Friday, February 18, 2011

Don't Look Now, But the Muni Market is Rallying

I doubt you will see this mention amongst all of the angst surrounding the municipal bond market recently, but this landed in my email in box last night from Merrill Lynch:

The muni market has experienced rallies for the last 6 trading days.
For the last 6 trading sessions, the 10 Yr Treasury yield has decreased by 8bps to 3.57%, however the 10 Yr AAA Muni rate has decreased by a significant 21bps to 3.18%. We think the rally of the muni market today can be partly attributable to the rally of Treasurys today, and another factor is the limited municipal primary calendar next week. The current 10 Yr AAA Muni/Treasury ratio of 89.0% has been the lowest level since 9/27/2010 and is below its 1 Year average of 89.3%.

In other words, munis are following their historic pattern: weakness into year-end, followed by a strong first quarter.