Market Post: Recovering from Selloff; Illinois GOs Quiet

The tax-exempt market opened on a quiet note after a double-digit rise in yields earlier in the week left market participants recovering Friday morning.

Illinois failed to pass pension reform Thursday evening, but Illinois general obligation bonds didn't react. "The market is taking a breather after the selloff this week," a Chicago trader said.

Others agreed. "It's very quiet but the bid side is good," a New York trader said.

Yields on the Municipal Market Data scale ended Thursday as much as two basis points higher. The 30-year yield increased two basis points to 3.22%. The 10-year was steady at 2.07% and the two-year finished flat at 0.29% for the fifth session.

Yields on the Municipal Market Advisors 5% scale ended as much as one basis point higher. The 10-year and 30-year yields rose one basis point each to 2.12% and 3.32%, respectively. The two-year finished steady at 0.36%.

Treasuries were weaker Friday morning. The benchmark 10-year yield jumped five basis points to 2.17% and the 30-year yield increased three basis points to 3.31%. The two-year yield rose two basis points to 0.32%.

In economic news, personal income fell $5.6 billion, or less than 0.1%, in April. Spending in April fell $20.5 billion, or 0.2%. The April figures were weaker than the 0.1% increased expected by economists.

"This report confirms that an easing in energy prices is giving U.S. households a much needed break in April as headline PCE price inflation slipped to 0.7% on a year-over-year basis," wrote economists at RDQ Economics. "Spending to offset an unusually cold March was replaced by a sharp rise in durable goods spending in April - so the headline increase in real spending doesn't tell the entire story."

"Big picture though, it appears that rising wealth gains from housing and equities have more than offset the shock to disposable income from higher taxes," the economists wrote. "The savings rate appears to have bedded in around 2.5%, which is a level consumers might be comfortable with given rising wealth. Inflation is well below the Fed's 2% target which, though expected, argues against June being the month for the first reduction in the pace of bond purchases."

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