When Treasuries run, munis jog. That's the usual trend. But this week's Bond Buyer indexes suggest the muni market backed up quite a bit more than Treasuries on concerns of diminished demand and the prospect of post-Labor Day supply.
The Bond Buyer's weekly indexes weakened quite a bit more over the past five trading sessions than the benchmark muni bond scale published by Municipal Market Data.
The Bond Buyer's 20-bond GO index of 20-year GO bond yields spiked 26 basis points this week to 4.09%, its highest level in three weeks. By contrast, the average double-A rated 20-year yield muni climbed just 11 basis points in the MMD scales.
The 26 basis point jump marks a sharp turn from the 64 basis points plunge seen over the previous three weeks. That rally had pushed the index all the way down to 3.83%, its lowest since Oct. 14, 2010.
"Demand is waning," said Peter Delahunt, national trading manager for munis at Raymond James & Associates Inc. "We have a thin demand base right now, and supply is expected to build."
Delahunt said yields are too low to attract retail buyers, and he can't see demand stemming from anywhere else. The latest data from Lipper FMI confirmed that sentiment late Thursday as investors pulled $148 million out from muni bond mutual funds, the fifth straight weekly outflow.
Top-tier GOs fared no better. The Bond Buyer's 11-bond GO index of higher-grade 20-year GO bonds also jumped 26 basis points to 3.81%, another three-week high. It too had plunged 64 basis points over the previous three weeks to its lowest level since April 1967.
By contrast, yields on MMD's triple-A scale only jumped 10 basis points over the same period.
"Some of the insurance companies may be trying to get ahead of potential claims for the hurricane by putting bonds out for the bid," Delahunt suggested late Thursday. "There was a pretty good flow of bid-wanteds out today."
The direction was the same, though less pronounced, for The Bond Buyer's revenue bond index, which measures 30-year revenue bond yields. It rose three basis points to 5.13%. A week before, its yield was its lowest since Nov. 10, 2010.
Relative weakness in Treasuries played a key role in driving tax-exempt rates higher, as the 10-year Treasury yield rose 14 basis points in the week to 2.23%, reversing part of the 92 basis point nosedive over the previous four weeks. The 30-year jumped 15 basis points in the week to 3.60%, reversing almost half of the 34 basis points descent in the previous week.
Delahunt said the muni market may be looking less at Treasuries in the final quarter of the year, as the market struggles with fewer redemptions and, potentially, more supply as big issuers including California seek to tap the markets.
"The bulk of the principal and interest redemptions are behind us," he said, referring to the June-to-August period. "Supply is going to build just as demand is waning, and we're a technically driven market so I would expect rates to back up, regardless of what happens in Treasuries."
Short-term rates remain exceptionally low but were unchanged this week, as The Bond Buyer's one-year note index remained at 0.31%. Its all-time low, in data going back to July 1989, was reached on July 20 at 0.28%.
The weekly average yield to maturity on The Bond Buyer's 40-bond muni index, which is based on prices for 40 long-term muni issues, held steady this week at 5.06%.