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Market Post: Munis Open on Solid Foundation as Cutting Slows

The tax-exempt market opened on solid footing as traders said this was the first day of the week where they weren't cutting bond prices.

"The better tone in the market means it's just not sinking," an Atlanta trader said. "It's not necessarily going up but the sinking has stopped. I had one good trade so far today. I don't feel like I have to be cutting like all the other days this week."

In the primary market, the trader added, there are still some balances left over while secondary trading is still relatively quiet. "People aren't puking bonds today," he added. "There's not that nervous tone out there."

In the primary market Thursday, Goldman, Sachs & Co. is expected to price for institutions $335 million of Bay Area Water Supply and Conservation Agency tax-exempt and taxable revenue bonds for the Capital Cost Recovery Prepayment Program. The bonds are rated Aa3 by Moody's Investors Service and AA-minus by Standard & Poor's.

In retail pricing Wednesday for the $237.5 million tax-exempt series, yields ranged from 0.32% with a 1% coupon in 2014 to 3.10% with a 4% coupon in 2034. The bonds are callable at par in 2023. Credits maturing between 2025 and 2027 and between 2029 and 2033 were not offered for retail.

Municipal bond market reads showed a softer market.

The Municipal Market Data scale ended lower for the fifth consecutive session. The 10-year yield jumped two basis points to 1.82% while the 30-year yield spiked three basis points to 2.87%. The two-year finished steady at 0.34% for the third session.

The Municipal Market Advisors 5% coupon triple-A benchmark scale also showed softer trades. The 10-year yield and the 30-year yield rose two basis points each to 1.84% and 2.94%, respectively. The two-year held steady at 0.35% for the third session.

Treasuries were mostly flat Thursday morning. The benchmark 10-year yield and the 30-year yield traded steady at 2.00% and 3.19%, respectively. The two-year yield rose one basis point to 0.28%.

In economic news, initial jobless claims rose 38,000 to 368,000 in the week ending Jan. 26, a higher level than the 360,000 economists had expected.

"The jump in claims in the latest week corroborates our view that the lower claims readings in the prior two weeks were a result of seasonal adjustment issues rather than signaling a marked improvement in the labor market," wrote economists at RDQ Economics. "The claims data have followed the pattern of years with a similar calendar pattern and we suggest, at a minimum, that the focus should be on the four-week average, which stands at 352,000. There is no sign in these data that layoffs have picked up in January and we continue to look for a payroll gain of 165,000 in tomorrow's employment report."
In other economic news, personal income jumped $352.4 billion, or 2.6%, in December while personal spending rose $22.6 billion, or 0.2%.

The personal income numbers beat economists' expectations of a 0.8% gain in December while spending fell just short of the 0.3% expected increase.

"These data provide the monthly flesh to the quarterly bones that were in yesterday's GDP report but, other than the monthly detail, contain no new information," RDQ economists wrote. "The income side of the account was dominated by moves to avoid the anticipated tax hikes on January 1 as dividend payments rose a nonannualized 34.3% in December and accounted for three-quarters of the rise in personal income and almost the entire increase in savings. The savings rate will almost certainly plunge in January as households are hit with the reversion of social security tax rates to their normal level."

The continued, "We expect spending to take a hit in the first quarter but we expect there to be some offset in inventories as far as its impact on GDP growth is concerned. PCE inflation through the quarter was all but nonexistent, which should further convince the doves at the Fed to keep printing."

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