Yields on The Bond Buyer's revenue bond index shot to the highest level since late 1992, as a nervous market bided its time before the Federal Reserve Board's inevitable tightening.
The revenue index jumped 17 basis points to 6.60% yesterday from 6.43% a week ago. This is the highest level since Nov. 5, 1992, when the index reached 6.70%.
The 20-bond and 11-bond indexes of general obligation yields both rose 14 basis points on the week, to 6.32% and 6.24%, respectively, from 6.18 and 6.10% last week. The GO indexes are at their highest levels since April 7, when the 20-bond index was 6.34% and the 11-bond was 6.25%. The April 7 figures were the highest since Nov. 12, 1992.
This week's price declines in the tax-exempt market obliterated the slow but steady gains made over the past month. Yields on the weekly indexes are now back to levels reached just before the modest price rally began during the week of April 10.
The average yield to maturity of the 40 bonds used in the daily Municipal Bond Index, which is comprised mainly of revenue bonds, rose 14 basis points, to 6.51% yesterday from 6.37% the previous Thursday. This week's peak yield to maturity of 6.53% was set Wednesday, and was the highest level since 6.54% on April 6.
Tax-exempts were pummeled right out of the chute, starting with last Friday's jump in April nonfarm payrolls report. The Labor Department reported that nonfarm payroll employment expanded from 267,000 jobs and March payroll gains were revised slightly higher, to 464,000.
Both the bond and stock markets were certain that the Federal Reserve Board would respond to the payroll figures with an increase in the federal funds rate's target range. When that didn't happen, municipal investors took to the sidelines and jiggled bond prices up and down for the rest of the week.
"How much pressure the Fed will apply is the major concern," a bond analyst said. "After that sloppy 10-year [Treasury note] auction, it's still in the back of traders' minds, and it's keeping investors out of the market until the consumer price index report on Friday."
Yesterday, the Labor Department reported that the producer price index fell 0.1% in April, in sharp contrast to forecasts for a 0.2% increase. Excluding food and energy, the producer price index gained 0.1%. Analysts attributed the index's decline to a 0.5% drop in food prices, a 0.9% drop in tobacco prices, and a 5.3% drop in fuel oil prices.
The Treasury auctioned $12 billion of 10-year notes at an average yield of 7.36% with a tail of four basis points. Traders expected the auction to produce a much lower level, with most calling for an average yield of 7.33%.
The government market took a pounding, as the yield on the Treasury"s bellwether 30-year bond soared 25 basis points, to 7.56% yesterday from 7.31% a week earlier.
"There was ample selling throughout the week and bond funds saw sizable withdrawals," the bond analyst said.
Although the tax-exempt market began a comeback yesterday morning, municipals backed up to former levels in the afternoon.
The market "just can't get going," a trader said yesterday. "We're seeing some bids heat up, but there's speculation that traders have gotten so destroyed they've been taken out of the market by managers. I really can't say we've made much progress at all."
The Bond Buyer's one-year note index rose for the fourth straight week, jumping 16 basis points, to 3.79% from 3.63% last Wednesday. The yield on the one-year index has not been so high since the 3.92% of Dec. 11, 1991. Since hitting an all-time low on Dec. 8, 1993, the index has risen 154 basis points.