The tax-exempt market posted more gains Tuesday morning as basic supply and demand factors pushed prices higher.

"It's stronger again here today," a New Jersey trader said. "It seems like retail is buying. The primary is quiet and overall in the secondary it seems two to three basis points up. There is still not a lot of product. The primary is light so people are bidding up whatever is left over from last year and it's starting to trade."

He added he is looking at the $500 million New York Metropolitan Transportation Authority deal expected to price later Tuesday.

In the primary market, Citi is expected to price for retail the MTA revenue bonds, rated A2 by Moody's Investors Service and A by Standard & Poor's and Fitch Ratings. Institutional pricing is expected Wednesday.

RBC Capital Markets is expected to price $330 million of Pennsylvania's Commonwealth Finance Authority revenue bonds in three series, including $207 million of tax-exempt bonds, $75 million of taxable bonds, and $48 million of tax-exempt bonds. The credit is rated A1 by Moody's, AA-minus by Standard & Poor's, and AA by Fitch.

Bank of America Merrill Lynch is expected to price for institutions $343.2 million tax-exempt and taxable senior revenue refunding bonds for the Louisiana Stadium & Exposition District. The deal will consist of $297 million of tax-exempt securities and $46.2 million of taxable bonds.

On Monday the Municipal Market Data scale ended higher for the second trading session. The 10-year yield fell one basis point to 1.69% while the 30-year yield dropped three basis points to 2.74%. The two-year closed steady at 0.34% for the fourth trading session.

The 10-year yield still remains 22 basis points above its record low of 1.47% set Nov. 28. The 30-year yield trades 27 basis points above its record low of 2.47% set Nov. 28.

Treasuries were stronger Tuesday morning for the third consecutive trading session. The benchmark 10-year and the 30-year yield each fell four basis points to 1.82% and 3.01%, respectively. The two-year yield fell one basis point to 0.25%.

In economic news, the producer price index fell 0.2% while the core rate rose 0.1%. Economists expected of a 0.1% drop in the headline number and a 0.2% core increase.

"This is a benign inflation report with overall and core finished goods prices declining over the last three months, while core intermediate goods prices rose only modestly over this period," wrote economists at RDQ Economics. "This suggests continued moderation in consumer goods prices for now. However, within the CPI, services prices have been picking up and we still expect inflation at the consumer level to run at faster pace in 2013 than the 1.75% rate we expect will be reported for 2012 with tomorrow's CPI report."
In other economic news, retail sales rose 0.5% to $415.7 billion in December, following a 0.4% increase in November. The figures were stronger than the 0.2% gain expected by economists.

"Underlying retail sales ended 2012 on a solid note with retail sales excluding autos, building materials, and gasoline up 7.0% at an annual rate in November and December despite the looming threat of the fiscal cliff," RDQ economists wrote. "This retail sales report, along with manufacturers' data on vehicle sales and trends in services spending, suggests real PCE rose 2.25% in the fourth quarter versus our previous projection of a gain slightly below 2%."

They added: "Looking ahead to 2013, the consumer faces headwinds from tax increases - particularly the payroll tax increase - and sluggish wage income growth and we expect consumer spending will slow in the first half of the year."

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