The hunger for paper and search for yield in the municipal market reached their limits this week.
Munis ran out of gas midpoint in the week as investors signaled reduced interest in both the primary and secondary markets and an overall tone of weariness set in. Their Treasury brethren, by comparison, outperformed on the intermediate and long ends of the yield curve with a strong week.
Muni bond indexes on the week, which reflect rates, mostly rose. The Bond Buyer’s 20-bond GO index of 20-year general obligation yields increased four basis points this week to 3.75%, but remained below its 3.81% level from two weeks ago. The 11-bond GO index of higher-grade 20-year GO yields also rose four basis points this week to 3.53%. But it remained below its 3.59% level from two weeks ago.
The yield on the U.S. Treasury’s 10-year note declined 18 basis points this week to 1.71%. That matches its most recent low of 1.71%, recorded on Sept. 22, 2011, which was its lowest level since the 1950s.
The yield on the Treasury’s 30-year bond plummeted 26 basis points this week to 2.81%, which is its lowest level since Sept. 22, 2011, when it was 2.79%.
The muni market started the week on a promising note, with the 30-year triple-A reaching a record low and intermediate-level yields falling near record range. By Wednesday’s close, though, yields on the intermediate and long ends backed up at least six basis points from Monday lows. They fell in Thursday’s session, but remained higher on the week since last Friday.
Several factors could be said to be at play this week that interrupted the market’s march to ever-higher valuations, said James Colby, a portfolio manager and senior municipal strategist at Van Eck Global. For one, the market could be responding to the recent negative long-term views about the ability of tobacco bonds to survive, based on recent Master Settlement Agreement payment numbers and in light of the diminishing population of smokers.
In addition, Colby added, a recent conference in Puerto Rico, attended by rating agencies and analysts, led to several headline news stories about the commonwealth’s struggles. These included mention of Puerto Rico’s unfunded pension liability issue, its struggle to come out of recession, its very high debt burden, and its position as one of the major issuers in the muni marketplace with one of the lowest investor-grade credit ratings.
“Those two major, major issuers and names coming to the fore, in terms of the discussion of their credit-worthiness, and the large presence they have in the secondary market, that probably had some impact on our market and caused the advance in higher prices-lower yields to stop somewhat,” Colby said.
The revenue bond index, which measures 30-year revenue bond yields, gained two basis points this week to 4.75%. It still remained below its 4.77% level from two weeks ago.
The Bond Buyer’s one-year note index, which is based on one-year GO note yields, declined one basis point this week to 0.24%. This is its lowest level since April 18, when it was 0.23%.
The weekly average yield to maturity of the Bond Buyer municipal bond index, which is based on 40 long-term bond prices, declined six basis points this week to an all-time low of 4.42%. It is the second consecutive record low for the weekly average.