The tax-exempt market continued to strengthen Tuesday afternoon as traders said deals in the primary were trading up in the secondary and prices were expected to hold.
"There is definitely money being put to work," a trader located in the Southeast region said. "When I saw money go into stock funds I thought people would bail on bonds but that's not the case."
He added there are several factors that are driving the rally, including limited supply and higher tax rates. "The fact that tax rates are now set at 39% and the 28% cap on exemption isn't the foregone conclusion anymore, retail is looking at munis and saying these levels are as cheap as they have ever been on a taxable equivalent basis."
He noted one triple-A muni bond yielded 1.20% with a 2020 maturity and had a taxable equivalent yield of almost 2%. That is compared to a U.S. Treasury, with a similar maturity, yielding 1.25%.
"There is still not a lot of paper around," he added. "In some states there are two to three high-grade type offerings and not a lot to choose from."
Once a few more deals price in the primary, the market will be able to settle, the trader added. With limited supply last week and a manageable supply this week, some price discovery is still happening. "We are still in price discovery to some extent. Then the secondary improves on these levels and everyone is seeing what the next wave of deals does. And I think these levels are going to hold."
In the primary market, Citi is expected to price for retail $500 million of New York Metropolitan Transportation Authority revenue bonds, rated A2 by Moody's Investors Service and A by Standard & Poor's and Fitch Ratings. Institutional pricing is expected Wednesday.
RBC Capital Markets is expected to price $330 million of Pennsylvania's Commonwealth Finance Authority revenue bonds in three series, including $207 million of tax-exempt bonds, $75 million of taxable bonds, and $48 million of tax-exempt bonds. The credit is rated A1 by Moody's, AA-minus by Standard & Poor's, and AA by Fitch.
Bank of America Merrill Lynch is expected to price for institutions $343.2 million tax-exempt and taxable senior revenue refunding bonds for the Louisiana Stadium & Exposition District. The deal will consist of $297 million of tax-exempt securities and $46.2 million of taxable bonds.
On Monday the Municipal Market Data scale ended higher for the second trading session. The 10-year yield fell one basis point to 1.69% while the 30-year yield dropped three basis points to 2.74%. The two-year closed steady at 0.34% for the fourth trading session.
The 10-year yield still remains 22 basis points above its record low of 1.47% set Nov. 28. The 30-year yield trades 27 basis points above its record low of 2.47% set Nov. 28.
Treasuries were stronger Tuesday afternoon. The benchmark 10-year yield and the 30-year yield dropped three basis points each to 1.83% and 3.02%, respectively. The two-year was steady at 0.26%.
