The municipal market was unchanged to slightly weaker Friday in light activity.
"It's a dead Friday in the summer," a trader in New York said. "Munis seem to have no direction and a lethargic tone."
"It's really quiet," a trader in Chicago added. "Certainly we're off a bit, but not as far down as we've been the past few days."
The Treasury market, however, showed gains Friday. The yield on the benchmark 10-year Treasury note, which opened at 4.21%, finished at 4.15%. The yield on the two-year note was quoted near the end of the session at 2.87% after opening at 2.93%.
The Federal Reserve will hold a policy-setting meeting on interest rates tomorrow and Wednesday. Although Treasury yields rose last week on the perception the Fed would start targeting inflation with rate hikes, Gary Thayer, senior economist at Wachovia Securities,said it was unlikely the Fed would increase its target rate this week.
"We expect the Fed will hold policy steady, and we're in the consensus on that," he said. "If you actually look at the underlying economy the Fed has to deal with, it doesn't give them a lot of room to raise rates."
Trying to balance a weak economy versus the threat of inflation, the Fed may try to stabilize the dollar through public pronouncements or other means to avoid having to raise rates, Thayer said. A stronger dollar could help slow surging commodity prices.
Prices on options on federal funds futures implied the market sees more than an 88% probability the Fed will keep rates steady at 2.0% at this week's meeting, according to the federal funds futures traded on the Chicago Board of Trade, a proxy for market expectations, at 3:45 p.m. EDT on Friday. The implied probability the Fed keeps rates the same during its August meeting is closer to 65%. However, Fed fund futures rates show almost an 80% probability there will be at least a 50 basis point increase in the target rate by the end of the year.
In addition to the Fed meeting, a slate of economic data will be released this week. The May durable goods and May new home sales data will be released Wednesday, followed Thursday by the final first-quarter gross domestic product, initial jobless claims for the week ended June 21, continuing jobless claims for the week ended June 14, and existing home sales for May. On Friday, May personal income, May personal consumption, the May core personal consumption expenditures deflator, and the final June University of Michigan consumer sentiment index will be released.
Economists polled by IFR Markets are predicting no change to durable goods, an 0.8% dip in durable goods excluding transportation, 515,000 new home sales, a 1.0% annual rate for first quarter GDP, 380,000 initial claims, 3.100 million continuing claims, 5.0 million existing home sales, a 0.4% rise in personal income, a 0.7% increase in personal consumption, a 0.2% uptick in the core PCE deflator, and a 56.9 Michigan sentiment reading.