Long term perspective

Yields on municipal bonds are lower than on Treasury notes because the interest earned is exempt from federal income tax. The spread is once again narrowing between these two series. It reflects the decreasing supply of Treasuries rather than a worsening of credit quality among municipal bonds. The spread actually turned positive (10-year minus municipal bond) in December 2005 as a result of decreased supply of Treasuries and continued improvement in the fiscal health of municipalities, continuing into early 2007. But rates rose during the remainder of 2007 due to increased fears of recession and the impact on revenues for municipal governments.

Short term perspective

The 10-year note yield has fallen below the bond buyer index – which is unusual. Typically, one expects the bond buyer index to be lower than the Treasury yield since it is comprised of tax-free municipal bonds. But flight to quality has pushed the Treasury yield down sharply. The bond buyer index rose 7 basis points in November while the 10-year note fell 38 basis points for the month.