NEW YORK – The tax-exempt market was slightly weaker with very light activity, as most traders recovered from a New York win in the Super Bowl. Munis followed Friday’s weaker direction.

“We are seeing a little activity in the secondary but it’s somewhat quiet,” a New Jersey trader said. “I think that after the big run up we are seeing the Municipal Market Data scale adjusting itself more in line with recent deterioration in the Treasury market,” the trader said, referring to Friday’s losses in munis and Treasuries.

“Because of that, yields have backed off significantly throughout most of the curve since the end of last week. So I think we’re going to see that adjustment reflected in the issues that come to market this week.”

Munis were steady to weaker, according to the MMD scale. Yields inside eight years were steady while yields on the nine- and 10-year jumped two basis points. The 11-year yield rose one basis points while yields outside 12-years were flat.

On Monday, the two-year yield closed steady for its fourth consecutive trading session at 0.30%, remaining at its record low set Oct. 10. The 30-year yield was steady at 3.22%. The 10-year yield roes two basis points to 1.79%.

Since the most recent rally began Jan. 24, muni yields fell as much as 22 basis points across the curve up until Friday. The losses Friday and Monday erased gains munis made since Jan. 26.

Treasuries continued to firm on fears that Greece will not reach a resolution of its fiscal crisis. The two-year yield fell one basis point to 0.24%. The benchmark 10-year yield dropped four basis points to 1.90% and the 30-year yield dove six basis points to 3.09%.

This week, the tax-exempt market can expect a paltry $3.91 billion, down from last week’s revised $4.38 billion. On the negotiated calendar, $3.02 billion is expected, up from last week’s revised $2.94 billion. In competitive deals, $893.1 million is expected, down from last week’s revised $1.44 billion.

“With the 30-day visible supply sitting below a very manageable $7 billion, the only wild card is the Treasury market,” said Mark Cantrell, managing director of tax-exempt municipals at Piper Jaffray. “Without significant supply, municipals can withstand and perform with the daily gyrations in the Treasury market. However, a longer trend towards higher yields will drag municipals with them.”

Others say munis are less likely to follow Treasuries and will be more affected by supply and demand patterns. “For at least the next few weeks, municipal yields will likely remain muted by high cash balances, surging inflows, and significant reinvestment capital against a backdrop of meager supply,” said Peter DeGroot, a muni strategist at JPMorgan.

In the primary market Monday, Goldman, Sachs & Co. priced for retail $279.2 million of Shelby County, Tenn., general obligation refunding bonds, rated Aa1 by Moody’s Investors Service, and AA-plus by Standard & Poor’s and Fitch Ratings.

Yields on the first series, $264.1 million of GO refunding bonds, ranged from 0.21% with a 2% coupon in 2013 to 2.75% with a 3.5% coupon and 2.62% with a 5% coupon in a split 2028 maturity. The bonds are callable at par in 2022 except for credits maturing in 2023 and 2024.

Yields on the second series, $15.1 million of special GO school refunding bonds, ranged from 0.21% with a 2% coupon in 2013 to 1.38% with a 4% coupon in 2019.

Bank of America Merrill Lynch held preliminary pricing for $150.4 million of Tarrant Regional Water District water system revenue refunding and improvement bonds, rated AAA by Standard & Poor’s and AA-plus by Fitch.

Yields ranged from 0.37% with a 5% coupon in 2014 to 3.77% with a 5% coupon in 2052. The bonds are callable at par in 2022.

In the secondary market, activity was very slow. Trades reported by the Municipal Securities Rulemaking Board showed weakening.

Bonds from an interdealer trade of Carrizo Springs, Texas, Consolidated Independent School District 5s of 2027 yielded 2.60%, nine basis points higher than where they traded last Thursday.

A dealer sold to a customer New York City Municipal Water Finance Authority 5s of 2045 at 3.83%, four basis points higher than where they traded Friday.

Another dealer sold to a customer Kansas Development Finance Authority 4s of 2022 at 2.53%, five basis points higher than where they traded Friday.

Muni-to-Treasury ratios fell last week as munis outperformed Treasuries and became more expensive. The five-year ratio closed at 87.2% on Friday, down from 97.3% the week before. The 10-year ratio fell to 90.8% on Friday from 92.4% the week prior. The 30-year ratio dropped to 102.2% from 106%.

The 10- to 30-year slope of the curve flattened last, falling to 145 basis points from 146 basis points the week before. Since the beginning of the year, the curve has flattened from 169 basis points.

With muni yields near record lows, many market participants wonder where the most value can be found. JPMorgan’s DeGroot analyzed callable 4% and 5% coupons in the 20- to 30-year range.

“Premium coupon structures have been bid higher in order to mitigate the impact of rising yields on the performance of longer-dated bonds,” he said. “Fives trade at a far lower yield relative to 4s given their defensive nature in the current rate environment.” The spread of 4s over 5s is about 60 basis points, or 10 to 15 basis points wider than average.

Four percent coupons generally outperform 5% coupons for small changes in rates while 5% coupons are better than 4% coupons for large changes in rates. Partly because of this, 5% coupons generally outperform in 30-year maturities while 4% coupon generally outperform in 20-year maturities.

“Despite the higher price sensitivity of 4% coupon bonds, these bonds can outperform long callable 5s for increases in the 30-year high-grade yields of up to 20 basis points,” DeGroot said. But, the performance of 4% coupons in 30-year maturities drops off at curve increases of over 25 basis points.

In the 20-year maturity, 4% coupons have the advantage and also have a 50 basis points spread advantage to 5% coupons. “The yield advantage allows for outperformance for yield movements up to 40 basis points,” DeGroot said.

“In a rising rate environment, we find the relative performance of the 20-year 4s versus 30-year 4s mixed, but the 30-year 5s generally outperform the 20-year 5s.”

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