The Bond Buyer's indexes took a tumble this week as the Federal Reserve Board's tighter monetary policy presented the markets with reasons for optimism.
The 20-bond index of general obligation yields fell 18 basis points, to 6.14% yesterday from 6.32% a week ago. The 11-bond index dropped 20 basis points, to 6.04% from 6.24% last week.
The revenue index slid 19 basis points, to 6.41% yesterday from 6.60% a week ago.
The indexes have not been at lows like these since March 30, when the 20-bond index was 6.07%, the 11-bond was 5.99% and the revenue bond index was 6.39%.
The average yield to maturity of the 40 bonds used in the daily Municipal Bond Index, which is comprised mainly of revenue bonds, declined 17 basis points, to 6.34% yesterday from 6.51% the previous Thursday. The yield to maturity has not been that low since the 6.23% of April 28.
The latest of the twice-monthly revisions to the 40-bond's list of bonds, done on May 15, raised the average coupon to 5.65% from 5.45%.
The government market was even more relieved by the Fed tightening, as evidenced by the yield on the Treasury's bellwether 30-year bond, which plunged 33 basis points to 7.23% yesterday from 7.56% a week earlier.
On Tuesday, the Federal Reserve Board hiked the discount rate for the first time in five years, to 3.5% from 3%. The Fed also increased the federal funds rate, to 4.25% from 3.75%.
Major commercial banks quickly followed the Fed move by boosting prime lending rates to 7.25% from 6.75%. It was second increase this year.
"The Fed's tightening move of 50 basis points, it is assumed, will make the Fed complacent, hopefully throughout the summer," a municipal market analyst said. "There's a lot of money on the sidelines waiting for the market's reaction. We're hoping they will be putting that money to work."
Although prices for tax-exempt debt gained throughout most of the week, prices were mixed yesterday as players strove to establish a solid trading range.
"Now that the Fed has made its move," a market player said, "we'll have to focus on economic reports to judge the true value of interest rates. The market's still vulnerable to price dips but it's generally a buying opportunity."
"We see some guys who want to buy the dip, but they're trying to figure out how deep a dip it will be," a broker said. "With the Fed out of the way, supply light, and munis attractive, the question is will we get institutions in here. They seem like they are flush with cash."
"In the backdrop, there is about $70 billion in redemptions, coupons and calls coming over the next two months and that will enhance demand," the analyst said. "As long as the Fed is not expected to do anything. Supply has remained light and showing little pickup. Weekly new issues have been limping along at barely $2 billion."
Both primary and secondary supply have been heading downward. Standard & Poor's Corp's The Blue List sank about $50 million yesterday, to $1.52 billion from $1.57 billion on Wednesday. This week, the measure of dealer inventories has dropped $440 million to the lowest level since April 26 when it was $1.50 billion.
The Bond Buyer's 30-day visible supply also has been drying up, falling $306 million yesterday to $3.71 billion from $4.01 billion on Wednesday. Forward supply has not been that low since March 3 when it was $3.14 billion.
The competitive component plunged $404 million to $1.18 billion, the lowest level since March 25 when competitives hit $1.06 billion.
"The bid lists are taking the edge off the market, but if somebody wanted bonds, we'd crank back up," a trader said. "The fact is, we may just sit tight in a range until after Memorial Day when we get some viable economic data."
The Bond Buyer's one-year note index slipped two basis points on Wednesday, declining to 3.77% from 3.79% last Wednesday.
