Weekly yield indexes fell precipitously this week thanks to a flight to quality among Treasuries coupled with seasonal demand for tax-exempt paper.

“We’ve seen a rally in high-grade tax-exempts over the past week as some of that reinvestment money is coming into play,” said Philip Villaluz, head of muni research and strategy at Sterne Agee & Leach, referring to July coupon payments that typically roll over into new product.

He pointed to this week’s personal income tax bond sale from the Dormitory Authority of New York as evidence. Yields fell as much as seven basis points after a strong retail period Tuesday even as the authority bumped up its sale to $866.1 million from $718.2 million.

“The bonds got sold relatively easily,” Villaluz said of the highly rated deal. “Reinvestment money is being selective.”

Such appetite helped The Bond Buyer 20-bond index of 20-year general obligation drop 14 basis points to 4.51%, reversing back-to-back gain in the previous two weeks. Its yield hasn’t been this low since a calendar-year low of 4.46% on June 23.

The 11-bond GO index of higher-grade 20-year GO yields declined 13 basis points to 4.24%. That too reverses back-to-back climbs and places the index at its lowest since June 23.

The revenue bond index, which measures 30-year revenue bond yields, fell six basis points to 5.30%, its lowest since Dec. 2, 2010.

“Both technicals and fundamentals are driving the market,” Villaluz said. “But I’m sensing that things are starting to slow down and focus on what’s going on with Treasuries coming under pressure, particularly from the debt ceiling issue.”

Despite fresh warnings that the U.S. sovereign credit rating could lose its gilt-edged rating as the deadline to raise the debt ceiling approaches, investors continued to pour money into government debt.

The 10-year Treasury yield plummeted 20 basis points this week to a four-week low of 2.95%, while the 30-year Treasury yield plunged 13 basis points to a four-week low of 4.25%.

Treasury yields are expected to be the primary driver of tax-exempts for the second half of this year, said a quarterly Citi survey published Wednesday. Trends in new volume received the second-most votes, followed by bond fund flows.

While credit concerns played a critical role in driving yields way up in late 2010, only 7% of respondents believe such concerns will be a main driver.

Investors continue to park money in short-term paper: The Bond Buyer’s one-year note index set another all-time low this week as it fell two basis points to 0.29%. The data dates back to July 1989.

The weekly average yield to maturity on The Bond Buyer’s 40-bond muni bond index, which is based on 40 long-term muni prices, shed five basis points this week to 5.20%, its lowest since June 30.

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