NEW YORK – Activity in the tax-exempt market continues to be driven by Treasuries as several poor economic reports fueled the risk-off trade, pushing fixed-income yields lower.

Munis were firmer Friday morning, according to the Municipal Market Data scale. Yields on the two- to five-year notes dropped as much as three basis points. Yields outside six years dropped between two and five basis points.

On Thursday, the 10-year yield fell one basis point to 1.79% while the 30-year yield dropped two basis points to 3.08%. The two-year yield closed steady at 0.33% for the seventh consecutive trading session.

Treasuries were much stronger on worse than expected economic news. The benchmark 10-year yield dropped nine basis points to 1.48%, setting a new record low. The 30-year yield plunged eight basis points to 2.57%. The two-year yield fell one basis point to 0.26%.

In economic news, non-farm payroll employment rose 69,000 in May pushing the unemployment rate up to 8.2%. The gain was well below the 150,000 gain economists had predicted and the unemployment rate increased above the 8.1% economists had expected.

“Apart from the 422,000 increase in household employment, there is no good news in this report,” wrote economists at RDQ Economics. “Payroll growth has slowed below 100,000 on average over the last three months, hours worked have contracted since February, and the unemployment rate ticked higher as labor force participation rose. Our guess is that fears related to Europe, the fiscal outlook, and election uncertainty is hurting economic growth but that the slowdown will not spiral into renewed recession.”

In other economic news, personal income rose $31.7 billion or 0.2% in April, following an unrevised 0.4% gain in March. The April increase fell short of the 0.3% increase economists had expected.

Personal spending climbed $31.8 billion or 0.3% in April following a downwardly revised 0.2% gain in March. The spending increase came in line with economist predictions.

“Just as employment growth is slowing, consumer spending growth is picking up, putting real PCE growth on a trajectory to increase by 3% in the second quarter,” wrote RDQ economists. “The consumer is beginning to benefit from a slowdown in inflation as a result of a drop in oil and other commodity prices and this trend is likely to continue at least through June given the continued drop in oil prices.

In other economic news, the ISM manufacturing index fell to 53.5 in May from 54.8 in April. The drop was worse than the slip to 54.0 economists had expected.

An index reading above 50 suggests expansion..

“Manufacturing remains the brightest sector of the economy,” RDQ economists wrote. “Although the headline ISM index fell back in May, the level of the index remains consistent with continued solid growth in manufacturing and the details of the report were more constructive for growth going forward as the leading indicators outperformed the coincident indicators.”

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