The tax-exempt market got off to a strong start Monday as trading activity was busy in the morning. By the afternoon, the secondary quieted as market participants prepared for the mid-week holiday.

"It's dead," a Chicago trader said. "Shops are half staffed and either trading today or tomorrow or the end of the week. And with only $60 million on the calendar, it's one of the lowest ever."

While activity has slowed, munis are still cheap relative to Treasuries, he added. "Percentage-wise, we are dirt cheap, " he said. "And we are set up to outperform through July and see ratios come down a little. I think there is a decent amount of redemption money and the technicals seem supportive of product."

Other traders said activity was waning. "It's definitely starting to slow down," a San Francisco trader said. "We have a $60 million calendar and we technically have a full day tomorrow, but equities have a short day so that could clear a lot of places out."

The market was busier Monday morning. "There is buying," a New York trader said. "I think today is going to be the busiest for the week."

Munis ended steady to stronger Monday, according to the Municipal Market Data scale. Yields inside four years were unchanged while the five- to 14-year yields fell one basis point. Outside 15 years, yields were flat.

The 10-year yield fell one basis point to 1.85%. The two-year ended steady at 0.32% for the 22nd straight session, while the 30-year yield finished flat at 3.16% for the seventh session.

Treasuries were much stronger Monday morning. The benchmark 10-year yield and the 30-year yield each dropped six basis points to 1.59% and 2.70%, respectively. The two-year yield fell one basis point to 0.31%.

In the primary market, Citi won the bid for $38 million of Tulsa County, Okla., Independent School District combined-purpose bonds, in what is expected to be one of the larger deals of the week. The bonds are rated Aa2 by Moody's Investors Service and AA by Standard & Poor's. They yielded 1.15% with a 1.5% coupon in 2015. Credits maturing between 2014 and 2016 were not formally reoffered.

In the secondary market Monday, trades compiled by data provider Markit showed a mix of firming and weakening. Yields on San Francisco Public Utilities Commission 4s of 2041 and San Antonio Electric and Gas Systems 5s of 2023 each fell two basis points to 4.09% and 2.39%.

But yields on Dormitory Authority of the State of New York 5s of 2026 and Georgia 5s of 2021 each jumped three basis points to 2.95% and 1.72%. Yields on Connecticut 5.25s of 2017 rose one basis point to 1.05%.

So far this year, muni-to-Treasury ratios have risen as munis underperformed Treasuries and became comparatively cheaper, at least for short to intermediate maturities. The five-year ratio jumped to 114.7% on Monday from 98.9% on Jan. 3. The 10-year ratio rose to 116.4% from 96.4% at the start of the year.

Muni-to-Treasury ratios have fallen on the long end as munis outperformed Treasuries and became relatively more expensive. The 30-year ratio dropped to 117% on Monday from 119.4% at the beginning of January.

The slope of the yield curve flattened so far this year as demand outweighed supply. The one- to 30-year slope flattened to 296 basis points on Monday from 332 basis points at the beginning of the year.

Credit spreads also compressed during this year. The two-year triple-A to single-A spread compressed to 39 basis points on Monday from 56 basis points at the beginning of the year. The 10-year spread flattened to 79 basis points from 96 basis points at the start of the year. The 30-year spread dropped to 80 basis points on Monday from 89 basis points on Jan 3.

Over the past few weeks, the municipal market experienced very little volatility as yields remained mostly flat, analysts at Citi said.

"Even in states such as New York, which saw an unusually large amount of paper come to market over the past week, the resulting extra pressure on yields was quite modest," wrote muni analyst George Friedlander.

The amount of cash on the sidelines has helped stabilized muni yields despite the increased issuance over the past weeks. "It is, of course, difficult to make the case that munis are currently 'cheap' but we would also note that more and more individual investor cash is piling up on the sidelines, a factor that should keep yields from rebounding sharply unless Treasuries yields do so," he wrote.

Friedlander noted the most value can be found in medium-coupon paper. Institutions prefer 5% coupons on longer-term callable paper while individual investors prefer lower coupons priced with significant extra yield. Because of that, the difference in pricing between 4% and 5% coupons is as much as 35 to 45 basis points, he noted.

There may also be opportunities in competitive deals with medium-coupon paper. "When competitive deals are not fully placed during and just after the order period, the reason is often that bidding rules require the use of lower coupons that institutions shun," he wrote.

"In any event, we continue to believe that for buy-and-hold individual investors in particular, the extra yield available on 4s and similar coupons can provide an important opportunity to put a portion of cash to work, especially for investors whose portfolios are continuing to be eroded by bonds calls," Friedlander wrote.

There may also be better opportunities in the fall after reinvestment money drops off. "After Aug. 1, we will be in a part of the calendar where bond calls and maturities drop sharply for three months," he wrote. "If volume remains heavy during that period, as we expect, some better relative value opportunities may arise."

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