Yields on The Bond Buyer's indexes plummeted over the past week as demand for municipal paper out-stripped supply.
The Treasury market also recovered ground during the week, boosting the tax-exempt sector. But the municipal rally outperformed the taxable market, and the MOB spread narrowed from negative 425 at the close last Thursday to negative 411 yesterday.
The yield on the 20-bond index of general obligations declined 13 basis points to 5.33%, the lowest since Oct. 28, when it was 5.31%.
The yield on the 11-bond index of general obligations declined 12 basis points to 5.23%, the lowest since the 5.21% of Oct. 28.
The average yield-to-maturity of the 40 bonds used to calculate the daily Municipal Bond Index, which is comprised mainly of revenue bonds, was down 16 basis points from last Thursday to 5.50%, the lowest since Nov. 1, when it was 5.49%.
The Revenue Bond Index is at 5.53%, down 18 basis points from 5.71% last Thursday and the lowest since Oct. 14, when it was 5.44%.
Over the same period, the Treasury bond index dropped 12 basis points to 6.14%.
Even with major deals from New York City, the New York State Local Government Assistance, and the Maryland Department of Transportation, dealers'inventories shrunk.
Standard & Poor's Corp.'s The Blue List, which measures dealers' inventories of unsold bonds, dropped this week to its lowest levels in nearly three months. Wednesday's total of $1.17 billion was the lowest since Sept. 14.
The Treasury market's strength over the past week returned despite an unexpectedly positive employment report last Friday. The market shrugged off the report and rebounded from recent lows on expectations that inflation remains well under control.
Fueling the optimism about inflation, oil prices reached their lowest level in five years during the week.
Although the Federal Reserve Board's "beige book" report painted a picture of an improving economy in the fourth quarter, market players expect the rate of growth to moderate by early next year.
The short end also rallied during the past week. A $1.3 billion new issue by New Jersey earlier this month failed to satisfy the tremendous appetite for short-term securities.
Despite this week's strength in the long-term market, sentiment seems to have shifted to a less bullish outlook. With investors fearing an end to the bull market in long-term bonds, many have moved to the short-end, where rising rates will do considerably less damage.