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Bond Buyer Indexes Reverse From Four-Decade Lows on Heavy Supply

DEC 13, 2012 6:42pm ET
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The municipal market slogged through an extended sell-off this week.

Bond Buyer Indexes

Over the past few sessions, too much supply flooded the market all at once, traders said. What’s more, munis weren’t helped by the negative reaction in the Treasury market to the Federal Open Market Committee plans Wednesday to expand QE3 by purchasing mortgage-backed securities and long-term Treasuries.

Some investors also appeared to be taking profits after an extended run up in prices and drop in yields.

Since Friday, muni yields beyond the front end of the curve have underperformed their Treasury brethren by rising at a faster pace.

New deals arrived cheaper by up to five basis points. In the secondary, bids were off amid overhang from last week’s primary.

Muni bond indexes reflected the jump in rates. The 20-bond index of 20-year general obligation yields increased 17 basis points this week to 3.44%. This was the first increase in the index in nine weeks, putting it at its highest level since Nov. 8, when it was 3.55%.

The 11-bond index of higher-grade 20-year GO yields jumped 17 basis points this week to 3.20%, which is its highest level since Nov. 8, when it was 3.32%.

The yield on the U.S. Treasury’s 10-year note increased 15 basis points this week to 1.73%. This is its highest level since Oct. 25, when it was 1.83%. The yield on the Treasury’s 30-year bond gained 13 basis points this week to 2.90%, which is its highest level since Nov. 1, when it was also 2.90%.

Muni bond indexes have been falling almost steadily for the past three months before this week’s reversal, Thomson Reuters numbers show.

Even with this week’s increase, the 20-bond index is down 35 basis points over a three-month period from a high of 3.79% on Sept. 13. For its part, the 11-bond index has plunged 38 basis points from a three month high of 3.58%, also on Sept. 13.

The revenue bond index has plunged 30 basis points over the past three months, to 4.12%.

The heavy tide of supply that rolled in as the muni market generally starts to wind down for the year lifted yields this past week more than anything else, said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. The FOMC announcement certainly pushed Treasury yields higher, he added, but supply tied munis to lower prices, regardless.

“The combination of too much supply in an environment where liquidity is dropping — as it normally does towards the end of the year — is the primary reason why the market’s been weak the last few days,” Pietronico said. “I would attach to that also some last-minute capital gain selling from investors who, perhaps, see the capital gains rate moving higher next year.”

Triple-A tax-exempt yields since Friday have risen dramatically, according to Municipal Market Data numbers. The benchmark 10-year yield jumped 18 basis points over the period to 1.66%.

The 30-year yield rose 17 basis points to 2.65%. The two-year held at 0.30% for a 54th straight trading session.

Muni ratios to Treasuries past the front end of the yield curve have also risen modestly since last Friday, MMD number show. They still remain rich on the intermediate and long ends, despite munis’ sharp backup.

The Bond Buyer’s revenue bond index, which measures 30-year revenue bond yields, ended a streak of five consecutive all-time lows and rose six basis points this week to 4.12%. This represents its highest level since Nov. 20, when it was 4.14%. The Bond Buyer’s one-year note index, which is based on one-year GO note yields, was unchanged this week at 0.23%.

The weekly average yield to maturity of the Bond Buyer municipal bond index, which is based on 40 long-term bond prices, rose three basis points this week to 3.93% for the week ending Dec. 13. But it remains below its 3.98% average from two weeks ago. It is the first time in six weeks that the weekly average has not fallen to a new record low. 

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I think it is clear that the WSJ article on Wednesday talking about the potential tax on munis also had an impact. Daily flows turned from positive to sharply negative in a single day.
Posted by mrmuni12 | Monday, December 17 2012 at 2:07PM ET
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