Lower-Rated Tax-Exempt Bonds Outperform as Buyers Seek Yield: Muni Credit
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Andrew Harrer/Bloomberg
Individual investors have begun focusing on riskier debt such as bonds issued by the Port Authority of New York & New Jersey to increase potential income, said Neil Klein, senior managing director at New York-based Carret Asset Management.
Individual investors have begun focusing on riskier debt such as bonds issued by the Port Authority of New York & New Jersey to increase potential income, said Neil Klein, senior managing director at New York-based Carret Asset Management. Photographer: Andrew Harrer/Bloomberg
Dec. 22 (Bloomberg) -- Bloomberg columnist Joe Mysak discusses the municipal bond market and banking analyst Meredith Whitney's forecast. Whitney, speaking on the "60 Minutes" show on Dec. 19, said there will be between 50 and 100 "significant" muni bond defaults in 2011, totaling "hundreds of billions" of dollars. Mysak speaks with Erik Schatzker and Sara Eisen on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Tax-exempt municipal bonds rated four levels above speculative grade are outperforming top-ranked securities this month as investors seeking higher yields drove the premium to the lowest level in almost a year.
The so-called spread between 30-year A- rated bonds and the same maturity of AAA securities last week narrowed to 100 basis points, or 1 percentage point, the smallest margin since Jan. 29, according to Bloomberg Fair Market Value indexes. It widened to 102 basis points yesterday.
Individual investors have begun focusing on riskier debt such as bonds issued by the Port Authority of New York & New Jersey to increase potential income, said Neil Klein, senior managing director at New York-based Carret Asset Management.
“Yield is the driving factor,” said Klein, who oversees $900 million in fixed-income assets. “There’s a significant amount of demand for those lower credits, because they’re hitting that tipping point where they’re attractive enough for the retail buyer.”
High-yield municipals this year have returned about 7 percent for investors, compared with a 2.2 percent gain for investment-grade bonds, according to Standard & Poor’s/Investortools Indexes, which track price changes and investment income. That contrasts with the trend of the last 11 years, when high-yields had annualized returns of 4.9 percent while investment grade debt gained 5.23 percent.
Port Authority, Illinois
The Port Authority this month sold securities backed by rental payments from retail concessions and airlines at New York’s JFK International Airport. The special project bonds were rated BBB- by S&P and Baa3 by Moody’s Investors Service, both the lowest investment grade, and BB by Fitch Ratings, two levels below that. Securities due in 26 years yielded about 181 basis points above top-rated obligations at sale before demand helped shrink the spread to 106 basis points on Dec. 20, according to a Bloomberg Valuation index.
The premium on Illinois Railsplitter notes maturing in 18 years, which are rated A- by S&P and BBB+ by Fitch, fell to 194 basis points yesterday from 227 on Dec. 1. The bonds, backed by payments from a 1998 tobacco lawsuit, have also traded every day this month.
At the same time, the spread on a 10-year top-rated revenue bond from Los Angeles County Metropolitan Transportation Authority widened to 59 basis points above 10-year AAA debt yesterday from 4 basis points below the benchmark on Nov. 30.
Lower-rated bonds “have held up well, from people looking for yield,” said John Dillon, chief municipal strategist at Morgan Stanley in Purchase, New York. “You can get good value on a spread basis.”
Lower-Rated Outperforms
Lower-rated debt has outperformed even as speculation about municipal risk has become more pronounced, with analysts such as Meredith Whitney, chief executive officer of Meredith Whitney Advisory Group, speaking Dec. 19 on CBS Corp.’s “60 Minutes” about the possibility of a “spate” of defaults among local municipalities triggered by states’ fiscal stress.
“It appears to me the health of states and municipalities is getting better, not worse,” said Mark Steffen, who oversees $450 million in munis as chief operating officer at White Plains, New York-based Belle Haven Investments. “They’ve been forced to address the problems, make remedies to balance budgets. From a credit perspective, over time munis are getting healthier not worse.”
Tax-exempt prices rallied across most maturities yesterday, with yields on top-rated 1-year notes falling 9 basis points, while 30-year rates dropped 2 basis points, BVAL indexes show.
Yields on 30-year BBB rated general obligations fell 3 basis points to 7.75 percent, while 1-year rates jumped 5 basis points to 1.63 percent, Bloomberg Fair Market Value indexes show.
To contact the reporter on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
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