After a firm week in the tax-exempt market, munis ended on a slightly weaker note Friday as better-than-expected employment data prompted a risk-on trade.

Nonfarm payrolls increased 165,000 in April and the jobless rate fell 0.1 percentage point to 7.5%. Stocks rallied on the news and the Dow Jones Industrial Average topped 15,000 in the trading session.

“While the report was not without a blemish it shows on balance, through the monthly volatility, continued solid job gains that, given demographic trends, are enough to further shrink the pool of unemployed labor,” economists at RDQ Economics wrote. “The headline gain of 165,000 in payrolls and the net 114,000 upward revisions to employment in the prior two months should provide something of an antidote to the spring swoon story for 2013.”

They added, “The decline in the unemployment rate to 7.5% further adds to the view that there is a significant chance that the rate will hit 6.5% sometime in the middle of 2014. Even though we expect PCE price inflation to drop below 1% in April, it now seems very unlikely that the Fed will upsize QE at the June FOMC meeting.”

Treasuries sold off on the news. The benchmark 10-year yield soared 12 basis points to 1.75% and the 30-year yield spiked 14 basis points to 2.96%. The two-year yield increased two basis points to 0.23%.

Munis followed, though at a lag. “We are looking at zero to two basis-point cuts out past 10-years,” a Virginia trader said, referring to price cuts and higher yields. “But again you’ve got a fairly quiet Friday activity and next week there is a light calendar and a manageable 30-day visible supply so it’s still supportive of munis.”

Other traders agreed the market was weaker, albeit quieter than the Treasury market. “There is not much trading really,” a New York trader said “The Municipal Market Data scale is showing cuts, but everyone is saying there’s not much significant trading. Treasuries are selling off but munis really aren’t trading much.”

In the secondary market, trades compiled by data provider Markit showed mostly weakening.

Yields on San Diego County Regional Airport Authority 5s of 2043 and Wisconsin 3s of 2028 jumped three basis points each to 3.84% and 3.11%, respectively.

Yields on University of Virginia 5s of 2037 and Garland, Texas, 5s of 2021 rose three basis points each to 2.76% and 1.52%, respectively.

Yields on Houston 5s of 202 increased two basis points to 1.75% and Kentucky Property and Buildings Commission 5s of 2020 rose one basis point to 1.62%.

On Friday, munis posted losses.

Yields on the Municipal Market Data triple-A GO scale finished as much as three basis points higher. The 10-year yield increased two basis points to 1.68% and the 30-year yield rose three basis points to 2.82%. The two-year finished flat at 0.29% for the 21st session.

Yields on the Municipal Market Advisors 5% scale ended as much as four basis points higher. The 10-year and 30-year yields increased three basis points each to 1.76% and 2.98%, respectively. The two-year finished unchanged at 0.32% for the 21st session.

Despite a softer market Friday, high-yield bonds continue to do well so far this year, especially coming off the junk-rated $1.2 billion Iowa fertilizer deal. “High yield bonds are still pushing upward as yield remains the focus of attention,” J.R. Rieger, vice president of fixed income at Standard & Poor’s Dow Jones Indices said. “The S&P Municipal Bond High Yield Index has completed 17 consecutive months of positive performance and is up so far in May.”

Year to date, the index returned 3.29% compared to the investment grade S&P National AMT-Free Municipal Bond Index which is up 1.67%.

Bonds in the five- to 10-year maturity range also continue to perform well, according to Rieger. The S&P AMT-Free Muni Series 2018 has returned 1.29%. The seven-year non-callable bonds in the 2020 index have seen yields fall 19 basis points, returning 1.73% year-to-date.

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