A last-minute compromise on the fiscal cliff late Tuesday night sent equity markets soaring Wednesday morning and pushed fixed-income markets lower on a risk-on trade.
The Dow Jones Industrial Average soared over 260 points, or 2%, to 13,366 while the Standard & Poor's 500 Index also jumped 2%, or 28.4 points, to 1,454. The Nasdaq jumped 2.55%, or almost 77 points, to 3,096.
That risk-on trade pushed Treasuries lower and while municipal bonds generally follow Treasuries, not everyone agreed munis were significantly weaker.
"With equities up so much Treasury yields have backed off considerably," said John Hallacy, municipal research strategist at Bank of America Merrill Lynch. "One would think munis generally track Treasuries but we don't have a lot of issuance this week so it's a matter of people thinking about what the potentials are here."
He added, "It's a big rollover month with a lot of bonds coming due. So there is going to be a lot of fresh cash once again chasing supply. So that might create the odd environment where we are somewhat richer than other fixed-income markets, at least for the near term. Munis also came through the fiscal cliff process relatively unscathed so that will help."
Hallacy added the sequestration has been delayed for two months and other spending cuts, including those that could affect municipalities, may be considered by Congress within that time.
The bond markets reopened for a full day of trading after a full close Tuesday and an early close Monday for the New Year's holiday.
On Monday, the Municipal Market Data scale finished flat. The 10-year finished steady at 1.72%. The 30-year yield was steady at 2.83% for the sixth session while the two-year closed flat at 0.31% for the ninth consecutive session.
Treasuries were much weaker Wednesday morning. The benchmark 10-year yield jumped eight basis points to 1.84% while the 30-year yield soared 10 basis points to 3.05%. The two-year yield rose two basis points to 0.28%.
In economic news, the ISM Manufacturing Index climbed to 50.7 in December from 49.5 in November. The figure beat economists' expectations of 50.2.
"The December ISM report was consistent with the data for the quarter as a whole that showed manufacturing activity continuing to expand at a modest pace with orders growing slowly," wrote economists at RDQ Economics. "Given the pressure that manufacturing was under from recession in Europe, a slowdown in Asia, and uncertainty over the fiscal cliff, this performance in the fourth quarter was probably as constructive as one could have hoped for and we view the report as consistent with the view that growth will continue into 2013 but at the lackluster pace that has been the hallmark of the recovery thus far."