Just as a strong rally in Treasuries helped make munis look good in the first three weeks of June, so too did a major sell-off in the month’s final week make tax-exempts appear weak.
“Whether or not the Treasury thing happened, that was likely to occur, but the Treasuries have driven the correction, for sure,” said Matt Fabian, managing director at Municipal Market Advisors.
The Bond Buyer 20-bond index of 20-year general obligation increased 13 basis points this week to 4.59%, after setting a fresh calendar-year low the week before. Yields in the index are now at their highest since May 12, seven weeks ago, when it was 4.61%.
The 11-bond GO index of higher-grade 20-year GO yields rose 10 basis points from a calendar-year low to 4.30%, its highest since May 12, when it was 4.35%.
The revenue bond index, which measures 30-year revenue bond yields, gained three basis points this week to 5.34%. It too had been at a calendar-year low but is now at its highest since June 9, or three weeks ago, when it was also 5.34%.
But yields rose much more rapidly among Treasuries, where the 10-year yield jumped 24 basis points this week to 3.17%, reversing a 25 basis point tumble in the week before. While previously at its lowest yield since late November, the 10-year yield index is now at its highest in six weeks.
The 30-year Treasury yield climbed 21 basis points this week to 4.38%, marking its highest yield since April 28, or nine weeks ago, when it was 4.42%.
Fabian said munis have been poised for a correction for the last three weeks at least, adding that the sell-off could become harsher next week if traders unload their positions to lock in gains for the quarter.
“It could be that we feel a more negative reaction after the first of the month, after the marking period,” Fabian said.
Nick Krzemienski, vice president of Capital Market Advisors, said participants are concerned about the end of QE2, the Federal Reserve’s program of quantitative easing.
“There really is nothing else the Fed can do,” he said. “There’s going to be some uncertainty about what’s next. That’s causing concern.”
He also said bond fund flows, which had turned positive recently after more than six months of constant outpourings, may continue to trend negative as cash flows into equities.
Short-term paper avoided the volatile week as The Bond Buyer’s one-year note index held steady at its all-time low of 0.34%. The index dates back to July 1989.
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, rose one basis point this week to 5.17% from a revised 5.16% in the previous week. It remains well below the 5.24% average from two weeks ago.
