Treasury Rally Helps Keep Tax-Exempts Looking Good

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A strong rally in the Treasury market over the last few weeks is helping to keep tax-exempt paper looking attractive despite low nominal yields.

“There’s no doubt that customer demand is getting a little better,” said Justin Hoogendoorn, managing director of strategic analytics at BMO Capital Markets. “We’re seeing a little bit of selling pressure but most bonds are getting put away pretty well and dealer activity is picking up.”

The first three weeks of June have each seen weekly supply of $5 billion or more, versus a 2011 average of less than $4 billion.

“It’s very healthy — the market is craving that supply right now,” Hoogendoorn said.

The Bond Buyer 20-bond index of 20-year general obligation yields fell three basis points this week to 4.46%, setting yet another calendar-year low. Yields in the index haven’t been this low since Nov. 10, 2010, when they were 4.24%.

The 11-bond GO index of higher-grade 20-year GO yields also declined three basis points to 4.20%, its lowest since Nov. 10, 2010, when it was 3.98%.

The revenue bond index, which measures 30-year revenue bond yields, declined one basis point this week to 5.31%, marking its lowest since Dec. 9, 2010, when it was 5.18%.

Hoogendoorn said buyers haven’t been enthused with absolute yields in recent weeks, but next to Treasuries their relative values do look appealing.

The 10-year Treasury yield has plummeted 24 basis points since May 20, while the triple-A rated 10-year muni yield fell merely one basis point.

“Although they’ve lagged for a little while, we could see more performance out of munis over the next month or so,” Hoogendoorn said. “We’re finally starting to see a downtrend in muni yields as we get into the height of the reinvestment period.”

The yield on the 10-year Treasury concluded a volatile week right where it started, at 2.92%. This is its lowest yield in the weekly index since Nov. 23, 2010, though in intraday trading it fell below 2.90% on multiple occasions during the week.

The yield on the 30-year Treasury bond rose a single basis point to 4.17%, reflecting a modest reversal after declining seven basis points in the previous week.

The Bond Buyer’s one-year note index, which is based on one-year tax-exempt note yields, was flat this week after tumbling five basis points in the week before to an all-time low of 0.34%.

The weekly average yield to maturity on The Bond Buyer’s 40-bond muni bond index, which is based on 40 long-term municipal bond prices, declined seven points this week to 5.17% — its lowest since Nov. 10, 2010, when it was 5.03%.

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