Market Post: Munis Post Small Gains With Treasuries On Poor Jobs Number

In a reversal, the tax-exempt market posted small gains Friday morning as Treasury yields fell on worse-than-expected jobs numbers.

“Prices are higher,” a New York trader said. “Yields are lower about one to two basis points I’d say.”

“Munis are slightly stronger but not much,” a Boston trader said. “Maybe a couple of basis points. Phones are ringing a little bit more than yesterday.”

Munis followed Treasury yields lower. The two-year Treasury yield fell six basis points to 0.46% and the benchmark 10-year yield fell seven basis points to 2.91%. The 30-year yield dropped four basis points to 3.84%.

A flight to safe haven assets came after the August employment report showed payrolls were up 169,000, less than forecasted, and the June and July figure was downwardly revised by 74,000. The unemployment rate fell to 7.3% due to a drop in labor force and participation.

“The only moderate payroll gain in August and the downward revisions to job growth in June and July are disappointing and will make the debate over scaling back bond purchases at the September 17-18 Federal Open Market Committee meeting an intense one,” wrote economists at RDQ Economics. “The unemployment rate continues to fall and is only 0.3 percentage point above the level that Chairman Bernanke said would be expected to prevail when bond purchases were fully wound down. Admittedly the decline in the rate was a result of a further drop in labor force participation but this continued fall in participation should give pause to those who argue that the decline is cyclical and will be reversed.”

“Our belief is that the Fed will still announce a modest reduction in the pace of bond purchases on September 18 but the call is a closer one than we were expecting.”

Back in munis, yields on the triple-A Municipal Market Data scale ended as much as three basis points higher Thursday. The 10-year and 30-year yields rose two basis points each to 3.04% and 4.51%, respectively. The two-year finished flat at 0.43% for the 36th straight session.

Yields on the Municipal Market Advisors scale also ended as much as three basis points weaker. The 10-year and 30-year yields rose two basis points each to 3.16% and 4.61%, respectively. The two-year closed unchanged at 0.55% for the 15th session.

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