Muni Yields Indicate a Healthy Start to Summer

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The Bond Buyer’s weekly yield indexes suggest the municipal market remains healthy heading into summer. Indexes were steady or a bit firmer this week even as the market digested more supply in the first two weeks of June than any comparable other period in 2011.

“The market isn’t so fragile that a minor increase in volume has an adverse impact,” said Chris Mier, managing director at Loop Capital Markets. “Maybe the market is a little less vulnerable than we think it is.”

The Bond Buyer 20-bond index of 20-year general obligation yields was flat this week at 4.49%, remaining at its lowest level since Nov. 10, 2010, when it was 4.24%.

The 11-bond GO index of higher-grade 20-year GO yields was also steady at 4.23%, remaining at its lowest since Nov. 10, 2010, when it was 3.98%.

The revenue bond index, which measures 30-year revenue bond yields, declined two basis points this week to 5.32%. This marks its lowest since Dec. 9, 2010, when it was also 5.32%.

The market is “treading water,” Mier said. It’s meeting resistance from retail buyers who are not so thrilled with current yields, but at the same time they are attracted to the stability of tax-exempts as the stock market on Thursday was looking at a seventh consecutive week of losses.

Further gains could be in the cards if Treasuries remain near current levels, he added.

The yield on the 10-year Treasury note declined eight basis points this week to 2.92% — its lowest since Nov. 23, 2010, when it was 2.77%.

The yield on the 30-year Treasury bond dropped seven points in the week to 4.16%, marking its lowest since Nov. 4, 2010, when it was 4.04%.

“If there’s a lot of that frothy, panic-buying going on there, then munis aren’t likely to go anywhere,” Mier said in reference to the flight-to-quality benefiting Treasuries. “But if it’s your old-fashioned mentality of slowing growth and yields falling, then I would think there’s more of a tendency for munis to follow at a lag.”

Mier said the market is pricing in GDP growth at 1.5% to 2%, instead of 3%.

Vikram Rai, strategist at Citi, added: “Technicals should continue to favor municipals, as investors have more cash to invest in the months of June-August due to coupon payments and redemptions.”

The recent flight to safe havens proved a major boon to the The Bond Buyer’s one-year note index, which is based on one-year tax-exempt note yields. It fell five basis points to an all-time low of 0.34% as frightened investors parked money there. Its previous record low was just three weeks ago at 0.38%. The index dates back to July 1989.

The weekly average yield to maturity on The Bond Buyer’s 40-bond municipal bond index, which is based on 40 long-term municipal bond prices, declined three basis points this week to 5.24% — its slowest since Nov. 10, 2010, when it was 5.03%.

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