The tax-exempt market weakened for the third trading session this week, though traders noted the selloff wasn't as hectic as it had been in prior trading sessions.

"It doesn't feel quite as crazy as it has been," an Atlanta trader said. "I know the bids are weak but it doesn't seem to be dramatic so far. It's probably going to stay a touch weaker until we get a good boost in govies and figure out what's going on in Washington, but people are actually calling in and bidding on my bonds. I haven't seen that in a while."

He added the market is not too optimistic and still feels weaker, but bonds may not see cuts as big as in previous days. "Generally it seems to have a little more foundation, but no one is grabbing for bonds."

"Retail structured paper is best trading right now, as many institutional investors are pulling back and/or selling," said Dan Toboja, vice president at Ziegler Capital Markets. "With the holiday-shortened weeks fast approaching there are really only a couple trading days left when desks will be fully staffed. The challenging liquidity may continue into next week as desks begin thinning staff."

In the primary market Wednesday, Jefferies & Co. is expected to price between $550 million and $850 million of the Metropolitan Transportation Authority Triborough Bridge and Tunnel Authority senior and subordinate revenue bonds, depending upon market conditions. The bonds are rated A1 by Moody's Investors Service and A-plus by Standard & Poor's and Fitch Ratings.

The Authority was expected to come to market last week and delayed the pricing due to market conditions. It was then again delayed earlier this week due to market conditions and the MTA said it could possibly delay the sale until 2013.

On Tuesday, yields on the Municipal Market Data scale continued to soar. The 10-year yield jumped eight basis points to 1.82% while the 30-year yield spiked seven basis points to 2.86%. The two-year yield rose one basis point to 0.31% after holding steady at 0.30% for 56 consecutive trading sessions.

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 stronger Wednesday morning after a very weak session Tuesday. The benchmark 10-year yield and the 30-year yield fell four basis points each to 1.79% and 2.96%, respectively. The two-year yield fell one basis point to 0.28%.

In economic news, housing starts fell 3% to a seasonally adjusted rate of 861,000 in November while building permits rose 3.6% to a seasonally adjusted annual rate of 899,000.

November housing starts fell short of the expected 870,000 projected by economists, but building permits were much better than the 875,000 expected.

"A mixed bag of housing data with the coincident indicator being a bit weaker than expected, but the leading indicator being stronger — though gains here were entirely driven by multi-family activity," wrote economists at RDQ Economics. "One thing that we can say is that Hurricane Sandy likely had only a small impact on the report since the declines in starts were concentrated in the West, while the increases in permits were in all regions apart from the Northeast."

They added, "We have to believe rebuilding from Sandy will have a significant [impact] on housing starts and building permits in the months ahead. However, we also believe that housing turned a corner some months ago and is on a path to recovery. This report provides some further support to this view as the level of building permits in November was the highest since July 2008."

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