The common talking point that municipal bonds are now driven by credit rather than rates seems a bit off the mark in a week like this.
Prices on Treasury bonds fell across the curve as the stock market recovered from a major sell-off last week, and munis simply followed a well-trodden path by keeping in the same direction at a slower pace.
“They are playing the traditional lag game,” said Justin Hoogendoorn, managing director at BMO Capital Markets.
The Bond Buyer’s 20-bond general obligation index of 20-year GO yields jumped eight basis points this week to 3.93%.
Last week it fell 22 basis points, just missing the calendar-year low by two basis points.
The 11-bond GO index of higher-grade 20-year GOs climbed nine basis points to 3.67%. It had previously tumbled 22 basis points to 3.58%, just three basis points from a 43-year low.
The Bond Buyer’s revenue bond index, which measures 30-year revenue bond yields, moved five basis points higher to 5.01%, but remains 10 basis points below the level two weeks ago.
Treasuries were the clear driver sending rates higher. The 10-year Treasury yield rocketed 27 basis points this week to 1.98%. It was previously at a six-decade low of 1.71%.
The 30-year yield jumped 24 basis points this week to 3.03%. It was previously at 2.79%, its lowest since the final week of 2008.
A week before, the 10- and 30-year yields plummeted 38 and 57 basis points after the Federal Reserve’s announcement on its Operation Twist.
“I don’t see this as a credit story this week — munis were lagging on the way down and ratios widened out, and now we’re coming back in,” Hoogendoorn said.
The 10-year muni ratio finished Thursday at 112%, down from a 2011 high of 115% on Sept. 22. The 30-year ratio closed Thursday at 118%, versus as much as 123% in the previous week.
One factor keeping the rise in municipal rates contained was lighter supply projections.
A few weeks ago, market participants were projecting $8 billion a week through the end of the year, according to Hoogendoorn. But The Bond Buyer’s 30-day visible supply shrunk to just $7.5 billion this week, versus as much as $12 billion on Sept. 20.
“That’s a good reason why munis don’t need to back up the way Treasuries are,” Hoogendoorn said.
The slope of Municipal Market Data’s yield curve has been in flux the last few months.
Just prior to the Fed’s announcement on Sept. 21, the spread between two- and 10-year top-grade munis was 180 basis points.
Within two days it fell to 165 basis points — the flattest slope since January 2009 — but this week it steepened to 184 basis points.
Hoogendoorn called that a minor story compared with the flattening of the two-year to 30-year slope.
Thanks to long-term rates getting pulled down by rumors of Operation Twist, the spread there flattened to just 312 basis points after the Fed’s move, versus 390 basis points at the start of August.
Meantime, the weekly average yield to maturity on The Bond Buyer’s 40-bond muni index, which is based on prices for 40 long-term muni issues, declined seven basis points to 4.90%, a 49-week low
Lastly, the one-year note index moved up four basis points to 0.33%.