Back-to-back holiday weeks combined with robust demand have kindled a strong rally in the municipal market and driven some muni bond indexes to levels they haven’t seen in more than 45 years.
Muni yields, subsequently, have burrowed deeper into record territory. The prospect of less issuance next week has made investors anxious and gobble up the deals that have reached the primary market this week.
Munis have outperformed Treasuries in the intermediate and long ends of the yield curve, lowering ratios and rendering tax-exempts ever-richer.
Muni bond indexes fell heavily past the short end of the yield curve. The 20-bond index of 20-year general obligation yields declined 14 basis points this week to 3.41%, its lowest level since Feb. 9, 1967, when it was also 3.41%.
The 11-bond index of higher-grade 20-year GO yields dropped 15 basis points this week to 3.17%. This is its lowest level since Aug. 26, 1965, when it was also 3.17%.
The yield on the U.S. Treasury’s 10-year note declined five basis points this week to 1.58%. This is its lowest level since Aug. 2, when it was 1.48%. The yield on the Treasury’s 30-year bond dropped four basis points this week to 2.72%, which is its lowest level since Aug. 2, when it was 2.55%.
In spite of the storms, both literal and figurative, the past couple of weeks have been a quiet time for the muni market, said Phil Condon, chief investment strategist for fixed income and lead muni portfolio manager at DWS Investments. Issuance is returning to normal after the hurricane knocked underwriting operations off-line and created uncertainty for investors.
And though some uncertainty remains due to the potential for changing of the muni tax-exemption status, the market isn’t currently being driven by it, Condon said. Demand, issuance and Treasuries are playing a much larger role.
“The trend has been for munis to catch up to Treasuries this year,” Condon said.
The triple-A tax-exempt yield has fallen six basis points to 1.51% since last Friday, breaking a record low each day of the week. The 30-year, likewise, has been breaking records daily over the same period, Municipal Market Data numbers show; it ended Thursday at 2.55%.
The two-year ended Thursday’s session at 0.30% for at 35th straight session.
Muni outperformance has forced ratios to Treasuries ever lower, and hence, richer, beyond the front end of the yield curve. The 10-year ended Thursday at 95.6%, dropping two percentage points since last Friday. The 30-year has fallen three percentage points over the same period, to 93.8%.
On the week, the market opened Tuesday after Monday’s observation of Veterans Day with an emphasis on the secondary market, given little action in the primary. Wednesday followed with strong demand in the primary and uncertainty overall concerning the potential for tax hikes.
Thursday piggy-backed on Wednesday’s strong session, with the Hawaii general obligation loan arriving upsized and with higher prices at many maturities.
The Bond Buyer’s revenue bond index, which measures 30-year revenue bond yields, fell six basis points this week to 4.17%, its second consecutive all-time low. The index began on Sept. 20, 1979.
The Bond Buyer’s one-year note index, which is based on one-year GO note yields, was unchanged this week at 0.22%. It sits at its highest level since Oct. 10, 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 seven basis points this week, to an all-time low of 4.05%. It is the fifth time in six weeks that the weekly average has reached a record low. The Bond Buyer began calculating the average yield to maturity on Jan. 1, 1985.