Muni Yields Extend Drop to 1967 Low as Investors Seek Tax Haven

U.S. municipal-bond yields extended their post-election plunge, dropping to the lowest in 45 years as potential tax increases fueled demand.

The interest rate on 20-year general-obligation bonds fell 0.14 percentage point to 3.41 percent in the week ended Nov. 15, according to a Bond Buyer index. That beats last week’s 3.55 percent, the lowest since April 1967. The new level hasn’t been seen since February 1967.

Tax-exempt munis have led a fixed-income rally following the Nov. 6 U.S. elections. The re-election of President Barack Obama, who seeks to increase the top federal income-tax rate to 39.6 percent from 35 percent, is boosting the appeal of the tax- free securities, according to investors and traders.

“It’s not a huge leap to think that the highest tax bracket will be higher than it is now,” said Ken Friedrich, head of municipal sales, trading and syndication at RBC Capital Markets in New York. “That, coupled with the Obamacare surtax, is net positive for munis.”

Obama’s Patient Protection and Affordable Care Act calls for a 3.8 percent surtax on capital gains and dividend income, and a 0.9 percent surtax on earned income for individuals making more than $200,000 per year.

Beating Treasuries

The $3.7 trillion muni market has earned about 8.3 percent this year, according to Bank of America Merrill Lynch data. That includes a 1.2 percent gain this month, the biggest since July. Local bonds have outpaced their federal counterparts, which have returned 2.8 percent, the data show.

In the 10-year segment, the yield on benchmark munis declined as much as 0.09 percentage point this week to 1.49 percent, data compiled by Bloomberg show. It’s a record low for a Bloomberg Valuation index that began in January 2009. The market was closed on Nov. 12 for the observance of Veterans Day.

The Thanksgiving holiday on Nov. 22 will also close the bond markets, which increased demand this week, Friedrich said in a telephone interview.

States and cities are poised to sell $3 billion next week, data compiled by Bloomberg show. That would be the least amount of issuance since the week ended Sept. 7, which was also holiday-shortened.

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net