The municipal market was slightly firmer Wednesday against a backdrop of strengthening Treasuries and a $3.7 billion taxable pension bond offering from cash-strapped Illinois.

"Stronger Treasuries have been helping hold yields down for a few days now and today was no exception," a trader in Los Angeles said. "A lack of supply to test the long-end of the tax-exempt market is also contributing to the slow-burn rally we've been experiencing."

"Tax-exempt issuance has been considerably light for pretty much the whole year, we do have that big taxable pension deal out of Illinois today," a trader in New York said. "There's been an appetite for taxable debt since [Build America Bonds] went away and clearly a lot of people brought their silverware today."

In the new-issue market Wednesday, Morgan Stanley priced $3.7 billion of taxable GO bonds for Illinois. Market participants said the deal received over $6 billion in orders.

The bonds mature from 2014 through 2019 with yields ranging from 4.026% in 2014 to 5.877% in 2019, all priced at par. The bonds were priced to yield between 235 and 280 basis points over the corresponding Treasury yields

"There was quite a lot of interest in the deal," a trader in Chicago said. "A lot of people wanted to get their hands on the debt and it was considerably oversubscribed as a result. There also seemed to be a fair amount of international interest. You're going to get buyers with yields that attractive."

The credit is rated A1 by Moody's Investors Service, A-plus by Standard & Poor's, and A by Fitch Ratings.

The Municipal Market Data triple-A 10-year scale fell four basis points Wednesday to 3.07%, the 20-year dipped three basis points to 4.33%, and the scale for 30-year bonds declined one basis point to 4.72%.

In the daily MMD commentary, Randy Smolik wrote "munis were more responsive today but only the serial sector played catch-up."

"Tax-exempt participants seemed more attentive today," he wrote. "Treasuries reacting to stronger oil and weaker stocks, extended their gains by mid-day pushing muni buyers off the fence. Tax-exempt buying came in as short as 2014."

Wednesday's triple-A muni scale in 10 years was at 88.0% of comparable Treasuries and 30-year munis were at 102.8% according to MMD.

Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 108.0% of the comparable London Interbank Offered Rate.

Treasuries showed some losses Wednesday. The benchmark 10-year note was quoted near the end of the session at 3.48% after opening at 3.46%.

The 30-year bond was quoted near the end of the session at 4.58% after opening at 4.61%. The two-year note was quoted near the end of the session at 0.76% after also opening at 0.74%.

The Treasury Department auctioned $35 billion of five-year notes, with a 2 1/8% coupon, a 2.190% high yield and a price of 99.69. The bid-to-cover ratio was 2.69. Federal Reserve banks bought $1.92 billion for their own account in exchange for maturing securities.

Elsewhere in the new-issue market Wednesday, JPMorgan priced $269.8 million of taxable funding notes for the Kentucky Asset/Liability Commission.

The notes mature from 2012 through 2019 with a term maturity in 2022. Yields range from 1.688% in 2012 to 5.339%, all priced at par.

The bonds were priced to yield between 130 and 185 basis points over the comparable Treasury yield.

The notes, which contain a make-whole call at Treasuries plus 30 basis points, are rated Aa2 by Moody's, A-plus by Standard & Poor's, and AA-minus by Fitch.

Alabama's Louisville and Jefferson County Metropolitan Sewer District competitively sold $226.3 million of sewer and drainage system subordinated bond anticipation notes to Wells Fargo Securities.

The Bans mature in March 2012 with a 2% coupon and were not formally re-offered.

The credit is rated MIG-1 by Moody's, SP-1-plus by Standard & Poor's, and F1-plus by Fitch.

Goldman, Sachs & Co. priced $136.9 million of GO bonds for San Diego's Grossmont Health Care District.

The bonds mature from 2016 through 2031, with term bonds in 2034 and 2040. Yields range from 2.77% with a 3% coupon in 2016 to 5.90% with a 6.125% coupon in 2040.

The bonds, which are callable at par in 2021, are rated Aa2 by Moody's.

Wells Fargo priced $80 million of variable-rate unlimited-tax school building bonds for Texas' Northside Independent School District.

The bonds mature in 2040, yielding 1.90% priced at par, and are backed by the state's Permanent School Fund guarantee program.

The underlying credit is rated Aa1 by Moody's and AA-plus by Fitch.

Bank of America Merrill Lynch priced $58 million of cultural and sports capital facilities bonds for Ohio in two series.

Bonds from the $28 million series mature from 2013 through 2020, with yields ranging from 1.11% with a 4% coupon in 2013 to 3.58% with a 5% coupon in 2020. The bonds are not callable.

Bonds from the $30 million series mature from 2013 through 2025, with yields ranging from 1.11% with a 2% coupon in 2013 to 4.49% with a 5% coupon in 2025. The bonds are callable at par in 2020.

The credit is rated Aa2 by Moody's and AA by Standard & Poor's and Fitch.

Piper Jaffray & Co. priced $32.2 million of student fee bonds for Indiana's Ball State University Board of Trustees.

The bonds mature from 2011 through 2030, with yields ranging from 0.70% with a 3% coupon in 2011 to 5.08% with a 5% coupon in 2030.

The bonds, which are callable at par in 2020, are rated Aa3 by Moody's and AA-minus by Standard & Poor's.

Trades reported by the Municipal Securities Rulemaking Board showed gains. A dealer sold to a customer California Statewide Communities Development Authority 5.5s of 2026 at 5.57%, two basis points lower than where they were sold Tuesday.

A dealer sold to a customer King County, Wash., 5.125s of 2036 at 5.05%, down three basis points from where they traded Tuesday.

A dealer bought from a customer Dormitory Authority of the State of New York 5.125s of 2023 at 4.41%, down three basis points from where they traded Tuesday. Bonds from an interdealer trade of taxable Illinois Build America Bond 6.725s of 2035 yielded 7.29%, two basis points lower than where they were sold Tuesday.

In economic data released Wednesday, existing home sales increased 2.7% in January to a seasonally adjusted 5.36 million as the median sale price fell to the lowest level in almost nine years. December sales were revised lower to 5.22 million from 5.28 million reported last month.

Economists polled by Thomson Reuters expected 5.220 million home sales for January, according to the median estimate.

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