Longest Bonds Lose Appeal After Best Year: Muni Credit
The longest-dated municipal bonds have generated the best returns in the $3.7 trillion local market in 2012. Yet they’ve become too expensive for firms such as AllianceBernstein LP and BlackRock Inc., which are turning to shorter maturities for gains in the year ahead.
Investors at five managers who help oversee at least $155 billion of munis combined aren’t alone in shunning debt due in decades. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said investors should avoid longer-term Treasuries because of steps to boost the economy. The lengthier the maturity, the more vulnerable bonds are to quicker inflation and rising interest rates.
Longer bonds “have much more downside than upside, and we recommend people trim that part of the curve and come more into that 10- to 15-year maturity range,” said Guy Davidson, who manages $31 billion as director of munis at AllianceBernstein in New York.
Muni yields at 47-year lows have driven buyers to take more risk. City and state bonds due in more than 22 years have earned 13.8 percent in 2012, beating all maturities, including a 9 percent gain for bonds due in 10 to 15 years, Bank of America Merrill Lynch data show. The longer bonds are on course for the first consecutive years of double-digit gains since 1989.
The gains have been spurred in part by Federal Reserve purchases of Treasuries, a program that that Chairman Ben S. Bernanke will extend at least through the first quarter of 2014, according to the median estimate in a Bloomberg survey of economists. Fed officials meet today to review policy.
Yet with the U.S. jobless rate falling to a four-year low last month, 2013 is set to bring higher yields, according to the median forecast in a separate Bloomberg survey. Yields on 30- year Treasuries will rise to about 3.3 percent in a year, from about 2.84 percent in New York yesterday, the survey indicates.
“We’re probably a bit more cautious on the market given the recent run that we’ve had,” said Peter Hayes, head of muni debt at New York-based BlackRock, which oversees about $105 billion of the bonds. “So we’ve come back down on the curve.”
The outsized performance on munis maturing in decades has collapsed the extra yield on the securities to the smallest in four years.
Thirty-year benchmark munis yielded as little as 1.08 percentage points more than 10-year maturities this month, the smallest gap since October 2008, data compiled by Bloomberg show. Benchmark local debt due in 2042 yielded 2.51 percent yesterday, close to the lowest level for a Bloomberg index that started in January 2009.
Bonds maturing beyond 20 years are “extremely expensive and you’re not getting enough incremental yield pickup for the risk,” Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management in Prairie Village, Kansas, said in an interview.
Yields on 20-year general-obligation bonds were 3.27 percent last week, the lowest since 1965, according to a Bond Buyer index.
The trend in yields for federal debt has been the opposite. The yield spread on 30-year Treasuries over 10-year maturities has increased this year to 1.18 percentage points, from about 1.03 percentage points in early January, data compiled by Bloomberg show.
Following are pending municipal sales:
REGIONAL TRANSPORTATION DISTRICT, which provides mass- transit in the Denver area and neighboring counties, plans to issue $466 million of debt as soon as today, data compiled by Bloomberg show. The bonds are backed by sales-tax revenue, according to Moody’s Investors Service. (Added Dec. 12)
TRIBOROUGH BRIDGE AND TUNNEL AUTHORITY, part of New York’s Metropolitan Transportation Authority, is set to sell $904 million of tax-exempt revenue debt as soon as tomorrow, data compiled by Bloomberg show. (Updated Dec. 12)
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