Market participants agreed the majority of the selloff in the tax-exempt market is over for now as the market is holding steady.

Yields finished steady across the curve Wednesday and traded flat Thursday morning, traders said.

"I think the bleeding has stopped," a Boston trader said. "It seems steady. It's a good opportunity to bottom feed if you have cash. And I still think we will see a snap back in January."

Others agreed that with limited supply at the end of the year and January reinvestment money coming due at the start of next year, the market should bounce back. "Munis have been relatively weak lately and institutional funds are selling short-term paper for liquidity purposes," a New York trader said. "Additionally banks are trying to shore up their balance sheets for year end. Rates should firm up after year end and after the uncertainty of the fiscal cliff is behind us."

On Wednesday, the Municipal Market Data scale ended flat. The 10-year yield and the 30-year yield finished steady at 1.82% and 2.86%, respectively. The two-year finished flat at 0.31%.

Since hitting record low yields on Nov. 28, the 10-year MMD yield has jumped 34 basis points while the 30-year yield has soared 38 basis points.

Treasuries were slightly stronger Thursday morning after posting small gains Wednesday. The benchmark 10-year yield fell two basis points to 1.79% while the 30-year yield fell one basis point to 2.98%. The two-year was steady at 0.28%.

In economic news, real gross domestic product increased at an annual rate of 3.1% in the third quarter, according to a final estimate. The growth is the largest since the third quarter of 2011 and is above the 2.8% expected by economists.

"Real GDP growth of 3.1% makes the third quarter the strongest quarter of the year on paper, although this picture is not supported by the income data, the output data, business surveys, or the hours worked data," wrote economists at RDQ Economics. "Nonetheless, these numbers are a far cry from recession and suggest that if the fiscal cliff could be resolved, the economy would continue to expand at a moderate rate in 2013."

They added, "It seems to us that investors should look through the quarter-to-quarter volatility in GDP growth and focus on the four-quarter change to get a better picture of growth trends. The average growth rate thus far this year, at 2.1%, is running ahead of the Fed's most recent forecast of growth for 2012. The Fed has no business continuing to ease if this is anywhere close to the true growth rate in nominal GDP."

In other economic news, initial jobless claims rose 17,000 to 361,000 for the week ending Dec. 15. Continuing claims were up 12,000 to 3.225 million for the week of Dec. 8. Both failed to meet economists' expectations of 355,000 for initial and 3.200 million for continuing claims.

"The four-week average of claims has dropped to 368,000, which is almost exactly the average level of claims that prevailed prior to Sandy crashing into the Northeast," RDQ economists wrote. "This suggests to us that the pace of layoffs in December was probably in line with October and points to continued modest job growth."

In other economic news, existing home sales rose 5.9% to a seasonally adjusted 5.04 million-unit rate in November. That pace was above economists' expectations of a 4.85 million rate.

"This report provides further support to the thesis that the housing market is in a real recovery as home sales and resale prices continue to rise at a double-digit year-over-year pace," RDQ economists wrote. "While we were projecting a recovery in home sales and prices in the second half of the year, the pace of gains has exceeded our expectations. In our view the economy is a greater threat to the housing market than the housing market is to the economy."

In further economic news, the Philadelphia Fed Index surged to a positive 8.1 in December from a negative 10.7 in November. The reading was well above the expected negative 2.5 that economists had expected.

"The Philly Fed survey paints an entirely different picture of manufacturing activity in December than the New York Fed's Empire State survey portrayed," RDQ economists said. "Orders and shipments posted strong gains, employment and the workweek expanded, and there was a sharp increase in manufactured output prices."

They added, "Given the volatility that this survey has displayed in the last couple of years, we need to see more evidence of manufacturing improvement before we can wholeheartedly buy into the picture of the economy suggested by this report. However, if we take the balance of evidence from today, the economy looks to be in surprisingly good shape as we head into the end of the year. These reports also make us wonder just how big a monetary policy mistake the Fed is making by expanding QE further in 2013."

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