The municipal bond market was unchanged Friday on a slow day of trading to kick off 2009.

One trader in New York described the muni market Friday as "dead." No municipalities scheduled bond sales, in either the competitive or negotiated sectors.

"I'm not seeing a thing, literally," said another trader in New York. "I'm on extreme skeleton staff. We've gotten about one call. I don't see anything going on. It's very quiet."

The subdued trading came on the heels of a rally last month to close out a turbulent 2008 for munis.

The three major weekly Bond Buyer bond indexes now show their lowest yields since at least October.

The Bond Buyer municipal bond index is at 99-03, up from 94-29 a month ago. The index is still down substantially over the past year.

Trades reported to the Municipal Securities Rulemaking Board were mixed.

A customer bought from a dealer a New York City general obligation bond Series G maturing 2035 at a yield of 5.75%, down a basis point from Wednesday.

A customer bought from a dealer an Anaheim Public Financing Authority lease revenue bond, maturing 2025, at 6.9%, unchanged from Wednesday, the last day the market was open.

The placid day for munis contrasted with a rocky session in the Treasury market. Treasuries tumbled despite a report showing the sharpest contraction in manufacturing activity in decades in December.

The Institute for Supply Management's gauge of manufacturing shrank to 32.4 in December, down from 36.2 in November and 50 in July. A number below 50 signals a contraction in manufacturing. Economists expected a reading of 35.5, according to Thomson Reuters.

This was the weakest reading in nearly three decades.

Indexes measuring new orders and prices sank to their lowest levels since the late 1940s, ISM said.

Kim A. Rupert, managing director of global fixed income at Action Economics LLC, said data continue to reflect a struggling economy and "add to concerns that this will be a pretty deep and long-lasting recession."

The market staged a counterintuitive response - stocks rose and Treasuries fell.

The yield on the benchmark 10-year Treasury swelled 19 basis point to 2.41%. The 30-year Treasury added 15 basis points to 2.82%. The two-year note climbed 10 basis points to yield 0.86%.

The Dow Jones industrial average, meanwhile, surged 258 points, or 2.9%.

Normally bad economic news pushes Treasury prices up because it stimulates appetite for safe-haven investments. Treasuries, though, have been on such a robust rally it would be hard to push prices up further with more bad news, Rupert said.

In other words, she said, in dragging Treasury yields down the market has already braced for further weakness in manufacturing.

The yield on the 10-year Treasury compressed below 2.08% last month after reaching as high as 4% in October.

"We're just seeing some profit-taking [in Treasuries] after yields are still hovering near record lows," she said. "It's just hard to buy at these levels."

Rupert expects a broad sell-off in Treasuries at some point, as "this huge flight-to-safety bid has to unwind."

Once the unwinding begins, Rupert said, "everybody and their brother is going to be trying to get out of that trade at the same time."

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