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Market Post: As Munis Cheapen, Retail Jumps In

The tax-exempt market continued to cheapen Tuesday afternoon as yields increased across the curve and traders looked to dump bonds.

Still, one trader said he is seeing pockets of strength in the market. "We've had a few cheap new issues recently," a retail-focused New Jersey trader said. "Small deals around $1 to $2 million are selling extremely fast."

This trader added he is looking at A-minus rated housing bonds with a 4.25% coupon maturing in 2034. "It came to market at 97 or 98 and I'm trading them to retail at par. Entire issue priced with no leftovers. And most of these small deals we are seeing are deals that the big shops never got in on."

To be sure, this trader said he is selling Puerto Rico and Detroit bonds given the recent credit problems. "I'm shedding stuff like that with small coupons and bad credits. I've been sticking up for Detroit for too long. Caa1 is where I draw the line," he said. "It's time to come out of Detroit to avoid the looming volatility."

"I think Puerto Rico has a problem on its hands too," this trader said. "They will be fine and continue to pay, but a downgrade could be very bad from investment grade to junk. It's not going to be good if you find that managers have to dump Puerto Rico because it violates certain investment parameters. The market will get flooded with Puerto Rico paper and anyone holding it is going to get whacked liquidity wise."

In the primary market Tuesday, Citi priced for institutions $850 million of New York City general obligation bonds, following a two-day retail order period. The bonds are rated Aa2 by Moody's Investors Service and AA by Standard & Poor's and Fitch Ratings. Prices were not available by press time.

RBC Capital Markets priced for institutions $625 million of Connecticut special tax obligation bonds for transportation and infrastructure purposes, following a retail order period Monday. The bonds are rated Aa3 by Moody's and AA by Standard & Poor's and Fitch. Pricing details were not yet available.

In the competitive market, JPMorgan won the bid for $560 million of Virginia Housing Development Authority revenue bonds. JPMorgan also won the bid for $290.6 million of triple-A-rated Georgia general obligation bonds. Prices were not yet available.

On Monday, the Municipal Market Data scale ended as much as two basis points weaker. The 10-year yield and the 30-year yield rose two basis points each to 1.50% and 2.50%, respectively. The 10- and 30-year yields are three basis points above their record lows of 1.47% and 2.47%, respectively. The two-year finished flat at 0.30% for the 51st consecutive trading session.

Treasuries continued to weaken Tuesday afternoon. The benchmark 10-year yield spiked up four basis points to 1.66% while the 30-year yield increased three basis points to 2.84%. The two-year was steady at 0.25%.

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