Uncertainly over where inflation is headed, coupled with heavy fund selling, pushed The Bond Buyer's indexes higher this week.
The rise reversed four weeks of declines.
The 20-bond and 11-bond indexes of general obligation yields rose eight basis points, to 6.04% and 5.95%, respectively, from 5.96% and 5.87% a week ago.
The revenue bond index jumped 14 basis points, to 6.34% from 6.20% last week.
The average yield to maturity of the 40 bonds used in the daily Municipal Bond Index, which is comprised mainly of revenue bonds, increased eight basis points, to 6.24% yesterday from 6.16% a week ago.
This week's slump in municipal bond prices was roughly in line with the one in government securities. The yield on the Treasury's bellwether 30-year bond rose 10 basis points, to 7.37% yesterday from 7.27% the previous Thursday.
The municipal bond market immediately began giving back last week's gains after the Labor Department reported last Friday that the producer price index in May slipped 0.1% for the second straight month on sharply lower prices for food and energy prices. However, the core index, which excludes those components, rose 0.4%, which reinforced the belief in certain camps that inflation will rise in the months ahead.
Tuesday's consumer price index for May came in as expected with a 0.2% increase in the overall rate and a 0.3% increase in the core rate. Also, retail sales fell 0.2% in May. The figures helped to calm some inflationary fears.
By midweek, however, the fears roared back. The Commodities Research Bureau's index jumped 3.31 points on Wednesday to close at 238.61. Oil futures soared on fears that the United States and North Korea could be headed for war.
The back and forth motion in the economic figures alone should have prompted reassessment in the market and higher municipal bond yields. However, municipal bond funds then began selling into the market. Compounded with a lack of institutional buying, the selling sent the market lower by as much as a full point on Wednesday.
"This is still a sell," a trader with a major New York-based firm said yesterday afternoon. "We're getting a little price bounce, but rates are going higher. It's the first time down and people will naturally buy it, but everybody is looking to see where the next trade is form and it's hard to find."
"The market's been adjusting higher due to a lack of retail interest, putting the market into a selling mode" a bond analyst said. "The June reinvestment withdrawals did not go into the bond funds, which exacerbated selling pressure."
The sour tone of the market was reflected in the Standard & Poor's Corp. measure of dealer inventories, The Blue List, which was at $1.896 billion yesterday, the highest level since since May 16 when it was $1.899 billion. The Blue List has now risen for five straight days, with inventory growing $483 million.
"The selling pressures were further increased with inflation fears stirred up by the CRB's striding higher on the Korea situation," the analyst said. "Add on the upcoming Treasury supply and the market felt it had to fall back."
Increasing primary supply has also been pressing the market. However, The Bond Buyer's 30-day visible supply has now been below $5 billion for 24 days, and 62 days so far this year. In all of 1994, it was below $5 billion only 78 times.
The Bond Buyer's one-year note index rose five basis points, to 3.60% on Wednesday from 3.55% a week earlier.