Nearly all of The Bond Buyer's weekly yield indexes declined this week, fueled by a flood of investor demand that helped turn around the municipal market's period of prolonged weakness.
"When you look at the big sell-off that occurred prior to this week, you can see that bonds got very cheap, to the point where, on Friday, according to [Municipal Market Data], a 10-year triple-A bond was spread 117 basis points over the 10-year Treasury note," said Howard Mackey, president of the broker-dealer business unit of Rice Financial Products. "So that made it pretty much a no-brainer for a lot of crossover buyers, and insurance companies, and other major institutions that had cash to come in and buy munis."
Mackey said that billionaire investor Wilbur Ross of WL Ross & Co. and PIMCO fund manager Bill Gross buying a combined $2.5 billion of municipal bonds this week had "quite a bit to do" with the market turnaround seen since mid-session Monday.
"Bill Gross' main function in that firm has been to buy taxable bonds. They have a unit in PIMCO that primarily buys munis, and for him to basically make a statement at that level of the firm to say, 'We are now going into munis,' is a huge statement," Mackey said. "And then you also had Wilbur Ross buying some bonds, and those are the people you read about."
"I think, as I mentioned, there were a number of crossover buyers, and there are some indications there were foreign investors involved as well, so you have a lot of money that is looking for a place to go," he said. "And you have a cheap dollar, particularly if you're a foreign investor, and so if you feel that you might be at the bottom in terms of how the dollar is trading versus the Euro, it's potentially a very good bet."
The demand in the market persisted despite even the pricing of three deals each over a billion. California came to market with $1.8 billion Tuesday, the Puerto Rico Aqueduct and Sewer Authority brought $1.6 billion to market Wednesday, and the North Texas Tollway Authority sold $2.3 billion yesterday.
Mackey said the California deal, which was the first of the three to price and saw yields lowered by as much as eight to 10 basis points at re-pricing, was the benchmark deal that demonstrated the amount of appetite for bonds in the market this week.
"Basically, you just have a lot of buyers with cash that think bonds are quite cheap, and so that's what's really causing them to step in," he said. "It's a real flight to quality, and because you've had a lot of crossover buyers come into the market, it's just a demonstration that levels are absolutely cheap for munis. It's irrespective of the tax-exempt feature, which normally would have been strong enough to dissuade crossover buyers to come in. But being cheaper than actual taxable bonds makes them very attractive."
The Bond Buyer 20-bond index of GO yields fell 19 basis points this week to 4.92%, but remained above its 4.66% level from two weeks ago.
The 11-bond index also dropped 19 basis points to 4.83%, but remained above its 4.56% level from two weeks ago.
The revenue bond index fell 11 basis points to 5.11%, but remained above its 4.94% figure from two weeks ago.
The 10-year Treasury note fell seven basis points to 3.61%. This is the lowest the yield has been since July 2, 2003, when it was 3.54%.
The 30-year Treasury bond rose five basis points to 4.85%. This is the highest it has been since Feb. 14, when it was 4.68%.
The Bond Buyer one-year note index fell two basis points to 2.25%, but remained above its 2.09% level from two weeks ago.
The weekly average yield to maturity on The Bond Buyer 40-bond municipal bond index finished at 5.23%, up 10 basis points from last week's 5.13%.