The municipal market was firmer yesterday by two to three basis points, though the market continues to lag behind the Treasury market, which showed large gains. “We’re firmer but people are very guarded,” a trader in Chicago said. “There certainly isn’t any feeding frenzy like we’re seeing in the Treasury market.” “Everybody is just staring at Treasuries— it’s the only business that’s going on,” a trader in Los Angeles said. “There have been several bid-wanted lists and people are trading into them, but it’s very quiet. Munis are probably firmer by two to three basis points.” Trades reported by the Municipal Securities Rulemaking Board yesterday showed some losses. Bonds from an interdealer trade of California State Board of Public Works 5s of 2026 yielded 4.90%, up one basis point from where they traded Wednesday. A dealer sold to a customer insured Los Angeles Unified School District 4.5s of 2028 at 4.70%, up one basis point from where they sold Wednesday. Bonds from an interdealer trade of insured Falls Church, Va., 3.70s of 2017 yielded 3.84%, even with where they traded Wednesday. The Treasury market saw large gains yesterday. The yield on the benchmark 10-year note, which opened at 4%, was quoted near the end of the session at 3.83%. The yield on the two-year note closed at 2.89%, after opening at 3.07%. Despite the move in Treasuries and the resulting cheapness that tax-exempts now enjoy, traders and analysts said the tax-exempt market continued to lag the taxable counterpart. “Amid last week’s strong flight-to-quality surge — and despite munis having reached new extremes in relative 'cheapness’versus taxables — tax-exempt bonds deeply lagged Treasury and derivative performance,” wrote Matt Fabian, managing director at Municipal Market Advisors, in his weekly report. “Further, the undertow from Treasuries is dragging absolute yields lower and farther away from levels that elicited circuit-breaker demand in August.” Also keeping market participants guarded and wary of the market is the recent focus on deriving secondary market levels from primary market deals. This may change starting today as the week’s new-issue deals begin to price. Activity in the new-issue market was light yesterday. “We’ve become a new-issue market, at least for leadership, and without any large new issues to hang the market on, people have been hesitant to take any major moves one way or the other,” a trader in Chicago said. “There is some decent supply this week, and at that point I think munis should do better. If we have one or two hot deals where people all of a sudden got involved, and we gapped higher, I could see that.” Fabian, too, sees the slight uptick in new-issue supply as something that may jolt the secondary. “We’ve noted before that a moderate new-issue calendar can lend a positive pricing influence to our sector; this week’s schedule — headlined by the well-marketed and likely well-spread $1 [billion California] GO bonds — may fit that bill,” he wrote. “We expect all new issues will be priced to sell quickly and could present opportunities for traditional investors. Of course, the large slate of economic data and continuing media coverage of subprime and credit-related losses may upset any other momentum.” The volume for the week stands at $6.1 billion, higher than both the $5 billion of bonds and notes that came to market last week and the $5.1 billion that was priced the week before. Leading the way, UBS Securities LLC will price $1 billion of general obligation bonds for California. Moody’s Investors Service rates the credit A1 and Standard & Poor’s and Fitch Ratings give it an A-plus. Also this week, the Los Angeles Unified School District will competitively sell $600 million of tax and revenue anticipation notes that mature in December 2008. The notes are rated MIG-1 by Moody’s. And Merrill Lynch & Co. will price $450 million of sales tax bonds this week for Washington’s Central Puget Regional Transit Authority. The underlying credit on the bonds, which will be insured by Financial Security Assurance Inc., is rated Aa3 by Moody’s. The economic calendar was light yesterday, though a full slate of potential market-moving data will be released throughout the week, starting with today’s November consumer confidence index.
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