The tax-exempt market headed lower, following Treasuries and equities, over fears the Federal Reserve will soon start tapering its $85 billion a month bond purchases after better-than-expected economic news released Thursday morning.

Municipal bonds felt as much as four basis points weaker, a New York trader said, though bonds within five years felt stronger. "There are lots of bids wanted out there," the trader said. "But munis are also following Treasuries."

The weaker tone comes as California issued $5.5 billion in short-term notes Thursday morning. JPMorgan priced for institutions the revenue anticipation notes, rated MIG-1 by Moody's Investors Service, SP-1-plus by Standard & Poor's, and F1 by Fitch Ratings.

The first series of $1.25 billion yielded 0.22% with a 2% coupon in 2014. In retail pricing Wednesday, prospective yields ranged from 0.18% to 0.23%.

The second series of $4.25 billion yielded 0.24% with a 2% coupon in 2014. In retail pricing, prospective yields ranged from 0.20% to 0.27%.

Retail investors bought $1.65 billion of the deal, representing 30% of the total offering, the Treasurer's office said Wednesday.

When California issued $10 billion of RANs in August 2012, the May 2013 maturities yielded 0.33% and the June 2013 maturities yielded 0.43%.

Wednesday, yields on the Municipal Market Data scale ended as much as two basis points higher. The 10-year yield rose one basis point to 2.80. The 30-year was steady at 4.33% and the two-year finished flat at 0.43% for the 21st consecutive session.

Yields on the Municipal Market Advisors scale also ended as much as two basis points higher. The 30-year yield increased two basis points to 4.42%. The 10-year was steady at 2.95% and the two-year was unchanged at 0.54% for the sixth session.

Treasuries were weaker, along with equities, on fears the Federal Reserve would make a decision to start tapering its purchases at its September Federal open Market Committee meeting. The benchmark 10-year yield jumped nine basis points to 2.80% and the 30-year yield increased seven basis points to 2.82%. The two-year yield rose four basis points to 0.37%.

In economic news, the July consumer price index came as expected at 0.2% while the core raise rose 0.2%.

"The July CPI report should ease concerns that the inflation rate is too low to begin scaling back the pace of bond purchases," wrote economists at RDQ Economics. "With headline CPI inflation at 2.0% in July on a year-over-year basis and with the core rate at 1.7%, these numbers should assuage the worries expressed by St. Louis Fed President Jim Bullard. Over the last three months, increases in the core CPI have been very steady at 0.2% per month and the gains appear to have been fairly broad based."

In other economic news, initial jobless claims fell 15,000 to 320,000 in the week ended Aug. 10, its lowest since October 2007, and more than economists expected.

"Jobless claims have fallen significantly in recent weeks, signaling a potential pickup in the pace of job creation," RDQ economists wrote. "The four-week average of claims now stands at the lowest level since mid-November 2007. Along with the stronger employment reading in the Empire State survey, the early indications for August is that the pace of job creation has picked up, which adds to the case that tapering will be announced at the September FOMC meeting."
Also, industrial production was unchanged in July after increasing a revised 0.2% in June. Capacity utilization fell to 77.6% from a revised 77.7% in June. The July figures were lower than the 0.3% increase in industrial production and the 78% capacity utilization expected by economists.

"A disappointing report on manufacturing activity for July but one that is very much at odds with the July manufacturing ISM report," RDQ economists wrote. "Only time will tell if the next two reports from the Fed for August and September will reconcile the divergent views on manufacturing activity. Despite being disappointing, these data are unlikely to factor into the decision of whether to taper bond purchases at the September FOMC meeting, where the focus will be on the labor market."

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