Indexes Mostly Fall on Scant Trading

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Slight activity in the municipal market during the holiday week left tax-exempt yields mostly unchanged since last Friday.

Industry pros this week have been consolidating their positions for year end, as well as gearing up for expected tax increases and a likely change to the tax-exempt status of muni bonds.

Scant issuance and light activity in the secondary have held yields and muni ratios to Treasuries to tight ranges. But despite the slow days, most muni bond indexes fell on the week.

The 20-bond index of 20-year general obligation yields declined six basis points this week to 3.58%, but it remained above its 3.44% level from two weeks ago.

The 11-bond index of higher-grade 20-year GO yields dropped five basis points this week to 3.34%, but still remained above its 3.20% level from two weeks ago.

The yield on the U.S. Treasury's 10-year note fell eight basis points this week to 1.72%. This is its lowest level since Dec. 6, when it was 1.58%. The yield on the Treasury's 30-year bond also declined eight basis points this week to 2.90%, which is the same level as two weeks ago.

Treasury yields have rallied on the intermediate and long ends of the yield curve, outperforming munis since last Friday. On the week, Treasuries have mostly stutter-stepped while munis have mostly held their levels.

Muni activity mostly confined itself to year-end swapping and capital gains-taking, said John Hallacy, manager of municipal bond research at Bank of America Merrill Lynch.

"Some accounts were definitely selling in anticipation of the capital gains rate going back up," he said. "To the extent that rates have fallen so much this year, people have some pretty substantial returns in certain names, even though the concern is: what do you replace it with? There's some of that going on."

The muni market has had to contend with seasonal troubles expected during the holidays. That translates into fewer market participants on the week and a sharp cut in primary issuance. And this year's drop in volume is sharper than most: a mere $2 million in total, all of it competitive deals, is expected.

Tax-exempt yields have fallen since last Friday in the belly of the curve, Municipal Market Data numbers showed. The benchmark 10-year triple-A yield has fallen three basis points over the duration to 1.74%.

The 30-year froze at 2.83%; the two-year sat all week at 0.31%.

Muni ratios to Treasuries have gotten slightly cheaper on the week, although the long end remains in rich territory comparatively for tax-exempts. The 10-year increased to 101%. The 30-year rose to 98%, while the two year remains a shade under 115%.

The Bond Buyer's revenue bond index, which measures 30-year revenue bond yields, rose two basis points this week to 4.28%. This is its highest level since Nov. 1, when it was 4.29%. The Bond Buyer's one-year note index, which is based on one-year GO note yields, was not calculated this week due to a lack of trading volume.

The weekly average yield to maturity of the Bond Buyer municipal bond index, which is based on 40 long-term bond prices, rose two basis points this week to 4.11% for the week ending Dec. 27, 2012. This is the highest weekly average for the yield to maturity since the week ended Nov. 8, when it was 4.12%.

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