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Rally Moves Indexes to Lowest Levels in More Than 47 years

The municipal bond market will enter the Thanksgiving holiday from a position of strength.

Yields have rallied to record lows on the intermediate and long ends of the curve. The short end, while showing a spot of weakness Monday, has basically held steady; the two-year triple-A has all but calcified at 0.30% for 38 straight sessions.

New issuance continues to be well-received in the face of persistent demand. The week’s largest deal, at $1.4 billion, arrived upsized and with lowered yields at re-pricing.

The secondary market was surprisingly active on Friday. And technicals remain strong, industry pros say.

Muni bond indexes heading into the holiday fell on all but the short end to levels not seen in more than 47 years. The 20-bond index of 20-year general obligation yields declined four basis points this week to 3.37%, which is its lowest level since Sept. 16, 1965, when it was 3.36%.

The 11-bond index of higher-grade 20-year GO yields dropped three basis points this week to 3.14%. That is its lowest level since June 3, 1965, when it was also 3.14%.

The yield on the U.S. Treasury’s 10-year note increased eight basis points this week to 1.66%. That is its highest level since Nov. 1, when it was 1.72%.

The yield on the Treasury’s 30-year bond gained 10 basis points this week to 2.82%, which is its highest level since Nov. 1, when it was 2.90%.

The run-up in prices fell in line from the flight to quality and worries about the fiscal cliff, as well as implications that it would mean higher taxes, said Richard Ciccarone, managing director and chief research officer at McDonnell Investment Management. Investors feel that the driving force would still be that munis at these levels represent a natural hedge to higher taxes.

There should be little activity the rest of the week, Ciccarone added, or at least until there is more news out of Washington. That probably won’t come any earlier than next week.

“So, these yield levels in place are, on a relative basis, still attractive to other instruments, not only against Treasuries, but against corporates in many maturities, depending on the credit quality in comparison,” he said. “The market is building in some defense against potential tax change. But the absolute yields themselves are poised as if we aren’t likely to see some change in some time.”

Tax-exempt yields since last Friday mostly hovered at or just above record lows on the holiday-shortened week. But they outperformed those of Treasuries, which rose dramatically Tuesday.

The benchmark triple-A 10-year ticked up one basis point during that span to 1.51%, just above the all-time low it reached on Friday. The 30-year muni held at the record low it reached Friday as well, 2.54%, Municipal Market Data numbers showed.

Across the curve, Treasury yields have risen rather dramatically, lowering muni ratios to them.

The Bond Buyer’s revenue bond index, which measures 30-year revenue bond yields, fell three basis points this week to 4.14% — its third consecutive all-time low. The index began on Sept. 20, 1979.

The Bond Buyer’s one-year note index, which is based on one-year GO note yields, rose one basis point this week to 0.23%, which is its highest level since Oct. 10, when it was also 0.23%.

The weekly average yield to maturity of the Bond Buyer muni bond prices, declined five basis points this week to an all-time low of 4.00%. It’s the third week in a row and seventh time in nine weeks that it’s reached a record low.

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