Buy Stocks as Municipal Yields Reach 43-Year Lows: Joe Mysak
Don’t worry about too much red ink in state and local budgets and not enough money in public pension plans. Forget about the prospect of inflation.
That’s what the municipal market is telling investors. The last time yields were this low, Jacqueline Susann had been on the bestseller list with “Valley of the Dolls” for 62 weeks.
The oldest gauge of yields in the market, the Bond Buyer 20-General Obligation Bond Index, fell to 3.88 percent last week, below the recent record low of 3.94 percent it reached in October 2009. Yields were last this low on May 11, 1967.
The municipal market rarely speaks in a single consistent voice; more often, it’s a Tower of Babel. In this case, what it is saying is unmistakable: There’s no yield here.
Some investors are interpreting this to mean: Go buy stocks. That sounds like good advice if you believe that the time to buy an asset is when everyone else has given up on it.
The municipal market is also telling investors that bonds are bargains, especially those with maturities of 10 years or more. Some munis are now yielding more than 100 percent of U.S. Treasuries. The normal ratio is about 85 percent. At the same time, municipal credit-default swaps, as measured by the Markit MCDX index, are climbing back to their record highs, signaling danger ahead.
Fewer Tax-Exempts
There are many reasons tax-exempt yields have declined. They follow U.S. Treasury yields, of course, and the Federal Reserve hasn’t raised interest rates.
Bond yields are generally lower as buyers embrace the safest assets. Investors have put more money into bond funds than stock funds for 30 months, the Investment Company Institute said last week, the longest stretch in almost a quarter-century.
The supply of tax-exempt securities has shrunk. So far this year, $181 billion in both fixed and variable-rate tax-exempts have been sold. For the same period last year, the figure was $227.3 billion.
Blame the government’s taxable Build America Bond program for that. So far this year, $64 billion in such bonds has been sold, compared with $21.4 billion over the same period in 2009 (issuers started selling BABs in April 2009).
Finally, there has been relatively good news, or perhaps it’s more the lack of bad news. For all the headlines about what perilous financial shape the nation’s states and municipalities are in, defaults are down so far this year.
In 2008, a total of 162 issues defaulted on a record $8.2 billion in bonds. In 2009, more issues defaulted, 194, but the overall dollar amount was down to $6.9 billion. To date, 46 bonds have defaulted, totaling $1.7 billion, according to the Distressed Debt Securities newsletter.
Good Time
For those who ask if it’s a good time to buy municipal bonds, I say it’s always a good time to buy them, if you want income and preservation of capital and don’t care much about price movements (as most individual bond buyers don’t -- they don’t buy to trade, they buy and hold).
Right now, you’re not getting a lot of income. Nor are you getting much peace of mind. State and local governments are still looking at oceans of red ink. They are grappling with that with varying degrees of success.
You can go out and find good old safe municipal bonds that you can retire with. You can also find a lot of bonds that aren’t quite what they seem, because so many different varieties of bonds have been introduced in recent years, cutting up revenue streams and taxes in an infinite number of ways.
I almost want to tell readers who write in that there’s no such thing as a municipal bond, that they really have to know who the issuer is and what the bond is about. This is an asset class that demands attention to the fine print. If you’re not happy poring over the offering documents, you have no business buying munis.
Is 3.88 percent the new normal in the municipal market? Keep this in mind: From 1935 to 1965, the 20-bond index never exceeded 4 percent, and averaged 2.71 percent over the period.
Maybe those “Valley of the Dolls” yields haven’t reached the bottom yet.
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net
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