The municipal market has been gorging on a lot of new issuance over the past few weeks, but apparently not more than it can digest.
Yields for the week have mostly risen to absorb the new volume. By midweek, they rose eight basis points on the intermediate and long end of the curve. But the sell-offs have been rather subdued, a sign that the market overall has withstood the vast increase in supply. This has left it in good stead heading into a holiday week, industry pros said.
“The new issuance has been very strong, and that’s certainly pushed ratios and other relative indicators a little higher,” said Alan Schankel, managing director at Janney Capital Markets. “But underlying that, the market showed great resilience and strength, on balance, because this week came on the heels of a bunch of heavy weeks.”
Still, all of The Bond Buyer indexes for muni bonds responded by rising this week. The Bond Buyer’s 20-Bond GO Index of 20-year general obligation yields increased seven basis points this week to 4.09%. It settled at its highest level since Oct. 27, when it was 4.12%.
The 11-Bond GO Index of higher-grade 20-year GO yields also rose seven basis points this week, to 3.82%, reaching its highest level since Oct. 27, when it was 3.85%. The yield on the U.S. Treasury’s 10-year dropped nine basis points this week to 1.96%, its lowest level since Sept. 22, when it was 1.71%. The yield on the Treasury’s 30-year bond declined 12 basis points this week to 2.98%, its lowest level since Oct. 6, when it was 2.96%.
The markets also seemed to have largely shrugged off any ill effects that might have occurred in the first week after Jefferson County, Ala., filed for the country’s largest municipal bankruptcy. In the immediate wake of the filing, many in the industry said the markets had been gearing up for difficult news from Jefferson County for some time and had prepared accordingly.
Also, the market anticipated $11.81 billion of new issuance to be sold this week, against a revised $9.41 billion last week — weekly numbers that rank first and fifth, respectively, for 2011. The two-year yield remained unchanged from the end of last week. The 10-year and 30-year yields rose just four basis points and six basis points, respectively, over the week in the face of the new supply.
While muni yields and ratios to Treasuries appear to sit in a comfortable spot for investors, the market recently received another sign of strength. Last week, it saw the largest inflows to municipal bond mutual funds since Sept. 2010.
The week ending Nov. 9 saw $761 million in inflows from muni funds that report their flows weekly, a fifth straight week of inflows and a ninth week of inflows out of 10, Lipper FMI said. The week before saw inflows of $141 million.
The Revenue Bond Index, measuring 30-year revenue bond yields, gained nine basis points this week to 5.09%, its highest level since Oct. 27, when it was 5.10%.
The Bond Buyer’s One-Year Note Index increased one basis point to 0.31%, its highest level since Oct. 26, when it was also 0.31%. The weekly average yield to maturity of the Bond Buyer Municipal Bond Index, which is based on 40 long-term bond prices, increased three basis points this week to 5.02%. This is the highest level for the weekly average yield since the week ended Sept. 8, when it was 5.03%.
