Indexes' Yields Drop Again As Investors Feast on Sales

Yields on The Bond Buyer's indexes tumbled once again this week, as eager investors had no trouble harvesting a new crop of bond issues.

The revenue bond index fell to a record low for the second straight week, decreasing four basis points, to 6.87% from 6.91%. The previous low had been 6.92% on Jan. 22, 1987.

The average yield to maturity of the 40 bonds used in the Municipal Bond Index, which are mostly revenue bonds, fell three basis points this week, to 6.88% from 6.91% a week ago. The yield is the lowest since The Bond Buyer began calculating it in January 1985.

The 20-bond index of general obligation bonds was down nine basis points, to 6.64% from 6.73% a week ago, and the 11-bond GO index dropped 10 basis points, to 6.50% from 6.60%. Both are at their lowest points since March 12, 1987, when the 20-bond index was 6.61% and the 11-bond index was 6.48%. A further decline of 11 basis points apiece would put the GO indexes at their lowest levels since September 1979.

GO bond yields fell more than revenue bonds, a New York-based bond dealer said, because more revenue bonds were issued this week, dampening their price gains. "There simply haven't been any significant GOs coming into the market for a long time," he said.

In the 16 weeks since June 13, the GO indexes have posted 15 weekly declines, pushing the 20-bond index down 55 basis points and the 11-bond index 54 basis points. During the same period, the 30-year revenue bond index posted 14 weekly declines and has fallen 49 basis points.

With estimated bond volume dropping sharply this week, to $1.43 billion from actual sales of $4.38 billion a week ago, investor demand has worked in favor of higher prices.

"There's an incredible amount of money out there," a municipal bond trader said. "And the new-issue calendar shows there's not that much out there, so everyone's bullish."

Yields are also being pushed lower by the market's certainty that the Federal Reserve Board will ease monetary policy. In addition, municipal yields remain attractive compared with other securities.

"Even the high-grade New York market is getting 6.75%, versus 7.80% on the long [Treasury] bond," another trader said. "We are very attractive. It is frightening how low yields are, but we're in good shape."

Another New York trader echoed those sentiments, saying that although there has not been a market correction in more than three weeks, the low yields aren't "necessarily a signal to sell. This is a basic bull market."

The Treasury's bellwether 30-year bond continued to decline in yield as well, dropping five basis points during the week, to 7.83% from 7.88% last Thursday. Since June 13, it has fallen 69 basis points, from 8.52%.

In fact, the Treasury rally has gone on so long that many participants are expecting a correction. However, a government note trader said he does not expect the market to falter until participants see some stronger economic statistics or get a signal that the Fed will not move soon.

"Until something fundamental changes, the market's trending to higher prices," he said. "Whether you think it's right or wrong, it's a pretty powerful trend right now."

Another bond trader called the market "bulletproof."

"Every day, there seems to be renewed buying interest, coming mostly from the money funds," the bond trader said.

In the short-term market, The Bond Buyer's one-year note index dropped nine basis points, to 4.60% from 4.69%. The index has not been lower since April 10, when it was at 4.56%.

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