The tax-exempt market once again took its lead from Treasuries as its own market provided little direction.

The last of the primary deals are expected to price Thursday, but most fixed-income market players kept their eyes on the Federal Open Market Committee meeting announcement expected early this afternoon.

"Munis are a bit stronger and are pretty much following Treasuries," a New York trader said.

In the primary market, Morgan Stanley is expected to price $162.4 million of Wisconsin Health and Educational Facilities Authority revenue bonds, rated AA-minus by Fitch Ratings.

Bank of America Merrill Lynch is expected to price $158.4 million of Massachusetts Housing Finance Agency revenue bonds in two series: $107.1 million and $51.3 million.

On Wednesday, the 10-year Municipal Market Data yield jumped three basis points to 1.84% while the 30-year yield spiked up four basis points to 2.98%. The two-year closed at 0.29% for the 34th consecutive session.

Treasuries were slightly stronger Thursday morning ahead of FOMC announcement. The benchmark 10-year yield dropped four basis points to 1.72% while the 30-year yield fell three basis points to 2.89%. The two-year fell two basis points to 0.23%.

Indeed, attention is turning to the FOMC announcement, but not all analysts expect the Fed to launch QE3. "The Fed is going to ease further, likely with communication tools - extending the forward-looking language," wrote Michael Gregory, senior economist at BMO Capital Markets. "QE3 is definitely on the table, but employing it now would imply a shift in the Fed's policy formation process. Besides, if QE pre-conditions don't become evident in the weeks ahead, they will probably be evident by early next year when the U.S. economy gets smacked with some fiscal consolidation. QE is only a matter of time; it's just not this time."

In other economic news, initial jobless claims rose 15,000 to 382,000 for the week ending Sept. 8, higher than the 370,000 expected by economists. Continuing claims fell 49,000 to 3.283 million for the week ending Sept. 1.

"As we expected, potential fallout from Hurricane Isaac appears to have put upward pressure on initial jobless claims in the latest week and we would expect claims to fall back somewhat next week," wrote economists at RDQ Economics. "We judge the underlying level of claims to be somewhere around the 370,000 mark and, even with the latest week's inflated reading, the four-week average is only 375,000. The weak gain in August payrolls remains something of an enigma in our opinion."

In other economic news, the producer price index rose 1.7% in August, coming in above the 1.4% expected increase. Core PPI increased in line with expectations at 0.2%.

"The August PPI report is an interesting table-setter to this morning's policy discussion at the FOMC," RDQ economists wrote. "The monthly increase in the PPI was the fourth largest since 1974 and we expect it to be followed by an outsized 0.7% increase in the CPI in tomorrow's report. There is not one whiff of deflationary pressures at the finished goods level in this report as overall prices have risen at an 8.2% rate over the last three months, while core finished goods prices have advanced at a 3.6% rate."

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