A stronger-than-expected inflation report helped push yields of The Bond Buyer's weekly indexes higher this week, snapping a string of six consecutive weeks of declining or steady yields.
The yields on the 20-bond and 11-bond indexes of general obligation bonds both rose three basis points from last week, to 5.27% and 5.18%. respectively, from 5.24% and 5.15%.
The 30-year revenue bond index gained five basis points. to 5.49% from 5.44% last Thursday.
The average yield to maturity of the 40 bonds used to calculate the daily Municipal Bond Index fell four basis points, to a record low of 5.45%. from 5.49%. But the decline is deceptive because the list of bonds used in the index was revised Wednesday, which substantially lowered the average coupon rate, to 5.41% from 5.53%.
The Municipal Bond Index itself, which is based on prices and adjusted for revisions in its composition, declined 5/32 on the week, to 105.06 from 105.11.
This week's lower prices ended a six-week rally that ran from July 29 to Sept. 9, during which the 20-bond and 11-bond GO indexes both fell 41 basis points and the revenue bond index decreased 43 basis points.
On Tuesday. the Labor Department reported that the consumer price index for August rose 0.3%. The core rate, which excludes volatile food and energy prices, also increased 0.3% in the month. Analysts had expected a 0.1% gain.
Although economists insisted that the slight rise was not an indication of runaway inflation, the markets took the news hard, with the 30-year Treasury losing almost a full point. The yield on the bell-wether 30-year bond rose three basis points on the week, to 5.99% from 5.96%.
"We're lucky yields aren't up more, considering the market's bearishness," a trader said. "Everyone knew that bonds would continue to rally and that there would be a correction. This has just been a pullback. The trend toward lower rates is still intact."
A portfolio manager said, "There hasn't been a lot of supply, and that's helped to keep the market stable. We've pretty much just been taking the Treasuries' lead."
Since the beginning of August, new-issue weekly volume has averaged $4.67 billion, compared with $5.75 billion for the January-July period. In the two weeks ended Sept. 10, only $5.77 billion has been brought to market.
Despite the recent lull in bond sales, new-issue volume has topped the $200 billion level this year, reaching $203.23 billion as of yesterday. That is well ahead of last year's record-setting pace, when new-issue volume did not exceed $200 billion until the week ended Nov. 20. For all of 1992, $234.99 billion of new issues were sold.
"The market was feeling toppy going into the CPI number," a market analyst said. "When it came in stronger than expected, there was considerable profit-taking. However, the market was able to maintain a slight trading range as it continued to consolidate the gains of the past month and a half."
The portfolio manager said, "Let's see how these interest rates stack up next week when the supply starts heading higher." The Bond Buyer's one-year note index climbed 11 basis points, to 2.80% from 2.69% a week ago.