The municipal market continues to gain from an extended rally that has boosted fixed-income securities.
Investors have embraced muni bonds as they see volatile equities and want security, if not yield. And tax-exempts have benefited.
Muni yields from the belly of the curve on out continue to dive deeper into record territory. Treasury yields have also dipped ever closer to record depths in those sections of the curve.
Investors have maintained a hearty appetite for the week’s truncated new-issue calendar. Muni bond indexes this week fell across all but the short end of the market.
The Bond Buyer’s 20-bond index of 20-year general obligation yields declined 14 basis points this week to 3.61%. That is its lowest level since Feb. 2, when it was 3.60%.
The 11-bond index of higher-grade 20-year GO yields dropped 13 basis points this week to 3.41%, which is its lowest level since Feb. 16, when it was 3.39%.
The yield on the U.S. Treasury’s 10-year note dropped nine basis points this week to 1.43%, its lowest level since the 1950s.
The yield on the Treasury’s 30-year bond decreased 12 basis points this week to an all-time low of 2.49%. The previous low was 2.53%, on Dec. 18, 2008.
At the moment, the demand for munis is too strong, according to Phil Condon, chief investment strategist for fixed income and lead muni portfolio manager at DWS Investments. It is best expressed in investors’ reception for new issuance, he said.
“Well, the deals we put in for this week, the bonds are well-subscribed,” Condon said. “The new issuance market is doing quite well from an issuer’s point of view. Everybody’s having trouble finding bonds.”
The shortage and nature of the calendar has affected market demand, Condon added. With the deluge of refundings, there are more bonds maturing than are actually being issued. “So, it’s a shrinking muni-bond market,” he said.
Since last Friday, triple-A muni yields have outpaced those of Treasuries, lowering ratios, according to Municipal Market Data numbers. The 10-year triple-A led the way, plunging 10 basis points to a record low of 1.60%.
The 30-year also dropped significantly over the period, pushing down seven basis points to a record low of 2.79%. The two-year fell two basis points to 0.29%.
But what has been a steady drop for intermediate and long-term muni yields for the past two dozen sessions or so may not continue on that trajectory, Matt Fabian of Municipal Market Advisors wrote in a research report. As resistance to low nominal yields builds, gains beyond current levels will become increasingly difficult, he noted.
“So while we agree with broad consensus that weak growth and thin net supply mean structurally lower bond yields in the near, medium and perhaps long terms, the path to lower yields is not a straight one,” Fabian wrote. “Munis are at risk of being whipsawed by rapid moves in U.S. Treasuries, itself driven by developments in credit, outlook or politics.”
The revenue bond index, which measures 30-year revenue bond yields, fell seven basis points this week to 4.44%. It is now at its lowest level since May 10, 2007, when it was also 4.44%.
The Bond Buyer’s one-year note index, which is based on one-year GO note yields, was unchanged this week at 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 seven basis points this week, to an all-time low of 4.24% for the week ending Thursday.
This is the second consecutive all-time low for the weekly average. The Bond Buyer began calculating the average yield to maturity on Jan. 2, 1985.