Muni Indexes Rise Amid Back-Ups This Week as 5-Month Rally Ends

bb031612inde-600.jpg

Spring is definitely in the air on Wall Street, with a particularly sunny view toward equities. But for munis and Treasuries, with yields rising rapidly in the wake of a robust risk-on trade, the outlook has been much gloomier.

Bond Buyer Indexes

Still, given that the muni market has been backing up in a healthy manner from what were almost prohibitively low yields, the forecast could be worse. Higher-yielding new issuance this week performed admirably amid falling demand in the primary market as investors hungering for yield showed a willingness to reach down the credit scale.

It all started with muni yields following Treasuries higher, though not to the same extent, according to Peter Hayes, the head of municipal bond trading at BlackRock.

“There’s a certain level of capitulation,” he said. “Everybody feels better about things, whether it’s domestically or overseas. We saw some pretty big moves in the equities markets, and the risk-on trade has been pretty strong. That’s finally driving rates higher.”

Muni bond indexes reflected this. Almost all were noticeably higher on the week.

The Bond Buyer’s 20-bond index of 20-year general obligation yields increased 11 basis points this week to 3.95%. It sits at its highest level since Dec. 1, when it was 4.12%.

The 11-bond index of higher-grade 20-year GO yields rose 14 basis points this week to 3.72%. That is its highest level since Dec. 1, when it was 3.85%.

The yield on the U.S. Treasury’s 10-year note increased 26 basis points this week to 2.29%. It is at its highest level since Oct. 27, when it was 2.40%.

The yield on the Treasury’s 30-year bond gained 24 basis points this week to 3.42%. That marks its highest level since Oct. 27, when it was 3.45%.

What’s more, yields for muni bonds this week may have officially marked the end to roughly five months of rallying. They have risen 16 basis points since last Friday at the 10-year mark, and nine basis points at the 30-year, according to Municipal Market Data numbers.

The 10-year triple-A yield, at 2.21%, has increased 54 basis points from its record low of 1.67% on Jan. 18. For equivalent Treasury yields, the figures show 24- and 22-basis-point jumps, respectively.

Expanding the lens, the Federal Reserve suggested in so many words at the most recent Federal Open Market Committee meeting that QE3 might not be necessary as Operation Twist, and its accompanying bond buying, comes to an end.

“And that helped the migration to higher rates,” Hayes said.

Also of note, muni ratios to Treasuries have gotten richer from the belly of the curve on out following munis’ outperformance in that area on the week. The two-year, 10-year and 30-year ratios each fell below 100% for the first time since July 5. The two-year ratio ended Thursday’s session at 89.5%, while the 10-year and 30-year ratios stood at 96.9% and 99.7%, respectively.

The revenue bond index, which measures 30-year revenue bond yields, gained seven basis points this week to 4.83%. It sits at its highest level since Jan. 5, when it was 4.93%.

The Bond Buyer’s one-year note index, which is based on one-year GO note yields, dropped two basis points this week to an all-time low of 0.22%. The previous record low was 0.23% on Feb. 22. The index began in July 1989.

The weekly average yield to maturity of The Bond Buyer municipal bond index, which is based on 40 long-term bond prices, increased four basis points this week to 4.63%. It is the highest weekly average for the yield to maturity since the week ended Jan. 26, when it was 4.67%.

For reprint and licensing requests for this article, click here.
Buy side
MORE FROM BOND BUYER