Yields on The Bond Buyer indexes declined modestly for the third week in a row, as the municipal market seems to have put its inflation fears aside.
An otherwise upbeat week was marred, however, by a one-point decline yesterday, as profit-taking in the U.S. governments market and a poor five-year Treasury note auction dragged municipal prices lower.
The 20-bond index of general obligation yields fell three basis points on the week, to 6.16% yesterday from last Thursday. The 11-bond was down four basis points, to 6.07% from 6.11%. The revenue bond index dropped three basis points, to 6.42% from 6.45%.
The average yield to maturity of the 40 bonds used in the daily Municipal Bond Index, which is comprised mainly of revenue bonds, eased one basis point, to 6.32% yesterday from 6.33% the previous Thursday.
The declines of the past three weeks have been modest at best. The 20-bond and 11-bond indexes have fallen only 18 basis points since April 7, while the revenue bond index has given back only 13 basis points.
Profit-taking hit the Treasury market yesterday morning, shortly after release of the report on first-quarter gross domestic product and the market continued to unravel throughout the day. A poor five-year note auction sent Treasuries into a near free-fall, knocking the the 30-year bond down 2 2/32 points. The yield on the 30-year closed at 7.26%, up five basis points from 7.21% last week.
The Commerce Department reported that GDP grew at a moderate annualized rate of 2.6% in the first quarter of 1994. The slowdown from the 7% annualized increased in the fourth quarter was expected.
The five-year notes were awarded at an average yield of 6.60%, up sharply from the 5.91% average in the previous sale on March 23 and the highest since the 6.75% average incurred in the May 21, 1992, auction.
"We came into this week with the market poised to do better," a bond analyst said. "Investors were encouraged to buy, with mediocre home sales and no indications of inflation as shown with the cost of labor index."
On Monday, the National Association of Realtors said sales of previously owned homes rose 5.7% in March, to a seasonally adjusted 4.06 million units. Also on Monday, the Labor Department's employment cost index rose a seasonally adjusted 0.7% in the first quarter of 1994.
"We had a strong two-year note auction, and a thin primary future calendar" for municipal sales, the analyst continued. "The market made some sizable gains this week. Most of them were given back today [Thursday], but that was purely on profit-taking."
The Bond Buyer's 30-day visible supply fell to $4.27 billion yesterday, the lowest level since the $3.15 billion of March 3.
When the Treasury market began its downward slope, however, municipal players "just pulled in their horns and watched Treasuries," a trader said.
"People are just not comfortable around the 7.10% level" for the 30-year Treasury bond, another trader said. "We get down to that level, and then to stay there you've got to believe the next move is through a seven basis. With next week's employment data on the horizon, people just aren't comfortable with the risk."
Some traders did not see yesterday's events as strictly profit-taking and they took a pessimistic view. "Just when you thought it was safe to come back ..." one broker said. "If you walk in here tomorrow and you're deluged by customer bid-wanteds, then you better be prepared for a 7.40% long bond."
The Bond Buyer's one-year note index rose nine basis points, to 3.5% from 3.48% last Wednesday. That put the short-term index at the highest level since Dec. 18, 1991, when it was 3.76%. The index normally is calculated on Wednesday but was delayed one day this week because the financial markets were closed Wednesday.