As President Bill Clinton signed his deficit reduction package into law last week, the municipal market took off and yields on The Bond Buyer's indexes plummeted by as much as 17 basis points.
The average yield to maturity on the 40 bonds used in the Municipal Bond Index fell nine basis points to 5.64%, the lowest average recorded since the index began tracking the yield to maturity in January 1985.
The yield on the 11-bond index dropped the most last week, falling 17 basis points to 5.36%, the lowest reading since March 23, 1978.
The yield on the 20-bond index dropped 16 basis points to 5.45%, the lowest reading since Nov. 23, 1977.
The yield on the revenue bond index fell 15 basis points to 5.68%, the lowest reading ever for the index, which was started in September 1979.
Short-term yields were actually up on the week, causing the yield curve to narrow. The yield on the one-year note index rose four basis points to 2.97%.
"One of the major factors driving the market is the drop in rates in the long Treasury market," said George Friedlander, managing director and market strategist at Smith Barney Shearson.
"The fixed-income market generally has been driven by the perception that the deficit reduction bill will depress the economy somewhat and will change the perception of the Federal Reserve," Friedlander said.
After Federal Reserve Chairman Alan Greenspan testified on Capitol Hill last month, some market players turned bearish, believing that the Fed might raise rates soon. But the deficit reduction bill seems to have calmed those fears, Friedlander said.
He added that his firm continues to hold a favorable outlook for the fixed income markets, and "municipals are still relatively cheap."
But going forward, technical market indicators are mixed, according to Christopher Dillon, market strategist at J.P. Morgan Securities.
Dillon noted that the municipal futures contract is expensive relative to the cash market, a historically bullish indicator.
However, the spread between current interest bonds and discount bonds is lower than it was earlier this year, indicating a reduction in favorable sentiment since February. The spread between callable and noncallable bonds has also shrunk, indicating reduced bullish sentiment.
And the long end of the market, at maturities over 20 years, still remains the cheapest segment of the market, generally an indication that market players are not overly optimistic, Dillon said.
"We're getting mixed signals. Based on the futures contract, we could be going higher, but the other spreads were higher earlier," Dillon said.
With prices on the upswing, dealers sold an estimated $7.4 billion of new issues this week. So far this year, sales of new issues have averaged $5.3 billion per week.
The 30-day visible supply was down $995 million from Wednesday, to $3.602 billion, its lowest level since June 30 when it was $3.569 billion.
"We see supply tapering off," one mutual fund portfolio manager said. "August is often slow and the market has been surprised by refundings cropping up in September in the past, but I don't see that scenario taking shape this year."
The Blue List fell for the fifth consecutive day, to $1.27 billion, its lowest level since May 10 when it was at $1.19 billion. Since Aug. 4, when the downward streak began, the measure of dealer inventory has plunged $700 million, or about 36%.
Excluding the June 29 to July 7 period, which includes the 4th of July holiday, the last time the 30-day visible supply spent three straight days under $5 billion was between Feb. 9 and Feb. 19, when it stayed between $3.28 billion and $4.8 billion.
The last time The Blue List spent three straight days under $1.5 billion was the May 4 to May 17 period, when it was between $1.19 billion and $1.46 billion.Yields Plummet
20-Bond
5.45%
11-Bond
5.36%
Revenue
Bond(*)
5.68%
Municipal
Bond([dagger]*)
5.64%([dagger]) Yield to maturity(*) Record low.
