The 12th-hour deal to keep the U.S. from plunging over the fiscal cliff and the yearly rollover of rates provided the impetus for municipal bond yields and indexes on the week to climb.

Bond Buyer Indexes

A holiday-induced drop in volume and limited activity in the secondary market also played their parts in muddying the picture for investors. Muni yields rose this week at the intermediate and long ends of the curve, though far less than those of equivalent Treasuries.

Muni bond indexes beyond the short end all rose, reflecting the yearly rollover in rates and the impact the signing of the American Taxpayer Relief Act has had so far on the tax-exempt market. The 20-bond index of 20-year general obligation yields increased 10 basis points this week to 3.68%, its highest level since Oct. 25, when it was also 3.68%.

The 11-bond index of higher-grade 20-year GO yields rose nine basis points this week to 3.43%. That is its highest level since Nov. 1, when it was 3.46%.

The yield on the U.S. Treasury’s 10-year note increased 19 basis points this week to 1.91%. This is its highest level since May 3, when it was 1.93%.

The yield on the Treasury’s 30-year bond jumped 22 basis points higher this week to 3.12%, its highest level since May 3, when it was also 3.12%.

The week of Dec. 6 marked a low point for muni market indexes. Since then, the 20-bond index has risen 41 basis points from when it measured 3.27%. The 11-bond index has climbed 40 basis points since then, when it measured 3.03%.

Tax-exempt yields across the board have risen on the week following the release of the news out of Washington. The 10-year triple-A had been falling modestly the previous week and hovering during the lead-up to year end. After Congress made its move, it rose six basis points to 1.78%.

The 30-year increased four basis points since last Friday to 2.87%. The two-year climbed five basis points to 0.36%, after nine consecutive trading sessions at 0.31%.

The muni market can withstand some backing up in yields, according to Chris Mier, a strategist in the analytical services division of Loop Capital Markets. Emerging from the fiscal cliff negotiations intact was a positive note for the market, he said.

“You need to wait; it’s a new year, and there are different issues this year,” Mier said. “We saw a lot of mutual fund redemptions late last year, but that was during a period of time when people didn’t know what would be happening with the negotiations. But now we dodged a bullet, and that’s a plus.”

On a negative note, he noted that this is the time of year when retail representatives and brokers think about what they’re going to sell this year and where their focus will be.

“It’s hard to imagine they’re going to stick with municipal bonds forever, given the fact that we’ve had two pretty good years of total returns,” Mier said. “It kind of drifted away from us at the end of 2012 ... At best, you’re going to earn the coupon on a par bond. There’s a little bit of having to test the waters because it is a new year and people are revising their thinking.”

The Bond Buyer’s revenue bond index, which measures 30-year revenue bond yields, gained two basis points this week to 4.30%. That is its highest level since Oct. 25, when it was 4.33%.

The 25-bond revenue bond index has increased 24 basis points since its low during the week of Dec. 6 of 4.06%. 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’s municipal bond index, which is based on 40 long-term bond prices, declined one basis point this week to 4.10% for the week ending Jan. 3. However, it remained above its weekly average of 4.09% from two weeks ago.

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