Following a big sell-off last week, the municipal market rallied this week on the latest message from the Fed to pare some of its losses.
The yields for 10- and 30-year AAA maturities fell eight and 10 basis points respectively, from their highs for the week by Thursday’s close. But The Bond Buyer’s 20-bond general obligation index of 20-year GO yields and the 11-bond GO index of higher-grade 20-year GO yields both jumped eight basis points.
The past week started out decidedly weaker on Friday. And as the week progressed, the muni market seemed unwilling to gracefully absorb the slight uptick in new issuance. But by midweek, the market found its footing, with the curve flattening and yields pushing lower at the intermediate and long ends.
However, Treasury yields have outperformed those of munis at the short and intermediate ends.
The Bond Buyer’s 20-bond GO index increased eight basis points this week to 3.68%. This marks its highest level since Jan. 5, when it was 3.83%. The 11-bond GO index also rose eight basis points this week to 3.42%, placing it at its highest level since Jan. 5, when it was 3.57%.
The yield on the Treasury’s 10-year note declined five basis points this week to 1.94%, but remained above its 1.93% level from two weeks ago. The yield on the Treasury’s 30-year bond gained five basis points this week to 3.10%. That marks its highest level since Dec. 1, when it was 3.12%.
The week for bonds turned on Federal Reserve Board chairman Ben Bernanke’s comments on Wednesday, according to Jim Kochan, chief fixed-income strategist for Wells Fargo Funds Management. When the Federal Open Market Committee announced that the low rates would linger through late 2014, muni yields responded largely by falling from weekly highs.
By Thursday’s close, the 10-year triple-A yield dropped eight basis points from its high on the week, and four basis points total for the week, to 1.79%, according to Municipal Market Data numbers. By comparison, the 30-year yield fell 10 basis points from its high for the week, and seven basis points all told for the week, to 3.27%.
“We’re treading water here a bit, until we see some buildup in the calendar, and that usually happens in February and March,” Kochan said. “The market needs to be tested with some more representative supply. And we might find that perhaps we have to adjust the yields higher to absorb supply here.”
Muni ratios to Treasuries remained cheap on the short end, with two-years rising 19 percentage points on the week to 159%. But they got richer on the intermediate and long ends, with the 10-year ratio inching up to 92% on the week, and the 30-year falling to almost 106%.
The ratios reflect a market with yields that have yet to reach a degree of equilibrium, Kochan said. “On a relative basis to Treasuries, muni yields are still OK,” he said. “But on an absolute basis, maybe we have to see some adjustments once we get heavier calendars.”
The Bond Buyer Revenue Bond Index, which measures 30-year revenue bond yields, declined six basis points this week to 4.71%. This is its lowest level since Nov. 4, 2010, when it was also 4.71%.
The Bond Buyer’s one-year note index, which is based on one-year GO note yields, was unchanged this week at its all-time low of 0.24%. The index began in July 1989.
The weekly average yield to maturity of The Bond Buyer municipal bond index, which is based on 40 long-term bond prices, increased six basis points this week to 4.67%. But it remained below its 4.73% average from the week ended Jan. 12.