Municipal bonds weakened Friday morning as an economic report showed labor market improvement, which would allow the Federal Reserve to continue winding down its quantitative easing program and support the eventual raising of interest rates.
Despite the jobless rate's February rise to 6.7% from 6.6%, market observers said increases in nonfarm payroll and private payroll jobs indicated strength in the U.S. economy. Nonfarm and private payrolls grew by 175,000 and 162,000, respectively, beating the consensus of economists polled by Thomson Reuters.
Economists said the unemployment rate increase resulted from more people entering the labor force looking for work. The minor increase in the jobless rate does not indicate weakening in the economy, they said.
"Clearly the market took this report as a positive for the economy," a fixed-income strategist in St. Louis said in an interview. "It signals the Fed will continue on its tapering path."
The report was especially strong given the inclement weather conditions throughout much of the nation in February, the strategist said.
Signs of a strengthening economy could spur the Fed to consider raising interest rates earlier, market participants said. Fed Chair Janet Yellen has indicated that the rate of tapering is dependent on economic growth.
"The big issue is can the Fed hold out until the second half of 2015, when it's expected to increase interest rates," an economist in New York said in an interview. "We expect that the Fed will start normalizing rates earlier and faster. Now interest rates can rise in early 2015 rather than the second half of 2015."
Municipal bond yields measured by Municipal Market Data's AAA scale gained as much as eight basis points in the intermediate part of the curve, while those maturing within three years were steady to two basis points higher.
Treasury yields spiked overall Friday morning, with the 30-year jumping six basis points to 3.74% and the 10-year benchmark up by six basis points to 2.80%. Two-year notes gained two basis points to 0.36%.
