The tax-exempt market jumped on Mr. Toad’s Wild Ride Friday as a massive selloff continued and liquidity dried up.

Yields ended as much as 20 basis points higher again Friday, following a 20-basis-point selloff Thursday in reaction to Federal Reserve chairman Ben Bernanke’s comments that the Fed could start tapering its $85 billion-a-month bond purchasing program by the end of the year.

Even as muni yields jumped almost 50 basis points throughout the week, several traders agreed the evaluation prices have not caught up to the market with reports of some bonds being 75 to 90 basis points too high.

“I think the pricing services are behind the market,” a Florida trader said. “Even stuff I put out for bid in the last couple of days to get a color of where the real bids are in the market, we’ve seen them off almost 80 basis points. No one wants to step in this market.

“No one wants to go long balance sheet risk into the weekend,” the trader said. “There is not only no bottom but everyone is conditioned to buy the dips and put your balance sheet out there and a lot of people are out of buying power.”

This trader said he had been buying the selloff in closed-end funds Thursday and stopped Friday. “I said ‘OK, that’s it. I’m done.’”

“There is massive liquidation,” this trader said. “It’s an overreaction but that fear is driving why people aren’t putting bids out.”

Another trader agreed there was little buying. “There are no bids,” a Chicago trader said. “Everyone has lists out. There are several lists over $100 million. There is no liquidity and bonds have to get cheaper. Fast.”

He added that bond yields need to rise at least another 20 basis points before a buyer would step into the market.

The Municipal Market Data scale ended as much as 18 basis points higher Friday. The 10-year yield jumped 15 basis points to 2.63% and the 30-year yield spiked 18 basis points to 3.96%. The two-year yield increased six basis points to 0.43%.

Yields on the Municipal Market Advisors 5% scale closed as much as 20 basis points higher. The 10-year jumped 18 basis points to 2.78% and the 30-year yield spiked 20 basis points to 4.08%. The two-year yield rose three basis points to 0.50%.

Treasuries continued to weaken. The benchmark 10-year yield jumped 11 basis points to 2.51% and the 30-year yield increased eight basis points to 3.57%. The two-year yield rose four basis points to 0.37%.

Outside the traditional market, tender obligation bonds were not left unscathed. “We are aware of definitely one large liquidation and there is talk of another two,” the Florida trader said. “What you have is a massive unwind of someone’s bonds. The market has been really wide because dealers don’t have the balance sheet to step up.”

Mutual funds were also hit very hard as investors withdrew $2.2 billion from muni bond funds that report weekly, according to Lipper. And the outflows were described as a self-fulfilling prophecy to the overall weaker market.

“Of course it’s not helping that there has been continued mutual fund outflows,” the trader said. “Mutual funds are forced to sell and the market doesn’t have bid.”

Still, that could leave room for cross-over buyers to step in when the market cheapens up enough. “There are not a lot of natural buyers that are going to step up without massive pain. The banker are already massive buyers and they can’t step in anymore so we need to wait for the hedge fund community to step up. Munis have to get significantly cheaper than taxables.”

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.