Weekly Yield Indexes Show Buyers Turn to Short-Terms

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The yield curve steepened a bit this week as investors took their cash out of longer maturities and parked it into short-term notes, according to The Bond Buyer's weekly indexes.

Movement wasn't dramatic, though, given the shortened week and a relatively stable Treasury market. Market participants said it's too early to say if the July 1 reinvestment period is having any impact.

"It's early in the month, it's a short week, and generally speaking there isn't a lot of conviction either way in terms of which way rates are going," said Michael Zezas, vice president of research at Morgan Stanley.

"Reinvesting is happening but it's not as strong as everyone expected," said Catherine Corrigan, president and chief executive officer at Rockfleet Financial. "Even though issuance picked up the last few weeks — except for this week — there is still money on the sidelines."

The Bond Buyer 20-bond index of 20-year general obligation increased six basis points this week to 4.65%, following a 13 basis point climb in the week before. Before the back-to-back gains, the index was at a calendar-year low, while now it sits at its highest level since May 5, or nine weeks ago, when it was 4.69%.

The 11-bond GO index of higher-grade 20-year GO yields jumped seven basis points to 4.37%, its highest since May 5, when it was 4.43%. That also marks a back-to-back climb, after a 10 basis point rise a week before from a 2011 low.

The revenue bond index, which measures 30-year revenue bond yields, gained two basis points this week to 5.36%, following a three basis point gain the week before. It too had been at a calendar-year low but is now at its highest since May 26, or six weeks ago, when it was 5.38%.

Corrigan said the retail market is hoping for rates to back up to levels they find attractive. She noted that retail buyers seem to be jumping in whenever the 10-year muni-Treasury ratio climbs above 90% — something that has only happened on three occasions since May 1.

The 10-year Treasury yield fell two basis points this week to 3.15%, a slight move next to the 24basis-point rise a week before, while the 30-year Treasury yield held steady at a 10-week high of 4.38%.

The Bond Buyer's one-year note index hit a fresh all-time low at 0.31%, three basis points down from its previous all-time low. The data dates back to July 1989.

Zezas said short-term rates are dropping as buyers park their money in tax-exempt debt and wait for the Treasury curve to steepen.

"At some point there is going to be pressure for them to move their money out along the curve," he said. "It's not sustainable — rates can't stay that low from a technical standpoint."

The weekly average yield to maturity on The Bond Buyer's 40-bond muni bond index, which is based on 40 long-term municipal bond prices, rose eight basis points this week to 5.25%. That is its highest since the week ending June 9 when it was 5.27%.

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