Muni Indexes Dip While Treasuries Dive After FOMC Comments

Plummeting Treasury yields pulled the tax-exempt market downward on the week, providing direction alongside active muni trading.

Municipal investors welcomed a steady primary diet of deals that were priced cheaply this week, but still underperformed Treasuries. Tax-exempt yields that mostly hovered throughout the week fell at the intermediate and long ends of the curve in the two most recent sessions.

However, they were unable to keep pace with Treasury yields, which behaved similarly with munis until midweek. On Wednesday, Treasury yields beyond the short end of the curve plunged almost 10 basis points after the release of Federal Open Market Committee minutes broached the possibility of a third round of quantitative easing.

They continued their descent Thursday.

Indexes past the short end fell several basis points on average. The Bond Buyer's 20-bond index of 20-year general obligation yields declined four basis points this week to 3.76%, but remained above its 3.75% level from two weeks ago.

The 11-bond index of higher-grade 20-year GO yields also dropped four basis points this week to 3.55%. However, it remained above its 3.54% level from two weeks ago.

The yield on the Treasury's 10-year note declined 17 basis points this week to 1.67%. This is its lowest level since Aug. 2, when it was 1.48%.

The yield on the Treasury's 30-year bond also dropped 17 basis points this week to 2.79%, which is its lowest level since Aug. 2, when it was 2.55%.

Traders said the week's calendar was very well received, with deals arriving attractively priced.

In addition, moderate activity in the secondary market also resulted in price discovery.

Treasury yields, though, and not issuance, drove the tax-exempt market, said Matt Fabian, managing director at Municipal Market Advisors. Munis followed the Treasury market lower for most of the summer into July. Since end of last month, they shadowed the Treasury yield backup, as well.

"There's no reason for a retracement to diverge significantly from what we just saw," Fabian said. "So, if Treasuries rally 40 [basis points], we might rally 20."

Tax-exempt yields beyond intermediate and long ends of the curve have fallen since last Friday, Municipal Market Data numbers show. The benchmark 10-year triple-A dropped six basis points to 1.81%.

The two-year yield held at 0.29% for a 21st straight session. The 30-year fell six basis points since last Friday to 2.95%.

Issuance hasn't provided much direction for the market of late, and likely wouldn't for a time, Fabian said. Volume likely would be down through the Labor Day period, he added, if not beyond.

"Issuance might pick up ahead of the election if issuers are trying to manage uncertainty before the election; that might happen to the financial markets, in general," Fabian said.

The revenue bond index, which measures 30-year revenue bond yields, fell three basis points this week to 4.49%. This is its lowest level since Aug. 2, when it was 4.46%.

The Bond Buyer's one-year note index, which is based on one-year GO note yields, increased one basis point this week to 0.27%. This is its highest level since May 2, when it was also 0.27%.

The weekly average yield to maturity of The Bond Buyer municipal bond index, which is based on 40 long-term bond prices, was unchanged this week at 4.26%. It remains the highest weekly average for the yield since the week ended July 19, when it was 4.31%.