The tax-exempt market continued to weaken Thursday morning, continuing the trend of the week, though traders noted the movement was more a correction than a panicked selloff.

"Weakness persists in the muni market," wrote Dan Toboja, vice president at Ziegler Capital Markets. "The last several days have seen a selloff in munis. Although it's been far from a fire sale there's been about a 10- to 15-basis-point cheapening over the last three trading sessions."

The selloff came from pressure in the primary and an overload of supply. "Participants had been carrying a lot of inventory and were caught by a larger than normal primary calendar," Toboja said. "So far it's been a controlled selloff with market players only cheapening bids five to 10 basis points from previous levels. Offers are cut, but within a relatively narrow range."

Still, he added the weakening may not last long. "If this tone persists into next week and year-end the selloff could take more significance, but right now it feels more like recalibration than capitulation."

He continued that in a true selloff the market would be pulling back bids hard and slashing offers. "Right now there are still a fair amount of bids, just at cheaper levels. Offers are being walked down in two- to five-basis-point increments. Wednesday had as much to do with the FOMC announcement as the uptick in new issue supply. There's no sense of widespread panic."

In the primary market, Guggenheim Securities is expected to price $1.26 billion of Indiana Finance Authority Midwestern disaster area bonds on behalf of the Midwest Fertilizer Corp. The short-term bonds are rated A-1-plus by Standard & Poor's.

JPMorgan is expected to price $781.4 million of California Pollution Control Financing Authority bonds, rated Baa3 by Moody's Investors Service and BBB-minus by Fitch Ratings. The series consists of $559.9 million and $221.5 million of water furnishing revenue bonds.

In the competitive market, Philadelphia is expected to auction $127 million of short-term notes, rated MIG-1 by Moody's and SP-1-plus by Standard & Poor's.

On Wednesday, yield on the Municipal Market Data scale ended as much as four basis points higher after climbing eight basis points Tuesday. The 10-year yield and the 30-year yield jumped four basis points each to 1.62% and 2.69%, respectively. The two-year finished flat at 0.30% for the 53rd consecutive trading session.

Treasuries were much weaker Thursday morning. The benchmark 10-year yield jumped four basis points to 1.74% while the 30-year yield increased two basis points to 2.92%. The two-year yield rose one basis point to 0.26%.

In economic news, initial jobless claims fell 29,000 to 343,000 for the week of Dec 8, the lowest since early October. Continuing claims fell 23,000 to 3.198 million for the week of Dec. 1.

The figures were better than expected; economists had predicted 370,000 for initial claims and 3.200 million for continuing claims.

"Between Sandy and the volatility in claims that materializes around the end of the year, it would be unwise to read much into one week's drop in claims," wrote economists at RDQ Economics. "The four-week average in claims, however, does appear to be moving down towards pre-Sandy levels. The next report for jobless claims aligns with the payroll survey week and it will be of interest to see whether claims hold below the 350,000 level or move back up to the 375,000 area."
In other economic news, the producer price index fell 0.8% while the core rate rose 0.1% in October. Economists expected a 0.5% increase in the headline number and a 0.2% core increase.

"It is ironic that in a month when wholesale prices fell because of a 4.6% drop in energy prices, many consumers in the tri-state area could not buy gasoline for much of the month or had to wait in long lines to purchase it and many homes were without electricity or heat due the effects of Hurricane Sandy," wrote RDQ economists. "Energy prices in today's PPI report and, more importantly, in tomorrow's CPI report are fairly meaningless."

They added, "In short, it is very difficult to discern underlying inflation trends from this month's wholesale price report. This matters little for the Fed, however, since the FOMC appears to have downgraded the importance of inflation as a factor influencing monetary policy decisions as it elevated the importance of unemployment in the decision-making process."

In further economic news, retail sales rose 0.3% to $412.4 billion in November following a 0.3% drop in October. The figure was below economists' expectation of a 0.5% increase.

"The strongest area in today's retail sales report is building materials, which is viewed as an intermediate good and is an area that is likely to be elevated for several months due to the reconstruction efforts after Hurricane Sandy," RDQ economists said. "It is impossible to tell how this report was affected by the hurricane and, therefore, difficult to assess the underlying trend in sales."


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