Municipal bond yields ratcheted up more quickly the last three weeks than any other period in 2011. But instead of worrying the market, alienated investors are happy to see yields finally returning to attractive levels.
The Bond Buyer’s 20-bond general obligation index of 20-year GO yields climbed three basis points this week to a 10-week high of 4.17%, marking a third straight week of rising yields, from 3.85%.
Yields haven’t jumped this much since the first three weeks of November 2010, when the 20-bond GO index leaped 70 basis points to 4.72%.
Still, borrowing costs are far from high: the 20-bond index remains 46 basis points under its 2011 average of 4.63%.
The 11-bond GO index of higher-grade 20-year GOs climbed three basis points to an 11-week high of 3.91%. In three weeks it has climbed 33 basis points, while in mid-August it bottomed out at a 43-year low of 3.55%.
The Bond Buyer’s revenue bond index, which measures 30-year revenue bond yields, moved two basis points up to a four-week high of 5.06%.
MUB, the ticker for an iShares exchange-traded fund tracking the S&P National AMT-free municipal bond fund, fell as much as $1.60 from Sept. 27, a loss of 1.5%. It rebounded 61 cents on Thursday.
Rather than lamenting the losses, Fred Yosca, head of trading at Bank of New York Mellon, said rates still have a long way to go before average investors feel persuaded to buy more munis.
“I can’t say we’ve seen any meaningful increase in retail here,” he said. “Rates are still pretty darn low, particularly in the low end of the curve.”
Indeed, five-year bonds continue to offer paltry cash flow despite a 37 basis point jump since Sept. 22. A top-rated five-year muni offers just 1.15%, versus a 2011 average of 1.66%, according to Municipal Market Data.
Among Treasuries, the 10-year yield finished 19 basis points up at 2.18%, a seven-week high. The 30-year yield rose 19 basis points to a four-week high of 3.15%.
Those larger climbs allowed muni-Treasury ratios to fall pretty dramatically over the past few sessions. The 10-year and 30-year spots, which each hit their highest ratios since January 2009 at roughly 128% last week, finished Thursday at 118%.
Market participants often debate whether muni rates are driven by Treasuries these days, as they were before the financial crisis when much of the market was rated triple-A thanks to credit enhancements.
Yosca believes Treasury rates account for merely 25% of the direction in munis.
He attributed much of the recent rise in yields to growing supply — some $32 billion of new issuance has hit the market in the last four weeks — during a period when that typically sees little redemption and reinvestment.
“In the collapse the Treasury market has had, we can’t sit here and remain unchanged,” Yosca said. “But since late 2007, the correlation between the two has become insignificant. The principal factor is not the Treasury market, it’s supply and demand for tax-exempts.”
The weekly average yield to maturity on The Bond Buyer’s 40-bond muni index, which is based on prices for 40 long-term muni issues, moved up seven basis points to 4.99%.
The one-year note index rose two basis points to 0.31%.