Municipal bond indexes rose on the week, reflecting a market that continues a lengthy, but welcome, backup from record low yields.
Tax-exempts past the front end of the yield curve have risen steadily throughout the previous five sessions, as they have over the past three weeks. Treasury yields over the same period have weakened even more dramatically.
Narrowing volume, modest activity in the secondary market, an improving picture in Europe and seasonal lulls have dampened the muni market over the past few weeks. Industry analysts have called into question recent demand at the long end of the yield curve, where the rally struck hardest this summer.
Muni indexes climbed higher on the week across the curve. The Bond Buyer’s 20-bond index of 20-year general obligation yields increased five basis points this week to 3.80%, which is its highest level since July 12, when it was 3.83%.
The 11-bond index of higher-grade 20-year GO yields also gained five basis points this week to 3.59%. It is now at its highest level since July 12, when it was 3.62.
The yield on the U.S. Treasury’s 10-year note gained 14 basis points this week to 1.84%. This is its highest level since May 10, when it was 1.89%.
The yield on the Treasury’s 30-year bond jumped 20 basis points this week to 2.96%, which is its highest level since May 10, when it was 3.06%.
Muni yields have been following their Treasury cousins upward, though at a slower pace. The effects of a better economic outlook eventually made their way to the tax-exempt market, said Alan Schankel, a managing director at Janney Capital Markets.
“I think Treasuries drove the muni market, especially on Tuesday and Wednesday,” he said. “Treasuries were weaker on better economic information and less chance of Fed easing.”
What’s more, ebbing supply may well be supporting muni yield outperformance against Treasuries, Schankel added. The week’s largest deals, led by $10 billion of California revenue anticipation notes, have received a decent reception, he said, indicating that demand is creating drag on muni yields’ upward trajectory.
The three-week backup in yields has been dramatic for both bond groups, according to Municipal Market Data numbers. At the 10-year mark, Treasuries have soared 44 basis points over the period through Thursday; munis have risen 27 basis points. The Treasury 30-year has rocketed 50 basis points over the past three weeks through Thursday. Meanwhile, the 30-year triple-A has jumped 22 basis points.
Demand has slackened at the long end of the tax-exempt curve. Investors will back off most quickly as they feel that, in theory, that’s where they’re most vulnerable, Schankel said. In addition, munis have buckled in Treasuries’ wake.
“The long end of the Treasury curve has gotten rocked a little more than the short end,” Schankel said.
The revenue bond index, which measures 30-year revenue bond yields, rose two basis points this week to 4.52%. This is its highest level since July 12, when it was 4.56%.
The Bond Buyer’s one-year note index, which is based on one-year GO note yields, increased four basis points this week to 0.26%, which is its highest level since May 2, when it was 0.27%.
The weekly average yield to maturity of The Bond Buyer municipal bond index, which is based on 40 long-term bond prices, rose one basis point this week to 4.26%. It is the highest weekly average for the yield since the week ended July 19, when it was 4.31%.