A surprise jump in April nonfarm jobs on Friday knocked Treasuries more than two points lower and pushed municipals down 1 1/4 to 1 1/2 point overall.
But selling volume was light despite the downturn in prices traders said.
"We didn't see a lot of customer selling," one municipal trader said. "It wasn't the kind of a day where you saw dozens of bid lists from customers."
Dollar bonds were down 1 1/4 to 1 1/2 point. Yields on high-grade issues were higher by 12 basis points overall, and by roughly 20 basis points in the shorter maturities.
One trader said little selling occurred because players had hunkered down. "No one's coming out of their foxholes," he said.
Two-sided markets were scarce and, when they could be found, cavernous spreads existed between the bid and asked sides.
"You could jackknife a truck between the bid side and the offered side," the trader said. "You're never close enough to get anything done."
Traders also noted that Fridays are generally quiet.
Municipals are technically set up for good performance because of lack of supply and greater demand because of higher taxes. "But that hasn't worked out yet, and that's what's really scary," the trader said.
July 1 is a big call date, which take bonds out of investors hands, he said. The key is whether retail stays in the market or jumps out, he added.
If the funds can make it to July 1 without seeing massive redemptions, the market should be in good shape to outperform Treasuries, he said.
Treasury market prices shed more than two points Friday as strong gains in April employment indicated that the U.S. economy continued to grow at the start of the second quarter.
More selling took place after the Federal Reserve failed to tighten credit after the strong jobs figures.
The yield on the Treasury's 30-year bond climbed to its highest level since December 3, 1992. It closed down more than 2 1/8 points to yield 7.53%.
With nonfarm jobs up so dramatically and the unemployment rate's drop, "the market is looking for a fed-engineered rate hike ASAP," said John Lonski, senior economist at Moody's Investors Service.
"I'm surprised that we went up to 7.50% so quickly," he added. He was surprise at the quickness because of "the lack of material evidence of a faster rate of inflation."
Lonski said Friday's payrolls news makes it likely that the Federal Reserve will tighten the Fed Funds rate by 50 basis points, not 25. That would make for a 4.25% Fed funds rate, which the economist said could reach 4.5% by July. The rate could get to 5% near the end of this year.
"We still have no evidence that higher borrowing costs have succeeded at materially slowing economic activity. Not until the U.S. economy shows unambiguous signs of faltering can we conclude that bond yields have peaked," Lonski said.
The Fed will probably tighten the rate sometime around the May 17 Federal Open Market Committee meeting, he said.
That could change, however, depending on what this week's inflation report brings.
Lonski sees both the producer price index's overall and core rates rising by up 0.2% and both core and overall consumer price index up 0.3%.
"A core CPI over 0.3% would trigger a deep sell-off of Treasury securities that will force the Fed's hand," Lonski said.
On a more specific note, Denver International Airport 6 3/4s bonds of 2022 were trading at 7.60% on Friday, about five to 10 basis points cheaper than Thursday's level. A trader however said the sharp losses the municipal market suffered Friday were behind that decline.
"Obviously, we are surprised and disappointed with the news that has come out in the last week," said Jerry Webman, a managing director who oversees close to $13 billion of municipal bond assets for The Prudential. "It injects an element of doubt." Webman said Denver Airport bonds are a "significant holding" for Prudential.
Webman, however, said he still believes the project is viable.
"We continue to be confident that this is a project that's going to work out in the long term," he said.
In debt futures, the June municipal contract closed down two points to 89 13/32s. The June MOB spread on Friday was negative 418, down from negative 419 on Thursday.
Long-term new issue sales last week totaled $1.86 billion, down roughly $1 billion from the previous week's $3 billion. Negotiated deals totaled $1.86 billion, down from $2.1 billion. Competitive sales were $707 million compared with $809 million a week earlier.
Anticipated sales this week total $3.97 billion, of which $2.78 billion are negotiated deals and $1.19 billion are competitive.
The 30-day visible supply totals $5.36 billion today, up $374 million from Friday. It consists of $2.31 billion of competitive sales, up $488 million, and $3.04 billion of negotiated sales, down $113 million.
The volume of bonds in Standard & Poor's Corp.'s The blue List totaled $1.67 billion Friday, down $58 million from Thursday.