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Yields Plunge on Big Rally

A week-long rally pushed municipal bond yields sharply lower, with rates measured by two Bond Buyer indexes falling to levels not seen since 1967.

Bond Buyer Indexes

And while muni yields outperformed those of Treasuries last week by doing very little, this week they marched steadily downward as Treasuries mostly fluctuated.

The 10- and 30-year triple-A yields continued to break records. Both reached all-time lows, at 1.76% and 3.29%, respectively, according to Municipal Market Data.

The Bond Buyer’s 20-bond GO index declined 21 basis points this week to 3.62%. That is the lowest the index has been since April 13, 1967, when it was 3.54%.

The Bond Buyer’s 11-bond GO index also declined 21 basis points this week to 3.36%, which is the lowest it has been since Feb. 9, 1967, when it was 3.33%.

The yield on the U.S. Treasury’s 10-year note decreased seven basis points this week to 1.93%. But it remained above its 1.90% level from two weeks ago.

The yield on the Treasury’s 30-year bond fell nine basis points this week to 2.97%, but remained above its 2.90% level from two weeks ago.

Investors haven’t been able to find yield at the shorter end of the curve for some time, and so are venturing farther out in their search.

This is true for Treasuries, where the long bond has strengthened due to ongoing investor concerns about the euro, according to Philip Villaluz, managing director and head of municipal research and strategy at Sterne Agee.

But the rally at the long end for munis has exceeded Treasuries. The 30-year triple-A has fallen 21 basis points on the week, which compares with a four-basis-points drop in the 30-year Treasury, leaving it at 2.97%.

“The long end continues to be driven by the rally in long Treasuries,” Villaluz said. “Also, the long end is the focus of institutional buying, where they’re extending on the maturity for that yield grab. You also have cash that’s looking for yield. They’re not finding it in the few deals that are coming in the primary market.”

The twin rallies at the long end have also pushed the 30-year muni-Treasury ratio down.

At 110.77%, the ratio is slightly cheaper than its average for 2011, at 109.40%. But it has fallen noticeably from its average in the fourth quarter, when it reached 122.03%.

Other factors driving the rally include buying by muni bond mutual funds, which continue to experience inflows, and January reinvestment cash, which has been fueling demand in the secondary, Villaluz said.

As the week wore on, the amount available in the secondary for market participants to pick over shrank, MMD analyst Randy Smolik wrote in a research post.

“Muni secondary blocks had thinned versus offerings at the start of the week,” he said. “Correspondingly, bidders were aggressive to purchase new blocks. The most aggressive bids remained in the longer serial range but impressive bids were shown on customer blocks in the intermediate range as well.”

The 10-year triple-A yield has also enjoyed a strong performance. It fell nine basis points on the week.

By comparison, the 10-year Treasury dropped just three basis points, landing at a still-low 1.93%.

The 10-year muni-Treasury ratio continues to slide ever further into richer territory. By Thursday’s close, it stood at 91.19%. It stands richer than it did throughout 2011, when it averaged 97.37%, and considerably richer than it was throughout the fourth quarter, at 109.54%.

The market should continue to coast into the holiday-shortened week under the same supporting factors, with low primary volume and intermediates and long munis holding firm, Villaluz said.

“We don’t see the rally slowing down, especially in the long end,” he added. “There’s zero selling pressure. Customer offerings in the long end trade right away.”

The Bond Buyers revenue bond index dropped 19 basis points this week to 4.74%.

It is the lowest level for the index since Nov. 4, 2010, when it was 4.71%.

The one-year note index fell three basis points this week to an all-time low of 0.25%.

The previous record low was 0.27%, first set on Dec. 14, 2011.

The weekly average for the Bond Buyer municipal bond index’s yield to maturity declined 11 basis points this week, to 4.73%.

This is the lowest weekly average for the yield to maturity since the week ended Oct. 25, 2007, when it was also 4.73%.

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