Investors Can’t Get Enough Long Bonds Chasing Yield: Muni Credit
Investors are pouring the most money in almost two months into the longest-maturity U.S. municipal bonds, signaling the securities may extend this year’s market-leading rally.
Investors added $329 million to long-term muni mutual funds in the week ended April 25, the most since the start of March, Lipper US Fund Flows data show.
With signs of a slowing U.S. economy helping keep local- government interest rates near four-decade lows, investors have an incentive to look to longer maturities. Thirty-year municipal yields were as much as 1.49 percentage points above those on 10- year debt last week, the biggest difference since February, according to data compiled by Bloomberg.
“Mutual funds are really starving for yield” at a time when longer-term debt sales have been limited, said James DiChiaro, a portfolio manager in Armonk, New York, at Cutwater Asset Management Corp. The firm oversees about $3 billion in munis.
State and local bonds due in 22 years or more have earned 5 percent in 2012, according to Bank of America Merrill Lynch indexes tracking prices and interest income. That beats other maturities by at least a percentage point. The $3.7 trillion municipal market’s 3.2 percent gain since Dec. 31 is its best start in three years.
The added demand for longer-dated debt may help issuers, including the Charlotte-Mecklenburg Hospital Authority in North Carolina, which plan borrowings of 30 or more years this week.
Interest rates on top-rated 30-year munis ended last week at 3.3 percent, and 10-years at 1.9 percent, close to two-month lows for both, according to Bloomberg Valuation data. The gap between the two has averaged 1.47 percentage points this year, after rising from as little as 1.13 points in March. For Treasuries, the difference between yields on these maturities is 1.19 percentage points.
Treasury debt led the fixed-income advance amid concern that Europe’s debt crisis is widening. Separately, U.S. jobless claims tallied 388,000 last week, close to the highest since January, Labor Department figures showed. As the U.S. economy shows signs of losing momentum, helping tamp down inflation expectations, the longest-dated part of the market benefits.
“If you look at it in terms of yield, it’s attractive, and if you look at it in terms of expected return, it’s attractive,” Daniel Solender, who manages $16 billion of munis at Lord Abbett & Co. in Jersey City, New Jersey. “As things have slowed down recently, that’s benefited the longer end.”
Buyers are seeking the pickup in yield as municipal interest rates remain close to four-decade lows. A Bond Buyer index of 20-year general-obligation bonds yielded 3.86 percent last week after reaching 3.6 percent in January, the lowest since the 1960s. The benchmark’s record low was 1.29 percent in 1946.
Dropping interest costs have spurred issuers to refinance debt, including Illinois, which is set to offer $1.8 billion of refunding bonds tomorrow, maturing in as long as 14 years. Refunding securities tend to be shorter maturities, leaving fewer longer-term bonds for investors to buy, said DiChiaro.
About 60 percent of the $108 billion of bonds sold this year has been for refunding, data compiled by Bloomberg show. The ratio was about 40 percent in the first four months of 2011.
“There’s really a dearth of supply in the long end,” said DiChiaro.
Following are pending deals:
DISTRICT OF COLUMBIA plans to sell $329 million in revenue bonds as soon as this week, according to an offering statement. The debt, backed by the district’s income taxes, will be used for refunding. Standard & Poor’s rates the bonds AAA, its top grade. (Added April 30)
LOS ANGELES plans to issue $300 million in wastewater revenue bonds as soon as this week, according to an offering document. The debt will be used for refunding and divided between senior lien bonds and subordinate bonds. (Added April 30)
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