated calendar, $9.45 billion is expected to be priced, up from last week's revised $6.78 billion. In competitive deals, $2.16 billion is expected to be auctioned, down slightly from last week's revised $2.21 billion.

Supply this week, and for the rest of the year, isn't likely to outweigh demand. "The 30-day forward supply has increased to close to $13 billion but the final deals of the year look like they will come without issue, as the majority are cleaner general market deals," wrote Dan Toboja, vice president at Ziegler Capital Markets. "With more drama continuing to unfold in Europe there's little reason to see weakness into year end."

On Monday, Citi is expected to price for retail $850 million of New York City general obligation bonds, rated Aa2 by Moody's Investors Service and AA by Standard & Poor's and Fitch Ratings. A first retail order period took place Friday and institutional pricing is expected Tuesday.

On Friday, the Municipal Market Data scale ended steady for the fourth consecutive trading session. The 10-year yield finished flat at 1.48%, one basis point above the 1.47% record low set Nov. 28. The 30-year yield ended unchanged at 2.48%, dangling above its record low of 2.47% set Nov. 28. The two-year finished flat at 0.30% for the 50th consecutive trading session.

Treasuries were slightly stronger Monday morning. The benchmark 10-year yield and the 30-year yield fell one basis point to 1.62% and 2.80%, respectively. The two-year was steady at 0.25%.

And while muni yields traded mostly steady last week, yields have fallen throughout the year with the most notable returns in the high-yield market.

JR Rieger, vice president at Standard & Poor's Dow Jones Indices, said the supply and demand imbalance has been exacerbated by the expectation of higher taxes in 2013.

Investment grade muni bonds have returned over 2% for the quarter and 8.39% year-to-date, as measured by the S&P National AMT-Free Municipal Bond Index. The taxable equivalent yield of 2.69% is higher than the Dow Jones Corporate Bond Index, which yields 2.47%.

Similarly, high-yield munis have returned over 4% this quarter and a whopping 18.8% year-to-date, as measured by the S&P Municipal Bond High Yield Index. High-yield munis have a taxable equivalent yield of 7.83%, which outweighs high-yield corporate bond yields of 6.33%, as measured by the Bank of America Merrill Lynch U.S. High Yield Master II Index.

Rieger added the belly of the curve has performed well this year as 10-year non-callable investment grade munis have returned 2.69% and a taxable equivalent yield of 1.96%.

States with higher yields have also seen great returns. California has returned 2.55% so far this quarter and 10.47% year-to-date while Illinois has returned 2.35% this quarter and 10.52% year-to-date.

New Jersey has returned 2.36% this quarter and 10.04% year-to-date while Puerto Rico has returned 1.96% this quarter and 7.34% year-to-date.

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