Tax-Exempt 10-Year Municipal Bonds Poised for Biggest Gain in Six Weeks

Municipal bonds are set for their biggest rally since early September as issuance slowed following the busiest sales week of the year.

Yields on top-rated 10-year bonds were 2.42 percent today, down 15 basis points from last week, according to data compiled by Bloomberg. That’s the biggest drop since the week ending Sept. 9, when yields fell 16 basis points. A basis point is 0.01 percentage point.

Yields, which move in the opposite direction of prices, dropped this week because investors grabbed tax-exempt bonds for their relative value compared with Treasury debt, Chip Peebles, head of retail trading at Morgan Keegan Inc. in Memphis, Tennessee, said in a telephone interview. The ratio between tax- exempt rates and federal bond yields was 111 percent, above this year’s average of 95 percent, as of Oct. 20.

“Between the confluence of absolute yields and the percentage to Treasuries, the market became very attractive,” Peebles said. “So we got both traditional and crossover buyers coming in this week with a somewhat limited supply.”

While states and municipalities are set to borrow $7.6 billion of debt this week, California and the Hudson Yards Infrastructure Corp. took up about $3 billion of that total. Muni issuers sold $8.9 billion of debt in the week ended Oct. 7, the most of any week in 2011.

“Apart from the Hudson Yards and California deals, the calendar was extremely manageable and was not overwhelming at all,” Peebles said.

To contact the reporters on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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