NEW YORK – The two-week muni rally paused on Friday as a better than expected employment report buoyed stocks and pulled Treasuries down, taking munis with them.

Friday morning, non-farm payroll employment rose 243,000 in January, pushing the unemployment rate down to 8.3%, beating the estimated 8.5% that economists had predicted. The unemployment rate is now the lowest since February 2009.

“It has been pretty lackluster ever since the number came out favorable toward stocks,” said a Los Angeles muni trader. “The long bond is off two and a half to three points and nothing is going on.”

He added that the “bid side has dropped off and a lot of guys have hung their towels and are waiting until Monday.”

He also added that munis are weaker because they are following Treasuries, and not because of any fundamentals in the muni market. “The weakening is just a blip, and not a trend. There is a lot of talk that these job numbers are skewed and the weakening is more a response to Treasuries.”

“Even though ratios are a little less attractive, munis will stay strong given supply has been eaten up and there are guys sitting on cash.”

Munis were weaker Friday after strengthening all week, according to the Municipal Market Data scale. The five-year yield rose two basis points while the six- to seven-year yields jumped seven basis points. Outside eight years, yield spiked up eight basis points.

On Friday, the two-year yield closed steady for its third consecutive trading session at 0.30%, matching its record low set Oct. 10. The 10- and 30-year yields jumped eight basis points each to 1.77% and 3.21%, respectively.

Since the most recent rally began Jan 24, muni yields fell up to 22 basis points across the curve up until Friday. The losses Friday erased gains munis made since Jan. 27.

Treasuries ended weaker Friday, paring all gains made during the week. The two-year yield rose two basis points to 0.25%. The benchmark 10-year yield jumped 11 basis points to 1.94% while the 30-year yield spiked 13 basis points to 3.15%.

In the secondary market Friday, trades reported by the Municipal Securities Rulemaking Board showed weakening.

A dealer sold to a customer New York City Municipal Water Finance Authority 5s of 2044 at 3.78%, 13 basis points higher than where they traded Thursday.

Another dealer sold to a customer California various purpose general obligation 7.550s of 2039 at 5.36%, 11 basis points higher than where they traded Thursday.

A dealer bought from a customer Waco, Texas, Education Finance Corp. 5s of 2043 at 3.61%, five basis points higher than where they traded Thursday.

Bonds from an interdealer trade of Texas Permanent University Fund 5.262s of 2039 yielded 3.96%, two basis points higher than where they traded Thursday.

Looking ahead to next week, the tax-exempt market can expect a paltry $3.91 billion, down from this week’s revised $4.38 billion. On the negotiated calendar, $3.02 billion is expected, up from this week’s revised $2.94 billion. In competitive deals, $893.1 million is expected, down from this week’s revised $1.44 billion.

Muni-to-Treasury ratios fell this week as munis outperformed Treasuries and became more expensive. The five-year ratio closed at 93% on Thursday, down from 97.3% on Monday. The 30-year ratio dropped to 104.3% from 106% on Monday.

The 10-year ratio was the exception, rising to 92.9% on Thursday from 92.4% on Monday.

The 10- to 30-year slope of the curve flattened this week, falling to 145 basis points from 146 basis points on Monday. Since the beginning of the year, the curve has flattened from 169 basis points.

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