Tax-exempts rallied Friday after a friendly employment report prompted Treasury market traders to push the yield on the 30-year bond through 6%.
The credit markets were bolstered by more signs of a suffering economy as nonfarm employment declined by 39,000, while manufacturing jobs dropped 42,000 during August, the Labor Department reported.
The Treasury long bond took off and managed to break resistance at 6% after the report was released. Government traders pushed the yield to a 5.98% in early trading. but only briefly. The bond quickly settled back to 6%, where it appeared it would stay for the remainder of the session. But market players gave it one more shove before the early 1 p.m., eastern daylight time, close of New York trading, pushing the yield down to 5.93%.
The Treasury market's strength spurred buyers to jump into the tax-exempt arena, although futures led the cash market higher.
The December municipal contract settled Up 21/32 to 104.18.
Cash prices were quoted up 1/2 point on average, but some bonds made gains of 5/8 point, traders said.
Secondary trading was spotty, with some dealers reporting brisk action, while others said it was lackluster.
But reflecting the increased buyer demand, The Blue List of dealer inventory fell $224.6 million to $1.22 billion.
In secondary dollar bond trading, prices were quoted up anywhere from 1/4 to 5/8 point, traders said.
In action just before the early close, New York State Power Authority 5 1/4s of 2018 were quoted at 99 1/2-100 to yield 5.28%, Florida State Board of Education 5 1/4s of 2023 were quoted at 98 3/8-1/2 to yield 5.35%, and Los Angeles Convention Center MBIA 5 1/8s of 2021 were quoted at 5.37% bid, 5.35% offered. In the short-term note sector, yields were quoted unchanged to three to five basis points lower on the day, traders said.
New-issue activity was nonexistent but underwriters reported good going-away business from new deals.
In the high-grade sector, First Boston Corp., senior manager for $93 million of Georgia general obligation bonds, reported an unsold balance of $235,000.
Looking ahead, by most accounts, the municipal market is in good shape, despite the fear of a price correction after such a big run-up.
Traders noted that forward supply is light - The Bond Buyer calculated 30-day visible supply at $2.66 billion - the Treasury market is stable, and bond funds appear to have plenty of cash to invest. But, unless the Treasury 30-year bond remains below 6%, municipals will have a tough time making any more significant gains, traders said.
Buyers have shown some resistance to the record low yields, and prices are likely to grind higher at best.
"In the coming weeks we could break even higher, but it's not likely," said one trader. "The customers are picky at these levels. "
Traders said the market is likely to open on the defensive today and could be marked by profit taking, as firms get back to full strength after the holiday and are greeted with sky-high bond prices.
The new-issue calendar is extremely light, with only $2.3 billion of new bond and note deals expected this week.
The negotiated new-issue slate features 9-198 million of Connecticut special tax obligation refunding bonds, to be priced by Bear, Stearns & Co.; $100 million of Michigan State Hospital Finance Authority revenue refunding bonds, to be priced by Goldman, Sachs & Co.; and $81 million of Detroit School District general obligation bonds, to be priced by Grigsby Brandford & Co.
The competitive calendar is dominated by $249 million of Maryland Department of Transportation revenue bonds and $167 million of Nevada refunding bonds.
The economic calendar is also light, but the producer price report due out on Friday will be closely watched. Inflation has been in the market's favor and any jump would probably spook the credit markets.