Bond indexes are finishing 1991 strong on discount rate cut, shrinking supply.

The municipal bond market is closing 1991 on its strongest note in years, with three of The Bond Buyer's indexes posting all-time low yields and the other two indexes falling to their lowest yields since early 1987.

This week's price gains were spurred by last Friday's full-point cut in the discount rate and the continued shrinkage in new-issue supply.

The 30-year revenue bond index declined eight basis points, to 6.76% from 6.84% last week, reaching a record low for the second consecutive week. The revenue bond index began in September 1979.

The average yield to maturity of the 40 bonds used in the Municipal Bond Index fell six basis points, to 6.71% from 6.77% last Thursday, the lowest it has been since The Bond Buyer began calculating it in January 1985.

The one-year note index, which began in July 1989, set a record low for the third straight week with a precipitous 36-basis-point drop, to 3.40% from 3.76% the week before.

The short end of the market had the most pronounced reaction to the Fed's discount rate cut, with California revenue anticipation notes being offered to yield 2.95% on Friday afternoon. In addition, about $905 million of New York State notes mature on Dec. 30 and market players are scrambling to sell the expiring notes and take positions in others.

The 20-bond and 11-bond GO indexes were both off eight basis points to 6.58% and 6.44%, respectively, from 6.66% and 6.52%. The indexes have not been lower since March 5, 1987.

Traders had anticipated a Fed cut in the discount rate, but did not foresee the full percentage point reduction.

"There's a bid for everything out here," a Philadelphia-based bond trader said on Friday. "The feeling is that the market's got a lot of room to move. Treasuries are cheap and municipals are even cheaper."

Governments outperformed municipals, with the Treasury's bellwether 30-year bond dropping 16 basis points from a week ago, to 7.50%.

New-issue volume dwindled to $635 million yesterday, while Standard & Poor's Corp.'s The Blue List of dealer inventory was down to $810 million.

Ram Bhagavatula, chief financial economist at Citibank, said the market will probably remain fairly quiet for the rest of the year.

"Most traders will be holding pat until the first of the year," he said. "Expect the long end to remain just about at the 7.50% level, with marginal change at the short end."

"The only concern that the government market has now is what action the people in Washington are planning," he said.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER