The tax-exempt market chugged along Tuesday as most participants said activity was heavier than usual for a holiday week.
"We are in a retail market and there was pretty broad-based participation," said a trader in Dallas. "It was mostly in the shorter maturities but we had an active day and an active week for a holiday week." He added most the activity was inside 20 years and quite a bit inside 15 years.
Morning trading was fairly busy too as buyers tried to place last-minute orders. "There are buyers," said a trader in New York. "There is a lot of cash to be put to work and we are busy."
But for the rest of the week, the overall market is starting to dry up.
"It's a holiday week so it's very slow," said a trader in New Mexico. "There is not a lot going on. There are a couple of new deals but not a whole bunch of anything. It is just a classic holiday week."
Munis were mostly flat, according to the Municipal Market Data scale. Yields inside the 21-year were flat, while yields rose one basis point outside the 22-year.
On Tuesday, the two-year yield closed flat at 0.36% for its 10th consecutive trading session. The 10-year muni yield closed flat at 1.92%, a record low as recorded by MMD, which was set Monday. The 30-year muni yield increased one basis point to 3.62%.
The risk-on trade made headlines Tuesday as Treasuries had a big selloff and the stock indexes rallied. The two-year yield rose two basis points to 0.26%. The benchmark 10-year yield jumped 12 basis points to 1.93%. The 30-year yield spiked up 14 basis points to 2.93%.
The stock indexes were all up around 3%. The Dow Jones Industrial Average was up 2.85%, or 334.7 points, to 12,102.
"A significant reversal in the Treasury market did little to disturb general levels of the muni serial sector," wrote MMD's Randy Smolik. "Dealers indicated that there was still a fair amount of cash around from this month's reinvestment needs and January could add about $20 billion in additional reinvestment needs."
In the primary market Tuesday, the competitive calendar took the lead.
JPMorgan won the bid for $400 million of Massachusetts general obligation bonds. The credit is rated Aa1 by Moody's Investors Service and AA-plus by Standard & Poor's and Fitch Ratings.
Yields ranged from 1.05% with a 5% coupon in 2017 to 3.16% with a 3% coupon in 2027. Credits maturing in 2015 and 2016 were not formally reoffered. The bonds are callable at par in 2019.
In the negotiated market, most of the week's biggest deals, while smaller than usual, priced Tuesday.
Barclays Capital priced $67.1 million of Oklahoma's Beaver County Hospital Authority revenue bonds. The credit is rated A1 by Moody's, AA-minus by S&P and A-plus by Fitch. Pricing was not available by press time.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming in the past week.
A dealer sold to a customer California University Regents 6.583s of 2049 at 5.21%, 15 basis points lower than where they traded the week before.
A dealer bought from a customer New Jersey Transportation Trust Fund Authority 5s of 2042 at 4.62%, 12 basis points lower than where they traded the week before.
A dealer sold to a customer Houston 6.29s of 2032 at 4.66%, nine basis points lower than where they traded the previous week. Another dealer sold to a customer District of Columbia 5s of 2022 at 2.41%, eight basis points lower than where they traded last week.
Ratios have jumped in the past week, with the 10-year muni-to-Treasury ratio closing back up above 100% to 106.7% on Monday from 97.5% the week before. The 30-year muni-to-Treasury ratio finished at 129.4% versus 121% the week before. The five-year ratio moved up slightly to 113.8% from 110.5%.
"Ratios rose to very attractive ranges over the past several sessions, causing relative value players to be better buyers than sellers," Smolik said.
Looking ahead to year-end, RBC Capital Markets expects $275 billion to $285 billion in total issuance for 2011, down 35% from 2010 and the lowest since 2000. But looking forward to 2012, many expect higher issuance. RBC estimates $340 billion in total issuance for 2012, due primarily to new-money financing and post-recession refunding trends.
RBC notes that since 1988, new-money municipal issuance has averaged $790 per capita. Because 2011 was an extremely low year, the firm projects issuance will total $588 per capita in 2011, the lowest since 1993. But gazing a few years forward and looking out five-years, RBC notes the average should pick back up to $790.
"We expect this ramp-up in new-money financing to occur over a multi-year period and don't anticipate that issuance will return to its post-2000 peaks anytime soon," wrote Chris Mauro, head of U.S. municipals strategy. "We estimate that new-money issuance will reach $750 per capita in 2012, $800 in 2013, and $850 in 2014."
Besides new money, refundings played an important part in 2011 volume.
"Since 2008, the current refunding rate has declined as low interest rates during this period generated a significant amount of refunding activity, thus shrinking the pool of eligible refunding candidates," Mauro wrote. That caused the refunding rate of eligible bonds that were refinanced to drop to 30% for the year through October versus 35% for 2010. RBC estimates that the current refunding rate will drop to 26% in 2012, or $84 billion.
The low interest-rate environment has also dropped the advanced refunding rate down to 13% since 2008 from 42% in years prior. RBC estimates the 13% advanced refunding rate will remain in 2012.