NEW YORK – The seven-day tax-exempt rally paused Thursday as muni yields followed Treasury yields higher. Positive U.S. economic news and subsiding European fears forced a risk-on trade in the markets.

Still, deals priced in the primary market saw decent reception.

“The market is flat to a smidge weaker,” a Chicago trader said. “It’s like a shot glass weaker.”

He added the muni market is running on supply and demand factors and will rally on limited supply and fears from Europe. “We have a chance now to have a favorable supply situation and now the 10-year Treasury is selling off a little but we may hold our own. So overall, we will do better than Treasuries.”

He added the Chicago water deal is doing well in the primary market. “It did well in the first pricing and they bumped prices,” he said, referring to the $400 million Chicago water revenue bonds priced by Siebert Brandford Shank & Co.

Munis had a much weaker tone in the morning. “Munis are weaker by about five basis points,” a New York trader said. “I think munis are tired.” He added yields were too low to fall further.

The muni yield curve steepened Thursday as yields on the short end fell while yields on the long end rose, according to the Municipal Market Data scale. Yields inside two years were steady while the three- and four-year yields fell as much as two basis points. The five-year yield was steady while yields outside six years rose one and two basis points.

On Thursday, the two-year yield closed flat at 0.31% for the 17th consecutive trading session. The 10-year yield rose two basis points to 1.76% while the 30-year yield increased one basis point to 3.09%.

The 10-year yield remains eight basis points above its record low of 1.68% set Jan. 31. The 30-year remains one basis point above the record low of 3.08% set Wednesday.

Treasuries ended weaker but pared most of the losses from the morning sell off. The benchmark 10-year yield closed up five basis points to 1.89% while the 30-year yield finished up two basis points to 3.06%. The two-year was steady at 0.27%.

In the primary market, Siebert Brandford Shank & Co. priced $399.6 million of Chicago second-lien water revenue bonds, rated Aa3 by Moody’s Investors Service, AA-minus by Standard & Poor’s and AA by Fitch Ratings.

Yields ranged from 0.96% with 4% and 5% coupons in a split 2016 maturity to 3.65% with a 5% coupon in 2042. The bonds are callable at par in 2022.

KeyBanc Capital Markets priced $375 million of Build Illinois taxable sales tax revenue bonds, rated AAA by Standard & Poor’s and AA-plus by Fitch. Pricing details were not yet available.

In the secondary market munis were mixed with yields rising and falling in a sample of CUSIP numbers compiled by data provider Markit.

Yields on Connecticut 5s of 2027 jumped five basis points to 2.66% while Puerto Rico Commonwealth 4s of 2021 increased three basis points to 3.71%. Yields on Illinois 5.1s of 2033 rose one basis point to 5.54%.

Other munis showed firming. Yields of New Hampshire Municipal Bond Bank 5s of 2018 fell four basis points to 1.23%. Los Angeles 5s of 2021 and Florida’s Citizens Property Insurance Corp. 5s of 2019 each fell two basis points to 2.02% and 2.84%, respectively.

Elsewhere in the secondary market, trades reported by the Municipal Securities Rulemaking Board showed weakening.

A dealer sold to a customer Regents of the University of California 4.858s of 2112 at 4.77%, six basis points higher than where they traded Tuesday.

Another dealer sold to a customer Houston 0.796s of 2015 at 0.83%, four basis points higher than where they traded last Thursday.

A dealer bought from a customer Michigan State Hospital Authority 2s of 2033 at 0.65%, two basis points higher than where they traded a week prior.

Bonds from an interdealer trade of Illinois 5s of 2022 yielded 3.37%, one basis point higher than where they traded Wednesday.

Municipal investors continue reach further out on the slope of the curve in search for higher returns. The slope of the curve flattened to 289 basis points on Thursday from 305 basis points at the beginning of the month. The curve has also flattened steadily from the beginning of the year when it was 332 basis points.

The 10- to 30-year slope of the curve has also flattened to 133 basis points from 138 basis points on May 1. It has steadily declined from 169 basis points at the beginning of the year.

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