Despite agressive pricing, investors stormed into a municipal market that had sharply lower new issue supply this week, driving all indexes lower and the yield on The Bond Buyer's weekly 20-bond index to its lowest level in almost 20 years.
A robust Treasury market also boosted tax-exempts, jacking the Municipal Bond Index to an all-time high this week.
The yield on the 20-bond index of general obligation bonds fell five basis points to 5.40% from 5.45% a week ago. That is the lowest level since March 14, 1974 when the index was at 5.32%.
The 11-bond index also fell five basis points, to 5.31% from 5.36% a week ago. The 11-bon has not been this low since Dec. 15, 1977 when it was 5.27%.
The yield on the revenue bond index fell seven basis points to 5.61%, the lowest reading ever for the index, which was started in September 1979. Last Thursday, the revenue bond index was at 5.68%.
The average yield to maturity on the 40 bonds used in the Municipal Bond Index fell two basis points to 5.62%, the lowest average recorded since the index began tracking the yield to maturity in January 1985.
The Municipal Bond Index index was at 103 29/32, an increase of 17/32 from a week ago and a record high.
U.S. Treasury debt prices "traded in a world of their own," as one government analyst put it. By the close yesterday, the yield on the bell-wether 30-year bond had plunged 24 basis points, to 6.19% from 6.43% last Thursday.
"It's really something, isn't it?" said George Fischer, a portfolio manager with Fidelity Investments. "Some people started to worry that the Federal Reserve Board would raise their short-term interest rates. But then we got great CPI and PPI numbers.
"This week there was more evidence of a stumbling economy, and that got people moving out on the yield curve," Fischer said. "With more money coming into the market, rates continued to collapse."
On Tuesday, the Commerce Department reported that July housing starts declined 2.7%. Economists had expected a slight increase.
Yesterday, Commerce reported that the U.S. merchandise trade deficit widened to $12.06 billion in June from a revised $8.38 billion in May.
"We're also still getting investor support from the budget compromise," a municipal market analyst said. "Mutual funds have been purchasing aggressively and trust funds have been getting involved in the market. Dealers have been building positions, and are bidding aggressively in the primary market."
The upsurge in investor demand was coupled with a decrease in supply. The Bond Buyer's 30-day visible supply, which measures upcoming issuance, was at $3.88 billion yesterday, a drop of $900 million from last Friday's $4.82 billion. The competitive component was $877 million, the lowest level since Dec. 21, 1992 when it was $796 million.
Throughout August the 30-day visible supply has averaged $5.45 billion, compared with an average of $6.38 billion for the year.
Volume in Standard & Poor's The Blue List, was calculated at $1.67 billion on Thursday, up $450 million from last Friday's $1.22 billion.
Short-term yields plummeted 15 basis points to 2.82% from 2.97% a week earlier.