Munis Hold Their Own as Treasuries Get Defensive

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Coming off three weeks of price losses, municipal bonds staged a decent rally this week despite a jump in supply and weakness in Treasuries.

The Bond Buyer’s 20-bond general obligation index of 20-year GO yields fell nine basis points this week to a to 4.08%. It had previously ratcheted up for three weeks to a 10-week high.

Bond Buyer Indexes

The 20-bond index is now 53 basis points under its 2011 average of 4.61%.

The 11-bond index of higher-grade, 20-year GOs dropped 10 basis points to 3.81%. In the prior three weeks it climbed 33 basis points to an 11-week high. Back in mid-August it had bottomed out at a 43-year low of 3.55%.

The rally was all the more impressive given that this weeks’ issuance was estimated at $6.7 billion, a 48% jump from the prior week’s $4.5 billion.

Dan Berger, analyst at Municipal Market Data, said you need to look at where the issuance was to understand why bonds rallied.

He noted the primary market was bifurcated this week as more than half of new issuance came from just three issuers: $1 billion of revenue bonds from Hudson Yards Infrastructure Corp., $1.8 billion of GOs from California, and $815 million of GOs from Pennsylvania.

 “There really was a lack of breadth of supply,” Berger said. Some buyers were shut out from the larger deals and so drove their bids towards the smaller issues like New Hampshire’s $100 million GO deal, which found attractive pricing, he said.

The Bond Buyer’s revenue bond index, which measures 30-year revenue bond yields, moved the other direction by gaining a single basis point to 5.07%, a five-week high. The one-year note index fell one basis point to 0.30%.

Treasuries were of no help driving the rally. The 10-year yield finished where it started five sessions ago, at 2.18%. During the week it ventured as high as 2.27% and as low as 2.09%. The 30-year yield rose four basis points to 3.19%, a five-week high.

The muni outperformance tamed muni-Treasury ratios. The 10-year ratio fell 5.5 percentage points to 112% and the 30-year ratio declined 2.5 points to 115.7%.

Eurozone debt troubles and speculative rumors of resolution have created a Jekyll and Hyde scenario for equity, Treasury, and muni markets, according to Phil Villaluz, head of muni strategy at Sterne Agee.

“It’s a love-hate relationship,” he said. “Munis were getting pounded last week when ratios jumped to almost 130%. But ratios fell this week — it seems the market has stalled at this point.”

The 10-year and 30-year ratios have been in triple-digits since early August and early July, respectively, meaning they effectively offer the tax-deduction as a free bonus.

The weekly average yield to maturity on The Bond Buyer’s 40-bond muni index, which is based on prices for 40 long-term muni issues, was unchanged this week at 4.99%.

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