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Market Close: Munis Hold Ground Despite Treasury Selloff

The tax-exempt market ended on a steady tone Thursday despite double-digits jumps in Treasury yields over the past two trading sessions.

Traders said limited primary issuance and heavy reinvestment money has kept the municipal market selloff in check, allowing munis to largely outperform their taxable counterparts.

“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.”

Other traders agreed munis outperformed Treasuries as limited trading and paltry new issuance kept the muni selloff on hold.

“There is a fair amount of trading going on in munis,” a New York trader said. “But munis are holding in there and through 15 years they are holding in fairly well. You haven’t had new issues over the past few weeks and there shouldn’t be a lot of supply next week so with the reinvestment money munis should outperform.”

The secondary market was weaker Thursday according to trades compiled by data provider Markit.

Yields on Jacksonville, Fla., transportation 5s of 2031 jumped four basis points to 3.07% while Lower Colorado, Texas, River Authority 5s of 2039 increased two basis points to 3.50%.

Yields on Buckeye, Ohio, Tobacco Settlement Financing Authority 5.875s of 2047 and New York City Municipal Water Finance Authority 5s of 2047 rose two basis points each to 6.66% and 3.32%, respectively.

Activity has been muted during this holiday-shortened trading week.

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 ending 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 trading 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.

The Municipal Market Data scale finished steady to slightly weaker after weakening Wednesday. The 30-year yield rose one basis points to 2.87%. The two-year and 10-year yields finished flat at 0.36% and 1.78%, respectively.

Treasuries yields jumped Thursday after rising almost 10 basis points on Wednesday. The benchmark 10-year yield jumped seven basis points to 1.91% while the 30-year yield spiked up eight basis points to 3.12%. The two-year rose two basis points to 0.28%.

The Treasury selloff was exacerbated by the release of the minutes from the Federal Open Market Committee’s December meeting that showed many members thought bond buying purchases should end by 2013, far sooner than the expected 2015.

“In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013,” the minutes state, “while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases.”

Some members even said the purchases should stop before the end of 2013, “citing concerns about financial stability or the size of the balance sheet.”

Economists were quick to react.

“The Minutes shed little new light on Fed policy apart from a glimmer on the expected life of QE3,” wrote Michael Gregory, senior economist at BMO Capital Markets. “Keep in mind that the Fed is expecting that QE3 will be effective in fuelling housing-led, above-potential economic growth by the end of this year, which is reflected in the waning desire to keep QE3 running deep into this year.”

Gregory added: “Given the minutes, it seems that the odds don’t favour QE3 lasting into 2014, let alone making it all the way to the end of this year. Of course, this assumes the FOMC’s projections will be realized.”

“Another theme running through the minutes was a deep concern over the impact of fiscal cliff uncertainty and eventual fiscal policy,” he said. “This suggests the Fed will likely stay the course until the initial impact of fiscal restraint works its way through the system. So, it’s QE3 at least through the first half of the year.”

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