Muni bond market rallies again, pushing yields down

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The battered municipal bond market rallied for a third day on Friday as selling pressure eased and more buyers hunted for potential bargains.

The market “definitely felt better today,” said Joe Lee, a muni trader at De La Rosa & Co. in Los Angeles. Although trading was typically light for a Friday, he said there were “not nearly as many bid wanteds” -- meaning requests from sellers for price quotes from interested buyers.

The annualized tax-free yield on the Bond Buyer index of 40 long-term muni bonds nationwide (charted at left) fell to 5.85%, the third straight drop since it peaked at a two-year high of 5.95% on Tuesday.

Falling yields mean bond prices are rising. The share price of the Vanguard California Long-Term Tax-Exempt fund closed Friday at $10.47, up 0.7% from the 21-month low of $10.40 on Tuesday.

The muni market has been hammered over the last three months, first as part of a sell-off in bonds in general in November, then by worries about the budget woes facing many deficit-ridden states and municipalities.

Heavy outflows of cash from muni bond mutual funds worsened the market’s decline by forcing managers to sell bonds.

But this week, the high tax-free yields on muni issues finally proved too much for some investors to resist.

For more on the week that was in the muni market, go here and also here.

-- Tom Petruno