Indexes Decline as Market Firms More Than It Weakens

The Bond Buyer’s weekly yield indexes declined this week, as the municipal market was firmer more frequently than it was weaker in a mixed-bag week. “Muni yields in general haven’t been moving that much because there’s a lot of uncertainty in the market, as there’s no definitive positive trend to evoke trading,” said Matt Fabian, managing director at Municipal Market Advisors. “With the lack of a convincing positive price trend, secondary volume has fallen off. Price discovery has trailed off, so there’s overall less activity, and yield motion slows down.”Fabian said that this is caused in part by uncertainty over bond insurers, risk aversion due to nearing year end, and the current difficulty in hedging municipals.“It’s near impossible to fully hedge against interest rate risks in the current environment, and at the same time, we have massive interest rate risks at the long end of the muni curve,” Fabian said. “It’s hard to expect anyone to want to buy long munis right now.”He added that “the muni market right now is the ideal place if you are a total return, unhedged buyer who is looking for low returns and high risk.”Before last week’s holiday-shortened session, the municipal market was slightly firmer, following Treasuries, as investors sought quality. This week, Monday found munis were firmer by two or three basis points, though the market continued to lag behind the Treasury market, which showed sizeable gains.On Tuesday, tax-exempt yields did an about-face, declining by about one basis point across the board, following Treasuries, which experienced a correction on the heels of Monday’s sizeable gains. Munis were then weaker again Wednesday, by one or two basis points, again reflecting the movement of Treasury yields.Yesterday, however, municipals were firmer by about three basis points, as Treasuries reversed course again and showed improvement. The Bond Buyer 20-bond Index of GO yields fell six basis points this week to 4.39%, which is the lowest since 4.33% on Oct. 25.The 11-bond index dropped seven basis points to 4.32%, which is the lowest since 4.27% on Oct. 25. The revenue bond index fell three basis points to 4.77%, which is the lowest since 4.73% on Nov. 1.The 10-year Treasury note fell 14 basis points to 3.95%, which is the lowest since 3.93% on June 30, 2005.The 30-year Treasury bond fell 15 basis points to 4.35%, which is the lowest since 4.29% on Sept. 1, 2005.The Bond Buyer one-year note index fell five basis points to 3.28%, which is the lowest since 3.28% on Feb. 8, 2006.The weekly average yield to maturity on The Bond Buyer 40-bond municipal bond index finished at 4.80%, down six basis points from last week’s 4.86%.