A strong July jobs report shoved municipals toward the ropes Friday, but tax-exempts escaped the pummeling that sent Treasuries on a nearly 1 1/2 pointdive to the mat.

An expected scantiness of upcoming supply, good distribution for last week's new deals, and few actual trades helped muni bonds to better withstand the employment news, one analyst said.

The analyst pegged dollar bonds down 3/4 point overall, and off more than a point in spots. Yields on highgrade issues rose by roughly seven basis points, he said.

In debt futures, the September municipal contract settled down more than 1 1/8 points at90 31/32s. Friday's September MOB spread was negative 389, down from negative 398 on Thursday.

"Activity was light, but there were a lot of bid-wanteds," the analyst said. Bid lists were not in evidence however, he said.

A municipal trader observed that "most of the selling has been by the street, which I guess is the good part about it." He added that institutions didn't appear to have the need to sell on Friday.

The market did see institutional selling earlier in the week, the trader said. He said that he considered the selling somewhat odd given the improved cash flow the funds appeared to be experiencing.

"We had some pretty good selling [last] Tuesday and Wednesday," the trader said. Just because institutions refrained from selling Friday, doesn't mean they won't start today, he said.

A second trader said that while municipals were "quoted down and felt down" Friday, not much was going on. It was "very, very quiet," he said, 'It's a typical Friday."

The Labor Department reported that nonfarm jobs increased by 259,000 in July, higher than the 200,000 figure analysts expected. The department also revised its June nonfarm payrolls report to reflect an increase of 356,000 jobs instead of the 379,000 gain initially reported.

A top underwriter at one firm said that in addition to expecting a smaller jump in July jobs, the market was also hoping for a bigger downward revision in the 3une nonfarm jobs figure.

While the street "had its fingers crossed" that a less-than-robust report might keep the Federal Reserve from tightening, now it's just a question of whether the Fed acts before this week's Treasury auctions or waits until the Aug. 16 Federal Open Market Committee meeting, the underwriting official said. If the Fed is going to act quickly, it's more likely to move before the this week's quarterly refunding auctions than after them, the official said. Investors would be hurt by any immediate Fed action after the refunding, he said.

In other news Friday, some Puerto Rico Aqueduct and Sewer Authority bonds improved by 100 basis points in one week, according to Sheila Amoroso, senior portfolio manager of the Franklin Puerto Rico Tax-Free Income Fund.

The improvement came after a government-backed guarantee for the bonds was signed into law by Gov. Pedro Rossello on July 29, according to Gregory Kaufman, executive vice president of the Government Development Bank for Puerto Rico.

"It's a GO backing to a PRASA obligation," Kaufman said. Amoroso said the authority's 7 7/8% bonds of 2017 were trading at yield of 6.30% on July 29. On Friday, they were trading at 5.30% to a 1998 call.

Government backing for the PRASA bonds was part of an "initial corrective action," taken following downgrades to non-investment grade by Moody's Investors Service and Standard & Poor's Corp., Kaufman said.

Standard & Poor's downgraded the bonds to BB from BBB on June 13. Moody's cut the bonds to Ba from Baa on June 9.

At the time of the downgrades, the development bank of Puerto Rico announced that a government guarantee would be sought for the bonds, but in the interim the bank offered to purchase the bonds at par until Oct. 31 or when the guarantee took effect, whichever was earlier, Kaufman said.

Based on the guarantee, the bank has requested that Standard & Poor's and Moody's re-rate the bonds, he said. Kaufman added that while "you don't rehabilitate a credit by guaranteeing it," steps are underway to address the concerns the rating agencies cited in their downgrades.

In announcing its downgrade, Standard & Poor's cited "a lack of needed rate increases since 1986, with none slated for future fiscal years; a poor financial position that has significantly worsened over the last three fiscal years; and uncertainties surrounding the sufficiency of moneys available to fund a large and mandated $2.4 billion capital improvement plan."

While the guarantee gives PRASA bonds the "full faith and credit backing" of the government of Puerto Rico, Kaufman said that nothing in its financial picture suggests PRASA will need it.

"PRASA does not have a cash-flow problem in meeting its financial obligations," the official said.

Charles Gasparino contributed to this column.

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