Nearly All Bond Buyer Indexes Show Sizeable Declines

After several weeks of continuously rising yields, the municipal market rebounded in a dramatic way this week, as nearly all The Bond Buyer's weekly yield indexes showed sizeable declines.

Yields plunged Tuesday and never looked back after the Federal Open Market Committee slashed the federal funds rate target at least 75 basis points, to a range of zero to 0.25% from its previous 1.00%, and indicated in its statement that it will keep rates low for an extended period of time.

"I think you can definitely attribute some of the rally to that," said Evan Rourke, portfolio manager at MD Sass. "Munis are safe, relative to most other fixed-income products, with the exception of Treasuries, so if you want to take on a little more risk than Treasuries, munis are an easy step out. And with the yields available, they're competitive against taxables.

"With the Fed making those statements, that may have just been enough to drive some people into doing a little bit of a crossover trade, or just buying munis," Rourke said. "And having a very light calendar is helpful, because our market is pretty illiquid, and because of the absence of arbs and the consolidation of dealers, I think this is the world that we're going to live in now, where the market is going to be more volatile, choppier, more inclined to have sharp moves both up and down, based on the supply/demand shifts."

The municipal market was largely unchanged Friday, breaking a week-long string of trading sessions that saw tax-exempts lose ground. Munis were then largely unchanged Monday in light activity.

However, on Tuesday, tax-exempts were firmer by about five to seven basis points, after the FOMC's rate cut. In its statement, the FOMC wrote that "weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."

On Wednesday, the muni market was markedly firmer, by about seven to nine basis points overall, picking up where it left off Tuesday when it surged after the Fed's statement was released.

Yesterday, the market experienced its steepest of the three rallies this week, as tax-exempt yields continued to plummet, with high-grade munis firmer by about 10 to 15 basis points.

The Bond Buyer 20-bond index of GO yields declined 39 basis points this week to 5.46%. This is the lowest the index has been since Nov. 25, when it was 5.39%.

The 11-bond index of higher-grade 20-year GO yields declined 40 basis points this week to 5.25%, which is the lowest it has been since Nov. 25, when it was 5.21%.

The revenue bond index, which measures 30-year revenue bond yields, fell 17 basis points this week to 6.22%, but it remains above the 6.17% level it reached two weeks ago.

The 10-year Treasury note yield dropped 58 basis points this week to 2.05%, which is the lowest level in at least half a century. The 10-year note's yield has fallen 181 basis points in the past five weeks, from 3.86% on Nov. 13.

The 30-year Treasury bond yield fell 53 basis points this week, to an all-time low of 2.53%. The bond's yield has fallen 181 basis points in the past five weeks, from 4.34% on Nov. 13.

The Bond Buyer one-year note index, however, rose 15 basis points this week to 1.27%. This is the highest level for the index since Nov. 19, when it was 1.29%.

The weekly average yield to maturity on The Bond Buyer 40-bond municipal bond index finished at 6.44%, down five basis points from last week's 6.49%, but remained well above the 6.23% average from two weeks ago.

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