Indexes Decline as Munis Grow Firmer Through the Week

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The Bond Buyer's weekly yield indexes declined this week, as munis grew firmer in each of the week's sessions.

"The new quarter opened up balance sheet capacity, and the reinvestment has been strong, because stocks right now are a lousy alternative to munis, so demand has been good," said Matt Fabian, managing director at Municipal Market Advisors.

"What we've had is a boom and bust type of cycle, because there are too few high grades out there. So any increase in demand sort of inflates the bubble, and now the problem is, because the market has run quite a bit, it becomes very difficult to expect continued performance out of high grade munis. It's a function of the bifurcated market."

Fabian said that, though the Treasury market set a "good context ... the main driver of demand became the retail reinvestment, the new balance sheets with the new quarter, and just people looking to get into the positive momentum."

"But the market is very thin, and liquidity has not really improved, so while we've seen a lot of strength, you have to be much more aware of the risks," Fabian said. "It's difficult to say that these have been sustainable gains, because in a less than fully liquid market, you could have unexpected volatility at any time."

The muni market was slightly firmer Thursday, ahead of a three-day weekend in observance of the July 4 holiday. In economic data, the unemployment rate remained unchanged at 5.5% in June, after rising 0.5 points in May, its largest jump in 20 years. Non-farm payrolls shrank by 62,000 in June, falling for the sixth consecutive month, while May payrolls were revised down 13,000, also to a loss of 62,000. Economists polled by IFR Markets had expected a 5.5% unemployment rate and a 60,000 loss in June payrolls.

The municipal market was firmer by about two basis points Monday, as market participants eased their way back from the three-day holiday weekend.

On Tuesday, munis were again slightly firmer, this time by about one or two basis points. In the new-issue market, Los Angeles competitively sold $977.6 million of tax and revenue anticipation notes to various bidders. Citi won the largest chunk of the deal, $412.6 million, with a true interest cost of 1.56%.

On Wednesday, tax-exempts were firmer by about three basis points, following Treasuries. In the new-issue market yesterday, Washington competitively sold $752.5 million of general obligation bonds in two series, to Merrill Lynch & Co. and to Lehman Brothers.

Yesterday, the municipal market was again slightly firmer, this time by about two basis points. In the new-issue market,Lehman priced $1 billion in second-tier revenue refunding bonds for the North Texas Tollway Authority.

The 20-bond and 11-bond GO indexes both declined 11 basis points this week, to 4.56% and 4.47%, respectively. These are their lowest levels since May 22, when they were 4.52% and 4.43%, respectively.

The revenue bond index declined 10 basis points this week, to 5.04%, which is the lowest since June 5, when it was also 5.04%.

The 10-year Treasury note yield fell 16 basis points this week, to 3.81%, which is the lowest since May 8, when it was 3.79%.

The 30-year Treasury bond yield fell 9 basis points this week, to 4.42%, which is the lowest since April 10, when it was 4.32%.

The one-year note index fell 8 basis points this week, to 1.62%, which is the lowest since April 16, when it was 1.54%.

The weekly average yield to maturity of the Bond Buyer Municipal Bond Index declined 5 basis points this week, to 5.12%. This is the lowest weekly average figure since the week ended May 29, when it was also 5.12%.

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