The municipal market was slightly firmer yesterday. Traders said tax-exempt yields were lower by about three basis points overall.

"Munis are doing a bit better today, and they've gotten progressively firmer as the day has gone on," a trader in Los Angeles said. "We were probably better a basis point or two early on, and into the afternoon, but yields have crept lower since then, and now I'd say we're probably better a solid three basis points. There's really nothing positive going on with Treasuries right now, so we're just kind of doing our own thing. There's been some demand out there, so business is getting done to a degree."

Trades reported by the Municipal Securities Rulemaking Board yesterday showed some gains. A dealer sold to a customer California 4.25s of 2033 at 6.15%, down one basis point from where they were sold Monday. A dealer sold to a customer New York 5s of 2027 at 5.29%, two basis points lower than where they traded Monday. A dealer bought from a customer insured Harris County, Tex., 4.75s of 2032 at 5.40%, one basis point lower than where they traded Monday. Bonds from an interdealer trade of insured Washington 5s of 2028 yielded 5.00%, down two basis points from where they were sold Monday.

In the new-issue market yesterday, JPMorgan priced for retail investors $350 million of power supply revenue bonds for the California Department of Water Resources in two series. The deal will be priced for institutional investors today. Bonds from the $150 million Series F-3 contain split maturities in both 2020 and 2021. Bonds maturing in 2020 yield 4.49%, with coupons of 4.375% and 5%. Bonds maturing in 2021 yield 4.74%, with coupons of 4.625% and 5%. Bonds from the $200 million Series F-5 contain split maturities in 2022, which yield 4.90% with coupons of 4.75% and 5%. All bonds are callable at par in 2018. The credit is rated Aa3 by Moody's Investors Service and A-plus by both Standard & Poor's and Fitch Ratings.

The Treasury market showed losses yesterday. The yield on the benchmark 10-year Treasury note, which opened at 2.48%, finished at 2.47%. The yield on the two-year note was quoted near the end of the session at 0.79% after opening at 0.76%. The yield on the 30-year bond, which opened at 3.02%, was quoted near the end of the session at 3.05%.

The Treasury Department sold $8 billion of inflation-indexed 10-year notes at a 2.245% yield, an adjusted price of about 98.930, with a 2 1/8% coupon. The bid-to-cover ratio was 2.48. Federal Reserve banks bought $622.3 million for their own accounts.

In a weekly report, George Friedlander, managing director and fixed-income strategist at Citi, wrote that he believes "the best values continue to be in longer-term maturities, as well as in the higher rated pars of the so-called high yield muni market."

"We do expect the muni market to cheapen up slightly as the new-issue calendar is placed, and there are continuing concerns about market liquidity, secondary market support by dealers and others, and a host of other issues," Friedlander wrote. "We expect some of the best values to occur in the new issue market, as issues are priced to sell in an environment where dealers still fear having to own unsold balances. Key reasons to be optimistic include the extremely steep slope of the muni market, and the massive amount of cash in individual investor hands."

In economic data released yesterday, the Institute for Supply Management's non-manufacturing business activity composite index was 40.6 in December, up from 37.3 in November, on a seasonally adjusted basis. Economists polled by Thomson Reuters had expected a 37.0 level.

New factory orders for manufactured goods slumped 4.6% in November. The factory order decrease, to $384.586 billion, was larger than the 2.5% decrease projected by Thomson and came after a revised 6.0% decrease to $403.315 billion in October. Excluding transportation, the level of all new manufacturing orders fell 4.2% to about $340.4 billion in November, following a 5.1% drop in October to $355.5 billion.

Also, at a meeting on Dec. 15 and 16, members of the Federal Open Market Committee agreed that "maintaining a low level of short-term interest rates and relying on the use of balance sheet policies and communications about monetary policy would be effective and appropriate in light of the sharp deterioration of the economic outlook and the appreciable easing of inflationary pressures," according to minutes of that meeting released yesterday.

A slate of additional economic data will be released this week, with the December non-farm payrolls report closing out the week on Friday. Initial jobless claims for the week ended Jan. 3 and continuing jobless claims for the week ended Dec. 27 will be released tomorrowNovember wholesale inventories and sales will be released Friday.

Economists polled by Thomson are predicting 540,000 initial jobless claims, 4.500 million continuing jobless claims, and an 0.8% drop in wholesale inventories.

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