The tax-exempt market saw light trading ahead of the Federal Open Market Committee meeting announcement later Wednesday afternoon.

One trader said most of the reaction should be centered on any insight current leader Ben Bernanke sheds on the procedure and candidates to replace him as Fed chairman, which they expect will come up in the question and answer portion of his appearance. Traders are also looking for language on how long the Fed plans to maintain its zero-interest-rate policy.

"It was all over the map in terms of tapering at the end of the year, and now it's maybe $10 billion," a San Francisco trader said. "That's in line with who will be the next Fed chairman and we saw that reaction on Monday to Yellen," this trader said, referring to the bond market rally on news that the front-runner Larry Summers withdrew his name from consideration. Janet Yellen is now considered next in line and views monetary policy similar to Bernanke.

"The psychology is we are here to stay," the trader said. "If they reduce purchases and keep short-term interest rates at zero percent, it's just a steeper curve. So all the money is down the curve."

Even after posting gains all week, municipal bond yields on an absolute basis are still attractive. "Yields are high enough where it's motivating," he said. "Buying is continuing and they are staying in on the curve. But you need to watch for the credits like Chicago and Puerto Rico."

In the competitive market, Massachusetts is scheduled to auction $800 million of general obligation revenue anticipation notes in three pricings, two $300 million deals and a $200 million deal. The notes are rated MIG-1 by Moody's Investors Service, SP-1-plus by Standard & Poor's, and F-1-plus by Fitch Ratings.

On Tuesday, yields on the triple-A Municipal Market Data scale ended unchanged. The 10-year and 30-year yields closed flat at 2.74% and 4.33%, respectively. The two-year was steady at 0.43% for the 44th straight session.

Yields on the Municipal Market Advisors scale also ended steady. The 10-year and 30-year yields were unchanged at 2.91% and 4.42%, respectively. The two-year closed unchanged at 0.55% for the 23rd session.

Treasuries were weaker Wednesday after five sessions of gains. The benchmark 10-year yield rose five basis points to 2.90% and the 30-year yield climbed three basis points to 3.87%. The two-year yield rose two basis points to 0.40%.

In economic news, August housing starts rose 0.9% to 891,000 while permits fell 3.8% to 918,000, both falling below expectations.

"While both the level of housing starts and building permits were below expectations, these shortfalls are entirely the result of the volatile multi-family sector, which [has] fallen sharply over the last three months from very high levels that were reached earlier in the year," wrote economists at RDQ Economics. "Single-family housing starts posted a very solid gain in August and single-family building permits also advanced. We note that single-family housing starts rose in all major regions in August and single-family permits rose in every region apart from the Northeast, where they were unchanged on the month. The breadth of the gains adds to the picture of sustainability in the housing market recovery."

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