Weekly Indexes Higher as Sell-Off Wipes Out Lingering Firmness

The Bond Buyer’s weekly yield indexes were mostly higher this week, as a sell-off yesterday wiped out any lingering firmness in the long end and tempered the short-end gains tax-exempts had seen in the previous two sessions after the Federal Reserve’s 75 basis point cut of the federal funds rate.

“There’s total market dysfunction right now,” said Fred Yosca, managing director and head of trading at BNY Capital Markets. “For the week, we’re still firmer in the first five years for sure. After six or seven years, though, we’re not. But past 12 years or so, there’s literally no bid.”

The municipal market was mixed Friday heading into a three-day weekend, reflecting short-end gains and long-end losses. Traders said tax-exempt yields were down two or three basis points on the short end, but were up one or two basis points in maturities longer than 15 years.

However, when market participants returned from the holiday weekend on Tuesday, they were met with a surprise, as the Fed’s dramatic 75 basis point cut sent Treasury and municipal yields lower, and left participants uncertain about future Fed monetary policy action.

The cut, which brought the target rate to 3.50% from 4.25%, marked the first monetary policy action taken by the Federal Open Market Committee between scheduled meetings since Sept. 17, 2001, the first trading day after the Sept. 11, 2001, terrorist attacks. It also marked the first 75 basis point lowering of the rate in more than 23 years, since October 1984.

While the municipal market firmed by as much as 15 basis points on the short end and up to three basis points in the longest maturities, trading activity was situated mostly in bonds maturing within 10 years.

Tax-exempts were again firmer Wednesday. Short-end yields were lower by as much as eight to 10 basis points, intermediate bonds were roughly three to five basis points firmer, and paper on the long end was showing gains of up to two basis points, traders said.

However, the municipal market was substantially weaker yesterday as the impact of a stock market rebound that made Treasuries about-face trickled into tax-exempts. Traders said tax-exempt yields were higher by three to five basis points on the short end, and as much as 10 basis points on the long end.

The Bond Buyer 20-bond index of GO yields rose 14 basis points this week, to 4.29%, which is the highest since 4.32% on Jan. 3.

The 11-bond index rose 12 basis points to 4.20%, which is the highest since 4.24% on Jan. 3.

The revenue bond index rose eight basis points to 4.71%, which is the highest since 4.72% on Jan. 3.

The 10-year Treasury note, however, fell eight basis points to 3.65%, which is the lowest since 3.54% on July 2, 2003.

The 30-year Treasury bond rose two basis points to 4.36%, but remained below its 4.45% level from two weeks ago.

The Bond Buyer one-year note index fell 49 basis points to 2.08% from 2.57% last Wednesday. This is the lowest level for the index since Dec. 29, 2004, when it was also 2.08%. This is the fourth-largest one-week decline on record for the index, which began on July 12, 1989.

The weekly average yield to maturity on The Bond Buyer 40-bond municipal bond index rose two basis points to 4.76%, but it remained below the 4.78% level from two weeks ago.

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