Muni Futures: Life Below 6%: Treasuries NarrowThe MOB Spread

In a reversal of expectations, Treasury futures played catchup to their municipal bond counterparts every day last week, chipping away at the sold gains munis totted up earlier.

Last Monday, the spread between municipals and Treasuries was a lofty 120 points. By Thursday the MOB closed at 109; on Friday the close was 100.

Why did it happen?

Thank the stunning performance of the Treasury bond market, which last week saw the long bond's yield dip below historic 6% levels.

Bolstered by falling Asian markets and a series of economic indicators suggesting low inflation, Treasuries took off.

And as Treasury cash soared, Treasury bond futures followed. Muni futures gained too, but couldn't keep pace with their Treasury counterparts.

"It's largely a flight to quality," said Dennis Yanez, an analyst for Market Paradigm. "This is a powerful move."

It wasn't supposed to be this way. With the new supply of municipal bonds scheduled to diminish with the approaching holidays, traders were expected to bid up the muni contract at the expense of Treasuries.

That still may happen this year, but not if Asia stays in turmoil, Yanez predicted.

If Asian markets continue to falter, "the Treasury bond's going to have the edge," Yanez said.

- Jake Ulick, Thomson Municipal News