Go-Go Market Beating U.S. Treasuries Most Since ’10: Muni Credit

Investors are pouring the most money since 2009 into U.S. municipal debt, putting the $3.7 trillion market on a pace for its longest rally versus Treasuries in three years.

Demand from individuals, who own about 70 percent of U.S. local debt, rose last week after Congress’s Jan. 1 deal to avert more than $600 billion in federal tax increases and spending cuts spared munis’ tax-exempt status. Investors added $1.6 billion to muni mutual funds in the week ended Jan. 9, the most since October 2009 and the first gain in four weeks, Lipper US Fund Flows data show.

The renewed appetite has propelled city and state debt to a 0.7 percent gain this month, beating a 0.4 percent loss for Treasuries, according to Bank of America Merrill Lynch data. Local bonds outpaced their federal counterparts the previous two quarters, and a third period would mark the longest winning streak since the first three months of 2010, the data show.

“The market has started the year with a decidedly solid tone,” said Jamie Iselin, head of municipal fixed income at New York-based Neuberger Berman, which manages about $11 billion of the bonds. Rising demand and a “reprieve” from threats to the tax-exemption have caused the market to “pick up from where it left off most of last year,” he said.

2012 Haven

State and local debt earned 7.3 percent in 2012, compared with 2.2 percent for Treasuries, as investors sought a haven from potential tax boosts. Muni mutual funds last year added the most cash since 2009, helping push yields to a 47-year low.

Munis maintained their full tax-exempt benefit after the fiscal pact passed Jan. 1. President Barack Obama has proposed limiting the value of the muni tax break for higher earners to 28 percent. Citigroup Inc. has said such a step would reduce the muni market’s value by $200 billion.

The Jan. 1 agreement raised taxes on individuals making more than $400,000 a year and households making more than $450,000, while letting the payroll tax used to pay for Social Security benefits return to the 2010 level of 6.2 percent, from 4.2 percent.

“Everybody is opening up their paychecks and they’re paying higher taxes,” Peter Hayes, who oversees $105 billion as head of muni bonds at New York-based BlackRock Inc., said yesterday on Bloomberg Television. “We’re seeing this huge demand.”

Supply Lag

The wave of cash has overwhelmed supply this month. State and local issuance totaled about $4.3 billion in the two weeks through Jan. 11, data compiled by Bloomberg show. Municipalities nationwide issued $6.8 billion weekly on average in 2012.

The interest rate on benchmark 10-year munis has declined for seven straight days, the longest stretch in two months, according to Bloomberg Valuation data.

The yield fell to 1.73 percent yesterday, the lowest since Dec. 31. That’s equivalent to a 2.86 percent taxable yield for earners under the new 39.6 percent top rate. Similar-maturity Treasuries yielded 1.83 percent yesterday in New York.

The rally is also poised to get a boost as investors face so-called “net negative supply” of munis, according to data from Citigroup. Local-debt sales are poised to trail bond calls and redemptions by $2.8 billion in January and by $2.5 billion in February, the data show.

“We’re at a point in the year -- for at least the first couple months -- where the market tends to do well,” Iselin said. “Those factors are in place to allow that to happen.”

Following is a pending sale:

ARIZONA TRANSPORTATION BOARD plans to sell $706 million of taxable and tax-exempt revenue bonds as soon as today, data compiled by Bloomberg show. Proceeds will help finance a five- year highway capital program and refund debt, according to Moody’s Investors Service. (Updated Jan. 15)

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

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