Anyone not convinced the municipal market has returned to a state of health need look no further than The Bond Buyer’s weekly indexes.
While the market absorbed a record level of issuance — the latest estimates suggest more than $8.5 billion hit the primary this week — yields mostly fell, suggesting investors were pleased to take on new paper.
“The municipal market has been actually starved for a large calendar and there seems to be plenty of cash around to absorb the first wave of deals,” said Michael Pietronico, chief executive at Miller Tabak Asset Management.
The Bond Buyer 20-bond index of 20-year general obligation fell five basis points this week to 4.46%, following a 14 basis point drop the week before. This matches its calendar-year low, last seen on June 23.
The 11-bond GO index of higher-grade 20-year GO yields declined six basis points to 4.18%, following a 13 basis point decline one week before. The index is now at its lowest since Nov. 10, 2010.
The revenue bond index, which measures 30-year revenue bond yields, rose two basis points to 5.32%. The hiccup follows a six-basis-point drop in the previous week to what was its lowest level since early December 2010.
“You would think demand would have suffered with the rating agencies warning of possible downgrades owing to the debt ceiling deadline, but it hasn’t,” said Jason Hannon, senior trader at Arbor Research & Trading.
Hannon characterized demand for high-grade paper as strong and suggested there is further room for muni outperformance given that the 10-year muni-Treasury ratio finished Thursday at 89.3%, versus a long-term average of less than 84%.
He noted the pickup in activity hasn’t quite translated into the secondary market, which remains relatively inactive.
One explanation, Hannon said, could be that much of the reinvestment money appears to be going straight into the primary market.
A flood of money into new-issues helps the primary market to perform and set benchmark yields lower.
The stability in munis was all the more impressive next to Treasuries, where yields rose as the European debt crisis moved closer to resolution and prompted the risk trade to turn back on.
The 10-year Treasury yield moved six points higher in the week after plummeting 20 basis points a week before. The 30-year Treasury yield picked up seven basis points to 4.32%, compared to a 13 basis point plunge the week before.
The weekly average yield to maturity on The Bond Buyer’s 40-bond muni bond index, which is based on 40 long-term muni prices, rose two basis points this week to 5.22%.
Pietronico said it would take several more weeks of heavy supply to “really knock the muni market down significantly” because of cash ready to be deployed from the sidelines.
“There’s a fair amount of cash out there,” he said. “Professional managers have been chronically short their duration benchmarks because there has been such little to supply to work with in the previous few months.”