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Primary, Secondary Well Received Despite Muni Yields Rising

The tax-exempt market was resilient this week as municipal bonds continued to outperform Treasuries.

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Deals in the primary market were relatively well-received and secondary trading activity felt balanced, according to market participants.

“The market has a lot of resiliency,” said Dan Heckman, senior fixed income strategist at US Bank Wealth Management. “Supply is still muted and it’s been in the $5 billion range for a couple weeks now. So demand has remained incredibly strong. And in the 10-year area, munis are very much outperforming Treasuries in 2013.”

He added demand for munis is spurred not only by limited new issue supply, but additional inflows flooding the market. “We are starting to see a little wane in inflows but they are still positive.”

Others agreed the relatively strong tone in munis was holding up despite weaker Treasuries. “The muni market has been resilient particularly in light of the weakness in the Treasury market,” said John Donaldson, director of fixed income at Haverford Trust. “The ability to absorb new issues has been state specific and we saw good response this week.”

Coupon payments and principal from bonds maturing also contributed to demand, Donaldson added. “The first and the 15th of every month are when bonds are maturing and bonds are being called and there is pressure to replace those and that’s driving demand. The first of February was busy and the 15th was heavy. March 1 is also expected to be heavy in terms of coupon payments.”

In the primary market this week, $5.92 billion in bonds were issued, including $3.45 billion on the negotiated calendar and $2.47 billion in the competitive market.

And despite a little weakness earlier in the week, primary deals were well received. “There were some balances but deals went OK assuming underwriters don’t try to push something through too much,” Donaldson noted.

“Yield paper fared better than general market paper,” Dan Toboja, vice president at Ziegler Capital Markets, noted on Wednesday. “The new issues that had printed in the general market space hung around enough that with a weaker open to Treasuries, balances were cut slightly and the market began to cheapen.”

In the secondary market, yields ended higher for the week, but traders said it was far from a panicked sell-off.

“In the secondary, what we saw looked pretty good and well balanced,” Donaldson said. “You can get trades done and the secondary market seems light in positions, but not excessively light. I didn’t see anything out of line on where people wanted to sell or where to bid.”

Heckman added demand in the primary followed through in the secondary. “The market was a few basis points up and a few basis points down so there was not a whole lot of movement. But we put out a piece for bid and received over 30 bidders. There is not enough good quality paper moving in the secondary and it’s extremely hard to find any kind of decent levels. So the secondary is strong.”

According to the Municipal Securities Rulemaking Board, trading activity was on par with the 30-day average.

On Monday, there were 37,118 trades, down from the 30-day average of 38,668 trades. In par amount, $8.234 billion was traded, down from the 30-day average of $10.810 billion.

Activity started to pick up Tuesday. There were 40,428 trades, up from the 30-day average of 38,998 trades. In par amount, $9.606 billion traded hands, down from the 30-day average of $10.945 billion.

On Wednesday, there were 42,219 trades, above the 30-day average of 39,786 trades. Par amount traded was $12.146 billion, up from the 30-day average of $11.250 billion.

Activity Thursday started to slow. There were 39,687 trades, down from the 30-day average of 39,835 trades. Par amount traded was slightly higher than the 30-day average, coming in at $11.605 billion versus the 30-day average of $11.334 billion.

Overall for the week, the Municipal Market Data scale ended lower with yields rising several basis points. The 10-year yield finished four basis points higher for the week through Thursday at 1.84% while the 30-year MMD yield finished six basis points higher at 2.92%. The two-year yield fell two basis points throughout the week to finish at 032%.

The Municipal Market Advisors 5% coupon triple-A scale also ended lower for the week. The 10-year yield finished four basis points higher through Thursday at 1.87% while the 30-year yield increased five basis points throughout the week to 2.99%. The two-year was steady for the week at 0.35%.

Treasuries were choppy throughout the week and ultimately ended lower with yields rising across the curve. The benchmark 10-year Treasury yield jumped six basis points throughout the week to 2.03%. The two-year and 30-year yields finished one basis point higher for the week at 0.28% and 3.19%, respectively.

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