The tax-exempt market had a rough ride this week as yields jumped as much as 13 basis points on the long end and municipal bond funds saw their largest weekly outflows since January 2011.
Many deals in the primary market were also delayed due to poor market conditions.
"Bids for some bonds have returned to the market, but we are far from touching the yields we saw at the start of last week," said Dan Toboja, vice president at Ziegler Capital Markets. "30-year triple-A yields from Monday of last week have backed up 30-plus basis points and bids for some bonds have pulled back further. There continues to be plenty of bid-wanteds to choose from. Both institutional customers and dealers are putting large numbers of bonds out for the bid, but may only transact on a select few."
Secondary trading activity was slow Friday morning as traders started to exit for the holidays.
On Thursday, the Municipal Market Data scale ended firmer for the first time in December. The 10-year yield fell three basis points to 1.79% while the 30-year yield dropped two basis points to 2.84%. The two-year finished flat at 0.31% for the third consecutive trading session.
Despite the small gains, the 10-year MMD yield still remains 32 basis points above its record low of 1.47% set Nov. 28 while the 30-year is still trading 38 basis points higher than its record low of 2.47% also set Nov. 28.
Treasuries were stronger Friday for the third consecutive session. The benchmark 10-year yield and the 30-year yield dropped five basis points each to 1.75% and 2.93%, respectively. The two-year was steady at 0.28%.
In economic news, durable goods orders were up 0.7% to $220.9 billion in November, following an increase of 1.1% in October. The increase beat economists' expectations of a 0.3% rise.
"It appears that order growth has picked up significantly over the last three months and we are most impressed by the 23.7% annualized increase in orders of core capital goods since August," wrote economists at RDQ Economics. "Following yesterday's better-than-expected Philly Fed report, we have a report showing fairly strong durable goods orders growth with only orders of computers showing a decline over the last three months."
In other economic news, personal income was up 0.6%, or $85.8 billion, while spending increased 0.4%, or $41.3 billion, in November.
The increase in income beat economists' expectations of a 0.3% rise, while spending came in as expected.
"The personal income and spending data have been surprisingly strong over the last three months as real disposable income has risen at a 3.4% annualized rate since August, while real PCE is up 3.5% on the same basis," RDQ economists wrote. "However, these data for the consumer are backward looking and consumers face a massive tax shock in January unless there is a last minute deal to extend out the Bush-era tax rates for most taxpayers and households are heading into the cliff with a fairly low savings rate."
They added, "Real PCE for the fourth quarter is running at a 1.9% pace which, along with stronger-than-expected capital goods shipments, opens the door to the possibility of a 2% fourth-quarter GDP growth number. The economy is growing despite Washington not because of it and if policymakers could just get out of the way, 2013 could see growth closer to 3%. Inflation trends have been benign recently with both overall and core PCE prices rising only 0.9% at an annual rate over the last three months and this is likely to provide reassurance to Fed officials."