The tax-exempt market decoupled from their taxable counterparts Friday morning as selling pressure surfaced even amid a much stronger Treasury market.

Munis were weaker as Treasuries posted gains on a weaker-than-expected jobs number. July payrolls rose 162,000 and June to May payrolls were revised 26,000 lower, leaving the 12-month average gain at 189,000. The unemployment rate dipped to 7.4% from 7.6% in June due to a drop in labor force participation.

"Employment continued to expand at a solid pace in July and the unemployment rate fell to 7.4% from 7.6% in June," wrote economists at RDQ Economics. "Since the Fed announced the third round of QE in September last year, nonfarm payrolls have risen by 2.1 million and the unemployment rate has fallen from 8.1% to 7.4%. Although the jobs gain fell a little short of expectations in July, we expect the Fed will go ahead and announce at the September meeting that it plans to pare back bond purchases."

"Bonds are enjoying a relief rally but if that rally is predicated on the assumption that the Fed will hold off until December to announce a tapering of bond purchases, we think buyers will be disappointed."
Friday morning, the benchmark 10-year Treasury yield slid nine basis points to 2.63% and the 30-year yield fell six basis points to 3.71%. The two-year yield fell two basis points to 0.32%.

Munis didn't follow. "It's very quiet but there are a lot of bid-wanted lists," a Boston trader said.

Thursday, yields on the Municipal Market Data scale ended as much as four basis points higher. The 10-year yield rose four basis points to 2.71% and the 30-year yield increased two basis points to 4.22%. The two-year finished flat at 0.43% for the 12th consecutive session.

Yield on the Municipal Market Advisors scale ended as much as five basis points weaker. The 10-year and 30-year yields rose four basis points each to 2.92% and 4.32%, respectively. The two-year yield increased one basis point to 0.55%.

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