The tax-exempt market continued to show gains as limited supply in the next few weeks spurred demand for new issues this week.

Overall, traders said volume is light and munis are generally following the direction of Treasuries.

"The market is doing OK," a New York trader said. "I don't have any real reasons for it but I think we are back to following the strong rates market. With no supply next week and probably no supply the week after, we are following Treasuries."

He added that the muni market had a muted reaction to the July 31 Federal Open Market Committee meeting minutes released Wednesday, and the market is still following govies. "It's causing [Treasury] rates to do better so that's causing munis to do better. We are back to following Treasuries and clearly anytime the sentiment changes and we know we will be stuck in the rate environment for a while it pushes people in. But it only takes a couple buyers to push things around." He added trading volume is still relatively light.

In the primary market, Citi priced $810 million of New Jersey Turnpike Authority revenue bonds, rated A3 by Moody's Investors Service, A-plus by Standard & Poor's, and A by Fitch Ratings. Pricing details were not available by press time.

On Wednesday, the 10-year Municipal Market Data yield and the 30-year yield dropped three basis points each to 1.87% and 2.99%, erasing Tuesday's losses. The two-year closed at 0.29% for the 20th straight session.

Treasuries held gains for the third consecutive session. The benchmark 10-year yield and the 30-year yield dropped two basis points each to 1.68% and 2.79%, respectively. The two-year fell one basis point to 0.27%.

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