Prices dashed higher yesterday in sympathy with Treasuries, and players said the market was coiled like a spring in the face of today's employment report.
Tax-exempts were awakened from the summer doldrums by a Treasury rally, sparked by the jobless claims report.
Initial state unemployment insurance claims fell 7,000 to a seasonally adjusted 324,000 in the week ended Aug. 28.
The credit markets expected a bigger drop in claims and bonds began to trade higher on the heels of the report.
The Treasury 30-year bond hit 6.05% before mid-session. It managed a 6.03% yield by mid-afternoon and held onto that level near the end of New York trading.
Municipal prices had risen 3/8 to 1/2 point on average by session's end. Many traders reported an active secondary and good going-away business from new deals throughout the day.
Thanks to the gains, The Bond Buyer Municipal Bond Index reached a record high of 104.14, up 1/4 from Wednesday, pushing the average yield to maturity of the 40 bonds in the index to a record low of 5.55%.
In the debt futures market, the December municipal contract settled up 18/32 to 103.29. The MOB spread, meanwhile, widened to negative 481 as governments outran municipals.
Yesterday's thrust higher came despite the specter of today's employment report, which has the potential to hurl the markets off record highs if it reflects an improving jobs sector.
Market players nonetheless appeared confident enough to hold bonds going into the report.
"People are willing to own it here," one trader said late yesterday. "They feel the jobs number will be a good one and they can trade it up and go home for the holiday."
Some market players predicted the Treasury long bond would penetrate 6% on a good number. but skeptics noted profit-takers would immediately knock it off the highs.
"Let me put it this way, when the bond hits 6% and then backs up to 6.01%, I'll sell it," one trader said.
But there was very little talk of selling during yesterday's session.
Supply continued to decline, reflected by The Blue List of dealer inventory, which fell $94.3 million, to $1.45 billion.
Secondary trading was highlighted by some sizable blocks of Florida and New York bonds changing hands, traders said.
For example, players said a block of Florida State Board of Education 5 1/4s of 2023 traded right around 5.41%.
In follow-through business, Lehman Brothers, senior manager, freed $202 million Omaha Public Power District electric system revenue bonds from syndicate restrictions.
The 5.30s of 2016 were quoted at 5.40% bid, 5.39% offered, late in the day, at the original reoffering yield.
In secondary dollar bond trading, prices were quoted up 1/8 to as much as 1/2 point, traders said.
In late action, Los Angeles Convention Center MBIA 5 1/8s of 2021 were quoted at 5.41% bid, 5.39% offered; Philadelphia Water Authority 5 1/2s of 2014 were quoted to yield 5.55%; and Michigan Building Authority AMBAC 5.30s of 2016 were 5.41% bid, 5.38% offered.
In the short-term note sector, yields were two to five basis points lower on the day.
In late action, traders quoted California Rans at 2.73% bid, 2.68% offered; Los Angeles Trans at 2.75% bid, 2.70% offered; and New York State notes at 2.50% bid, 2.40% offered.