Yields on Indexes Slip to Lowest Ever; Demand for New Munis Stays Strong

Yields on The Bond Buyer's indexes slid slightly lower again this week, pushing the 30-year revenue bond index to an all-time low.

Continued strong demand for new tax-exempt bonds kept yields locked in at lower levels, despite increasing supply, as municipals remained attractive compared with other securities.

The revenue bond index fell four basis points this week, to 6.91% from 6.95%. This was the lowest the index has been since its inception in September 1979. The previous low was 6.92% on Jan. 22, 1987.

The 20-bond and 11-bond indexes of general obligation yields both fell five basis points, to 6.73% and 6.60%, respectively, from 6.78% and 6.65% a week ago. Both are at their lowest levels since March 19, 1987, when the 20-bond was 6.68% and the 11-bond was 6.55%.

In the 15 weeks since June 13, the GO indexes have posted 14 weekly declines, pushing the 20-bond index down 46 basis points and the 11-bond index 44 basis points. During the same 15-week period, the 30-year revenue bond index posted 13 weekly declines and has fallen 45 basis points.

The Municipal Bond Index's average yield to maturity slipped one basis point this week, to 6.91% from 6.92% a week ago. The yield is the lowest since The Bond Buyer began calculating it in January 1985.

Despite in a heavy downpour of new issues in the primary market, secondary trading was brisk and prices relatively firm throughout the week. Underwriters said demand for new bonds remained strong even though interest rates were hitting "sticker shock" levels, although one trader noted, "It feels like there is slight weakness underneath, which may be normal after all the deals that we've had."

The price rally has slowed to a crawl over the past two weeks, leading some traders to say the large supply may be weighing the market down.

The U.S. governments market spent the early part of the week concentrating on the Treasury's $13.19 billion auction of two-year notes and $9.29 billion sale of five-year notes. The two-year notes were auctioned at an average 6.14% yield, the lowest since April 1977, and the five-years went at 7.05%, the lowest since Feb. 25, 1987. The Treasury's bellwether 30-year bond was down three basis points in yield during the week, to 7.88% from 7.91% last Thursday.

In the short-term market, The Bond Buyer's one-year note index dropped 14 basis points, to 4.69% from 4.83%. The index has not been lower since May 22, when it was also at 4.69%.

Note traders attributed the note index's decline to the successful Treasury auctions, which boosted the short end of that market, and to strond demand from large bond funds.

"The huge funds are soaking up anything they can get their hands on," one trader said. "There's a lot of cash out there."

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