The Bond Buyer's weekly yield indexes declined last week, as tax-exempts firmed in each of the abbreviated week's sessions in advance of the Christmas holiday.
Matt Fabian, managing director at Municipal Market Advisors, said muni yields have crept downward the past few days in part because of the belief that the surge in Treasuries is unsustainable. After the Federal Reserve slashed its interest rate target to nearlyzero two weeks ago, yields on 10-year Treasuries touched as low as 2.04%. As recently as October, they yielded more than 4%, according to Municipal Market Data.
With Treasury prices so high, some investors may be jumping out of Treasuries and into munis, according to Fabian.
He added that some people are buying bonds with 11-year maturities, anticipating that they will become benchmark 10-year bonds in 2009. He expects muni yields to drift downward slowly for the rest of the year.
Next year, though, the outlook is murkier, Fabian said. Institutional investors have not proved reliable buyers in this market, and he sees no reason to expect a return of meaningful liquidity for munis. The market may never recover fully to where it was before this year's credit crisis, he said.
"The market is evolving to what we've called the 'new normal,' " he said. "The 'old normal' has gone away and we're waiting for the new normal to emerge. At some point, things will stabilize. As far out as I can project, I just see more of the same."
In the new normal, Fabian assumes higher yields and a steeper yield curve. To expect otherwise requires an aggressive stance he does not see any reason to adopt, he said.
The Bond Buyer 20-bond index of GO yields declined 13 basis points last week to 5.33%, which is the lowest level for the index since Nov. 20, when it was 5.13%.
The 11-bond index of higher-grade 20-year GO yields declined 15 basis points to 5.10%, which is the lowest the index has been since Nov. 20, when it was 5.03%.
The revenue bond index, which measures 30-year revenue bond yields, also declined 15 basis points to 6.07%. This is the lowest the index has been since Nov. 25, when it was 6.06%.
The 10-year Treasury note yield rose 10 basis points to 2.15%, although it remained well below its 2.62% level from two weeks ago.
The 30-year Treasury bond yield rose 9 basis points to 2.62%, but it remained far below its 3.06% level from two weeks ago.
The Bond Buyer one-year note index, which measures one-year municipal note yields, declined nine basis points to 1.18%. It remained above the 1.12% level it had reached two weeks ago.
The weekly average yield to maturity for the 40 bonds in the Bond Buyer municipal bond index, which is calculated daily, declined 39 basis points last week to 6.05% for the Dec. 19-23 period. This is the lowest average yield to maturity for the index since the week ended Nov. 20, when it was 5.92%.
