The municipal market weakened as much as 10 basis points Tuesday as the absence of an extension of the Build America Bonds program in a new tax bill weighed heavily on secondary trading.

The muni yield shift was the biggest since Nov. 17.

Traders said tax-exempt yields were higher by one or two basis points within five years, three to five basis points in maturities from six to 20 years, and eight to 10 basis points on the long end.

An extension of the BAB program, set to expire on Dec. 31, was not part of the framework for a compromise tax bill that was agreed to Monday night by key lawmakers from both parties and administration officials, congressional sources confirmed Tuesday morning. That uncertainty is weighing heavily on a muni market that has issued about $175 billion of BABs since the program's inception in April 2009 and is hoping for an extension.

"There had been a growing sentiment in the market recently that a BAB extension was likely to happen, but this news is somewhat of a surprise," a New York trader said. "We're cheapening up quite a bit, especially out long, and I think it's mostly due to the fact that we're back to square one in terms of knowing what's likely to happen with the BAB program. It certainly looks less promising."

In the new-issue market Tuesday, Goldman, Sachs & Co. priced $1.5 billion of taxable BABs for the New Jersey Turnpike Authority. The BABs mature in 2041 and were priced to yield 287.5 basis points over the 30-year Treasury yield.

The credit is rated A3 by Moody's Investors Service, A-plus by Standard & Poor's, and A by Fitch Ratings.

Citi priced $854.7 million of unemployment compensation obligation assessment revenue bonds for the Texas Public Finance Authority in two series.

Bonds from the $554.7 million series mature from 2018 through 2020, with split maturities in both 2018 and 2019. Yields range from 2.34% with a 5% coupon in 2018 to 2.68% with a 5% coupon in 2020. Bonds maturing in 2018 are callable at par in 2015, while bonds maturing in 2019 are callable at par in 2014 and bonds maturing in 2020 are callable at par in 2013.

The deal also contains a $300 million series, which matures in 2020, yielding 2.50% priced at par. The credit is rated Aa1 by Moody's, AAA by Standard & Poor's, and AA-plus by Fitch.

The Municipal Market Data triple-A scale yielded 2.87% in 10 years Tuesday, up six basis points from Monday's 2.81%, while the 20-year scale rose nine basis points to a 4.11% yield. The scale for 30-year debt widened 12 basis points, to 4.48%.

"The weakness was definitely more substantial and more widespread out long, but you felt it no matter where in the curve you're talking or what you were trading," a trader in San Francisco said. "Treasuries got hammered after the tax compromise and we followed right along. Markets don't particularly like uncertainty, and that's exactly what we're looking at now with a possible BAB extension."

Tuesday's triple-A muni scale in 10 years was at 90.8% of comparable Treasuries and 30-year munis were at 101.6%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 108.2% of the comparable London Interbank Offered Rate.

The Treasury market sold off Tuesday while stocks rallied following the tax compromise, which will include a two-year extension of President George W. Bush's tax cuts.

The benchmark 10-year note finished at 3.11% after opening at 2.92%. The 30-year bond was quoted near the end of the session at 4.38%, after opening at 4.24%. The two-year note finished at 0.53% after opening at 0.42%.

The Treasury Department Tuesday auctioned $32 billion of three-year notes with a 3/4% coupon at a 0.862% yield, a price of 99.67. The bid-to-cover ratio was 2.91. The Federal Reserve banks also bought $465. 5 million for their own account in exchange for maturing securities.

Elsewhere in Tuesday's new-issue market, the Wayne County, Mich., Airport Authority came to market with $443 million of airport revenue refunding bonds in four series. Siebert Brandford Shank & Co. priced $225.1 million of the debt in two series.

Bonds from the $216.2 million series mature from 2011 through 2018 and are subject to the alternative minimum tax. Yields range from 2.40% with a 3% coupon in 2012 to 4.73% with a 5% coupon in 2018. Bonds maturing in 2011 were not formally re-offered. Bonds from this series were not callable.

Bonds from the $8.9 million series mature in 2011 and 2013 and are not subject to the AMT. Bonds maturing in 2013 yield 2.29% with a 5% coupon, while bonds maturing in 2011 were not formally re-offered. These bonds are not callable.

JPMorgan priced $217.9 million of the debt in two series. Bonds from the $188.3 million series, which are not subject to the AMT, mature from 2011 through 2022. Yields range from 1.90% with a 5% coupon in 2012 to 4.94% with a 5% coupon in 2022. Bonds maturing in 2011 were decided via sealed bid. These bonds are callable at par in 2020.

Bonds from the $29.7 million series, which are not subject to the AMT, mature from 2011 through 2021, with yields ranging from 1.90% with a 2% coupon in 2012 to 4.80% with a 5% coupon in 2021. Bonds maturing in 2011 were decided via sealed bid. These bonds are callable at par in 2020.

The credit is rated A2 by Moody's, A by Standard & Poor's, and A-minus by Fitch.

Colorado competitively sold $325 million of education loan program tax and revenue anticipation notes to various bidders. Goldman Sachs won the largest portion of the deal, worth $280 million, yielding 0.33% with a 2% coupon. Piper Jaffray & Co. won $25 million, yielding 0.33% with a 2% coupon, and Barclays Capital won the remaining $20 million, also yielding 0.33% with a 2% coupon.

The credit is rated MIG-1 by Moody's and SP-1-plus by Standard & Poor's.

Barclays Capital priced $129.4 million of GO refunding bonds for the Philadelphia School District. The bonds mature from 2011 through 2024, with yields ranging from 1.02% with a 3% coupon in 2011 to 4.75% with a 5.25% coupon in 2024. The bonds, which are callable at par in 2020, are rated Aa2 by Moody's, A-plus by Standard & Poor's, and AA by Fitch.

Citi priced $119.9 million of refunding revenue bonds for the Dormitory Authority of the State of New York. The bonds mature from 2011 through 2013, and in 2015, 2016, 2019, and 2020. Yields range from 0.96% with a 4% coupon in 2012 to 3.54% with a 5% coupon in 2020.

Bonds maturing in 2011 will be decided via sealed bid. The bonds, which are not callable, are rated Aa3 by Moody's and AA-minus by Fitch.

Morgan Stanley priced $119.1 million of educational facilities revenue bonds for the Virginia College Building Authority. The bonds mature from 2012 through 2025, with term bonds in 2030, 2034, and 2041. Yields range from 0.90% with a 2% coupon in 2012 to 5.10% with a 5% coupon in 2041. The bonds, which are callable at par in 2020, are rated AA by Standard & Poor's.

The economic calendar was light Tuesday.

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