Yields on The Bond Buyer's weekly indexes declined for the fourth straight week as the settling of the dust from Orange County, Calif., and the belief that interest rates have topped out for the month helped firm up the market.
The Bond Buyer's indexes of 20 general obligation bonds fell 11 basis points, to 6.77% from 6.88% a week ago. The index of higher grade 11 general obligation bonds was also down 11 basis points, to 6.67% from 6.78% last week.
The 20-bond and 11-bond indexes are now at their lowest levels since Oct. 27 when were 6.64% and 6.54%, respectively.
The index of 25 revenue bonds was down 15 basis points to 7.02% from 7.17% last Thursday. The revenue bond index has not been that low since Oct. 27, when it was 6.95%.
The average yield to maturity of the 40 bonds used in calculating the daily Municipal Bond Index dropped 10 basis points to 6.98% from 7.08% a week earlier.
"As Orange County gets resolved, the Street is becoming more confident it was a problem peculiar to itself, mainly because of its size," a market analyst said. "Investors are also more confident that insurance companies are not that vulnerable" to the Orange County situation.
Further, even though the economic indicators continue to show a robust economy, inflationary pressures have remained in check.
On Tuesday, the Commerce Department reported that retail sales rose 1.2% in November, double what analysts expected. The surge was fueled by sales of automobiles and other high-priced durable goods.
However, the core producer price and consumer price indexes, which exclude food and energy prices, increased only 0.1% and 0.2%, respectively.
"Even though the overall economy is strong, the inflation numbers are relatively neutral," said Robert Chamberlin, senior vice president of municipal research and marketing at Dean Witter Reynolds Inc. "There is a feeling in the debt markets that yields are close to a peak, although here is still some downside risk.
"In addition," Chamberlin said, "munis are still in relatively short supply. There is some willingness to take on paper. There has been broadbased institutional interest and the retail side has been quite strong."
However, some weakness remains in the municipal bond market, as was reflected in yesterday afternoon's price dip, as dealer-to-dealer trading dragged the market lower.
"The spread between street bids and customer bids is fairly wide," a trader said. "Customer bonds are getting bids that are equal to offerings on the street."
"It's so quiet it's hard to know what's going on," a market player said. "But when you get into an active market and you trade size you can see that it's weaker."
"Mutual funds have been adjusting their portfolios," the analyst said, "in part to offset losses in California as well as in anticipation of investor fallout from all the bad press on Orange County. But the market has firmed despite about a $1.5 billion outflow from funds."
The Bond Buyer's one-year note index surged 25 basis points to 4.85%, its highest level since Sept. 13, 1991, when it was 4.94%.