Light issuance and the Federal Open Market Committee's decision to taper its bond-buying program drove the municipal market on the pre-holiday week.
The municipal market had been preparing for news that the
In response, muni triple-A yields, which had moved little on the week until the announcement, on Thursday, rose noticeably at the intermediate and long end as they chased rising Treasuries.
Still, for the week, the 10-year and 30-year triple-A yields only rose four basis points.
Scant new volume had little impact on prices. The week's largest deals, led by Bank of America Merrill Lynch's purchase of $525 million of Massachusetts general obligation bonds in the competitive market, met an audience still hungry for tax-exempt paper.
For the coming holiday week, no significant issues are expected.
Almost $15 million of bonds are listed to arrive from issuers in Minnesota's Twin Cities, but underwriter M.R. Beal & Co. said the deals' status would be day-to-day.
Tax-exempt yields rose on the week. The 10-year tax-exempt yield rose four basis points over the span to 2.75%.
The 30-year rose four basis points to 4.18%. The two-year held at 0.33% for a 26th consecutive session.
Muni yields mostly underperformed those of Treasuries, particularly past the front end of the curve.
This left muni ratios to Treasuries slightly cheaper than they were when they started the week, except at the short end of the yield curve.
Ratios fell 15 percentage points over the week at the two-year level, declining to 85%.
They rose one percentage point at the 10-year maturity, to 95%, and climbed two percentage points for 30-year debt, to 109%.
Market technicals in the short term paint a mixed picture, John Dillon, chief municipal bond strategist at Morgan Stanley Wealth Management, wrote in a recent report.
Munis face seasonal redemptions at a time when issuance has been light.
"Although relative-value ratios may decline in the near term," he wrote, "related price action will likely be impacted primarily by the rates dynamic in Treasuries, especially since tax-reform was absent in the recent budget accord."
Demand has suffered, particularly over the past couple of weeks.
Weekly reporting municipal bond mutual funds recorded outflows of $55.1 billion this year through the week of Dec. 11, which were the worst outflows Lipper FMI has ever seen.
Outflows from those funds also persisted into a 30th consecutive week, fueled by what many industry pros say is investor tax-loss selling.
The Fed's announcement could hurt the municipal market in the short term, Thomas Weyl, director, research at Barclays, wrote in a report. Many investors appear to interpret the tapering of asset purchases as tightening credit, he wrote.
"Rate hikes have often been accompanied by fund outflows — idiosyncratic events in the muni market are also a driver of outflows," Weyl wrote.
"However, the Fed has made a concerted effort to dissociate tapering from monetary policy tightening. It is unclear how successful those efforts have been, but the Treasury and equity markets' reaction following the announcement was better than expected," he added.
Traders agreed that 2013 would come to a close with some expected last-minute positioning, but little in the way of heavy trading in the secondary market for the coming week.
