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Market Post: Munis Steady; Outperform Weaker Treasuries

The tax-exempt market continued to outperform Treasuries on Thursday as muni yields stabilized despite a Treasury selloff.

"We are outperforming and moving sideways at best," a Los Angeles trader said. "There is not a whole lot of activity and not a lot of new issues. People are constructive on the market."

He added that while the imminent threat of capping tax-exemption has passed, there will most likely be discussions about it again soon. "The threat is still out there but the market will disregard it until we see negotiations again. So for now, if the threat is not right in front of us, the market will disregard it."

On Wednesday, the Municipal Market Data scale finished slightly weaker, with yields rising one to two basis points across the curve. But after the MMD scale was adjusted for the January roll, yields were marked up between one and eight basis points.

Overall, the two-year MMD yield - now a 2015 maturity - rose five basis points to 0.36%. The 10-year MMD yield - now a 2023 maturity - finished six basis points higher at 1.78%. The 30-year MMD yield - now a 2043 maturity - closed three basis points higher at 2.86%.

Treasuries continued to weaken Thursday after a spike in yields Wednesday. The benchmark 10-year yield rose three basis points to 1.87% while the 30-year yield increased four basis points to 3.08%. The two-year yield rose one basis point to 0.27%.

In the secondary market, activity has indeed been muted. On Monday - New Year's Eve - there were 18,685 trades, down substantially from the 30-day average of 41,348, according to data from the Municipal Securities Rulemaking Board. In par amount, $3.281 billion was traded, down from the 30-day average of $11.493 billion.

After market reopened for the first day of trading in 2013 on Wednesday, activity picked up. Over 38,000 trades were recorded, down only slightly from the 30-day average of 41,220. Par amount traded was $8.635 billion, down from the 30-day average of $11.157 billion.

For the week ending Jan. 2 the number of buy trades and sell trades declined, but there were almost double the amount of buys than there were to sells, according to data from BondDesk Group.

There were 39,682 buy trades for the week ending Jan. 2, fewer than the previous week's 40,598 trades and far lower than any of the previous five weeks. Due to the typically quiet holiday season, there were also not surprisingly a lower amount of sell trades as well. There were 20,501 sell trades, fewer than the previous week's 26,252 trades and lower than any of the previous five weeks.

But investors did prefer to buy for the week ended Jan. 2 than in previous weeks as the ratio of buy-to-sell trades jumped to 1.9 from the previous week's 1.5. The 1.9 ratio was the highest in five weeks, matching only the week of Dec. 19.

Activity was muted from a dollar amount perspective, according to BondDesk Group. There were just over $1 billion in buy trades for the week, fewer than the previous week's $1.126 billion and the lowest amount of any of the previous five weeks. The dollar amount of sell trades was also down to $592 million from the previous week's $800 million and down by half from the previous five weeks. Due to a spike in yields and munis becoming cheaper relative to Treasuries, there were more buyers than sellers as the ratio of buy-to-sell trades in dollar amount jumped to 1.8 from 1.4.

In economic news, the Federal Open Market Committee is expected to release minutes from its December meeting at 2 p.m. EST.

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