The lack of supply in the primary and secondary continued to steer the municipal bond market this past week.

Bond Buyer Indexes

While this week’s volume stands at an estimated $4.46 billion, it’s still heavily outweighed by investor demand. And early prognostications forecast lighter calendars over the next two weeks, according to Alan Schankel, managing director at Janney Capital Markets.

Despite the imbalance, muni yields have had a strong week, particularly in the short end and belly of the curve. Overall, they’ve outperformed Treasury yields. And muni yields have either matched or broken record lows everywhere on the curve but the 10-year mark, according to Municipal Market Data numbers.

The week’s new issuance has also done well, traders say. Some of Thursday’s larger scheduled deals arrived a day early and were well received.

Muni bond indexes point to a market that mostly continues to rally. The Bond Buyer’s 20-bond index of 20-year general obligation yields declined eight basis points this week to 3.60%. That’s the same level as two weeks ago. The 11-bond index of higher-grade 20-year GO yields also fell eight basis points this week, to 3.34%, which is also the same level as two weeks ago.

The yield on the U.S. Treasury’s 10-year note declined 11 basis points this week to 1.83%, its lowest level since Sept. 22, when it was 1.71%. The yield on the Treasury’s 30-year bond dropped nine basis points this week to 3.01%, which is its lowest level since Jan. 12, when it was 2.97%.

“It’s the same story that we’ve had for most of January: moderate supply, strong demand, the ICI flows were positive for the 22nd week, and ratios [to Treasuries] have stabilized from their highs,” Schankel said. “Investors are just looking to lock in tax-free yields. And ratios are still relatively high, so that’s helpful.”

The short end of the curve, after hovering at 0.35% since Jan. 12, declined five basis points this week to match a record 0.30%. Investors were still reacting to the Jan. 25 announcement by the Federal Open Market Committee that the low interest rates would persist through 2014, a trader in New York said.

“The logical reason for [the two-year, triple-A muni yield’s fall] most likely is that all the people that have been holding cash at zero, because they think rates are going to be hiked sometime in the next two years, now decided that’s not going to happen, so they bought two-years,” he said.

The revenue bond index, which measures 30-year revenue bond yields, declined one basis point this week to 4.70%. That is its lowest level since Oct. 28, 2010, when it was 4.67%.

The Bond Buyer’s one-year note index, which is based on one-year GO note yields, rose one basis point this week to 0.25%, the highest level since Jan. 11, when it was also 0.25%.

The weekly average yield to maturity of the Bond Buyer muni bond index declined 10 basis points this week to 4.57%. That is its lowest level since the week ended March 22, 2007, when the average was 4.54%.

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