Weekly Indexes Push Higher as Munis Grew Even Weaker

The Bond Buyer's weekly yield indexes pushed higher this week, as municipals grew consistently weaker in the wake of more than a week's worth of market turmoil.

"We're seeing significantly higher yields," said George Strickland, managing director and portfolio manager at Thornburg Investment Management. "Trades are happening off the scale for sure, where you've got motivated sellers, trades are happening at levels that under normal circumstance that you would think would never happen. They're way too cheap.

"I don't think we're really being driven by reaction to the bailout plan. I think the main factor in our market this week is that money market funds have been putting back everything they own, and that's pushed up funding costs to very high levels," Strickland continued. "When you've got dailies and weeklies trading at 8%, 9%, 10% yields, that causes a few things. For one, that attracts some cash away from the real bond market, and two, for anyone that's still using leverage, it just turns the screws a little harder on their thumbs, and they've got to sell. And buyers like us are willing to buy, but we've got to get good value when we do it."

The municipal market was markedly firmer Friday, following news of a major bailout plan from the federal government that would see it insure money market mutual funds, purchase the debt of Fannie Mae and Freddie Mac, and take over troubled mortgage assets from financial institutions.

This followed Lehman Brothers Inc.'s bankruptcy, Bank of America NA's planned purchase of Merrill Lynch & Co. and an $85 billion federal bailout of American International Group Inc.

Traders said tax-exempt yields were lower by six or seven basis points overall, with muted gains on the short end but more extreme gains on the long end.

Tax-exempts weakened Monday, with more losses situated on the long end, and turmoil in the new-issue market continued, with a new round of deal postponements. These began towards the end of last week, when several large negotiated deals were placed on standby in light of the massive flight-to-quality in the Treasury market and extreme market dislocation.

The municipal market then showed continued weakness Tuesday, Wednesday, and Thursday, with yields rising by four or five basis points Tuesday, about five basis points Wednesday, and roughly three to five basis points yesterday. Also yesterday, the news that Congress had struck a preliminary agreement for a $700 billion bailout plan weighed on the market.

The Bond Buyer 20-bond index of GO yields and the 11-bond index both rose 20 basis points this week to 5.23% and 5.14%, respectively. These are the highest levels for the indexes since May 16, 2002, when they were 5.24% and 5.18%, respectively.

The revenue bond index rose 12 basis points this week to 5.56%. This is the highest level since May 16, 2002, when it was 5.59%.

The 10-year Treasury note yield rose 34 basis points this week to 3.87%, which is the highest since Aug. 14, when it was 3.89%.

The 30-year Treasury bond yield rose 24 basis points, to 4.40%, which is the highest since Aug. 21, when it was 4.46%.

The Bond Buyer one-year note index rose 26 basis points this week to 2.19%, which is the highest since March 5, when it was 2.25%.

The weekly average yield to maturity on The Bond Buyer 40-bond municipal bond index finished at 5.73%, up 18 basis points from last week's 5.55%. This is the highest level since the week ended Nov. 30, 2000, when it was 5.75%.

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