The tax-exempt market made a definitive shift Thursday morning with the market posting gains as traders said yields were high enough to finally look attractive to buy.

One Los Angeles trader said the market felt three to five basis points stronger in the morning with much more conviction than the small gains posted earlier in the week.

"It's feeling strong right now," the trader said. "Everything is up. There is a lot less supply out there and a not a lot of bonds are coming to market. Treasuries are up again and outflows might have finally subsided."

He added that prices are cheap enough that buyers are comfortable participating in the market again. "We have had such major outflows for the past several weeks that it seems like yields are attractive enough to bring people in."

In the primary, Goldman, Sachs & Co. held preliminary pricing for $188.4 million of Turnpike Authority of Kentucky economic development road revenue bonds, rated Aa2 by Moody's Investors Service, AA-plus by Standard & Poor's, and A-plus by Fitch Ratings.

Yields ranged from 0.43% with a 2% and 5% coupon in a split 2015 maturity to 4.73% with a 4.625% coupon and 4.70% with a 5% coupon in a split 2033 maturity. The bonds are callable at par in 2023.

In the competitive market, Richmond, Virginia, is expected to auction $142.8 million of general obligation bonds, rated Aa2 by Moody's and AA-plus by Standard & Poor's. The deal will come in two series consisting of $131.5 million and $11.3 million.

On Wednesday, yields on the triple-A Municipal Market Data scale ended as much as four basis points firmer. The 10-year yield fell four basis points to 2.95% and the 30-year yield dropped two basis points to 4.46%. The two-year was steady at 0.43% for the 40th straight session.

Yields on the Municipal Market Advisors scale ended as much as three basis points lower. The 10-year and 30-year yields fell two basis points each to 3.10% and 4.57%, respectively. The two-year closed unchanged at 0.55% for the 19th session.

Treasuries were stronger Thursday morning for a second session. The benchmark 10-year and 30-year yields fell five basis points each to 2.87% and 3.81%, respectively. The two-year yield slid one basis point to 0.44%.

In economic news, initial jobless claims fell 31,000 to 292,000 for the week ending Sept. 7, a surprise drop and the lowest level in over seven years. Economists had expected a 7,000 increase to 330,000. Continuing claims for the week of Aug. 31 fell to a five-year low, dropping 73,000 to 2.871 million.

"It is impossible for us to evaluate the impact of the computer upgrades in two states that delayed the processing of applications and, according to the BLS, were a major factor in the decline in initial claims in the latest week," wrote economists at RDQ Economics. "We can only wait for more data and use the four-week average to smooth through any resulting volatility as this effect reverses."

"However, regardless of the reason for the decline in claims, the four-week average had already fallen below 330,000, which signaled to us that layoffs continue to decline," the economists added. "The drop in continuing claims lowered the insured unemployment rate to 2.2% in the last week of August, which is the lowest since May 2008."

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