The Bond Buyer’s weekly indexes indicate that tax-exempts outperformed the Treasury market this week — a trend that almost never happens when the two markets are rallying.
But the lesson here is less about a muni rally than it is about how extreme the volatility in the Treasury market has been since Standard & Poor’s downgraded the sovereign credit on Aug. 5.
“You can safely say that munis were carried along, for the most part, by Treasuries,” said Matt Fabian, managing director at Municipal Market Advisors. “They didn’t show any mainstream selling pressure that, in other scenarios, they might have.”
Munis did have an excellent week, but the apparent outperformance was due solely to a gargantuan sell-off in Treasuries on Thursday afternoon.
The 30-year Treasury yield launched 29 basis points Thursday to end the session at 3.79%.
But compared to last Friday, its yield is just up nine basis points. The 10-year yield rocketed 18 basis points Thursday to end at 2.35% yet remains nine basis points down from last Friday.
So weekly indexes imply there was modest strength in intermediate Treasuries and some weakness in long-term Treasuries. The reality, of course, was wild gyrations.
The 10-year and 30-year Treasury yields each hit multi-year lows earlier in the week: the 10-year yield nearly broke the 2% barrier for the first time ever Tuesday when it went cliff-jumping mid-afternoon to 2.03%, just as the 30-year yield fell to as low as 3.47%.
Munis once again participated in the rally, but as usual the market was slow to react when the direction changed Thursday afternoon.
But sluggishness on the sell-off isn’t a bad thing; it merely highlights the stability of the tax-exempt market.
Fabian said the muni market has grown “older and wiser” during the turmoil of the last few years.
“Now that we’ve seen two or three of these major sell-offs and rebounds, the market has a better understanding of those things,” he said. “It’s able to prevent them — people will buy into them and mute the impact going forward. There’s been a lot of talk about that this week.”
The Bond Buyer 20-bond index of 20-year general obligation bond yields tumbled 22 basis points in the week to 3.97%, an impressive rally following a 28 basis point drop the week before. The index is now below the 4% mark for the first time since Oct. 28, 2010.
The 11-bond GO index of higher-grade 20-year GO yields also descended 22 basis points, following a 29 basis point rally the week before, to 3.68%. It now sits at its lowest since Oct. 21, 2010, whereas in mid-January the index was at 5.16%.
The revenue bond index, which measures 30-year revenue bond yields, fell 12 basis points to 5.09%, its lowest since Nov. 10, 2010.
The Bond Buyer’s one-year note index rose three basis point to 0.32% this week, just four basis points above its all-time low in data that goes 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, was down eight basis points this week to 5.05%.
What the yields don’t tell us is who has been buying.
“The buying that has brought munis to these exceptionally low yields has been mostly institutional,” Fabian said. “We don’t have broad retail participation, and it may take a while for retail to get comfortable at these levels, so a large-supply week could cause yields to go higher.”
