Bond Buyer Indexes Feel the Effects of Disorder in D.C.

The Bond Buyer’s weekly indexes reflected a bit of selling pressure this week, which traders attributed to general uncertainty caused by the political gridlock in Washington.

The Bond Buyer 20-bond index of 20-year general obligation bond yields rose one basis point this week to 4.47%, following the previous week’s five-basis-point drop to a calendar-year low.

The 11-bond GO index of higher-grade 20-year GO yields also rose a basis point to 4.19%.

It too had been at a calendar-year low after declining six basis points the week before.

Alan Schankel, head of fixed-income research and strategy at Janney Capital Markets, ascribed the rise in yields to political worries, but said it isn’t so much about when federal policymakers raise the debt ceiling as it is about federal spending cuts and what that could mean to municipalities.

“I think you’re seeing more buying interest on the short end and less buying interest on the long end, so we’re getting a lot more slope to the yield curve,” he said. “That’s the general tenor of things.”

The one-year to 30-year spread is currently 417 basis points, according to Municipal Market Data, meaning the slope of the curve is at its steepest since May 4. Its five-year average is 290 basis points.

“You get paid to extend maturity a little bit and you don’t get paid to keep your money in a money market fund or some alternative,” Schankel added.

John Dillon, chief muni strategist at Morgan Stanley Smith Barney, warned in a July 22 note not to go too far out the curve.

He noted that the first 15 years of the curve captures 77% of all available yield, whereas the latter, flatter half offers 23% of the construct.

“The flatter curve beyond the 15-year extension point challenges the case for further yield-curve extensions,” he said.

The revenue bond index, which measures 30-year revenue bond yields, was steady this week at 5.32%. Two weeks ago it was at 5.30%, its lowest since early December 2010.

Munis have been relatively stable compared with the Treasury market, but this week tax-exempts underperformed as the stock market experienced heavy selling and helped Treasuries across the curve.

The 10-year Treasury yield moved five points lower in the week to 2.96%, while the 30-year Treasury yield dropped three basis points to 4.29%.

Less volatility among munis has helped short-term tax-exempt yields remain at or near all-time lows, according to Schankel.

The Bond Buyer’s one-year note index rose two basis points to 0.30% this week, bouncing off a fresh record low the week before. The data dates back to July 1989.

The weekly average yield to maturity on The Bond Buyer’s 40-bond muni index, which is based on 40 long-term muni prices, rose two basis points this week to 5.24%.


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