Bernanke Delaying Taper Slows Worst Fund Withdrawal: Muni Credit
Credit Federal Reserve Chairman Ben S. Bernanke with putting the brakes on the biggest stampede out of municipal mutual funds since 2011.
As the $3.7 trillion local-debt market logs its best rally in 21 months, individuals are yanking the least money in six weeks from funds focusing on city and state debt. The slowdown in withdrawals follows Bernanke’s unexpected decision last week to refrain from curbing the Fed’s monthly bond buying.
The rally has led investors seeking higher interest rates to munis, where yields have exceeded those on Treasuries for the longest stretch in almost a year. Individuals in the week through Sept. 18 pulled $1.1 billion from local-debt mutual funds, the smallest withdrawal since Aug. 7, Lipper US Fund Flows data show. The slowing exodus should continue and extend the market’s gains, said Michael Zezas, chief municipal strategist at Morgan Stanley in New York.
“Conditions for demand to return are improving, and we’re expecting to see an improvement in fund flows going into the fourth quarter,” Zezas said. “You can capture excess relative value in the market right now, particularly in high-grade bonds.”
The demand boost following the Fed announcement has helped moderate the worst losses in 14 years for municipal investors. Local debt dropped 4.4 percent in 2013 through Sept. 17, on pace for the biggest yearly decline since 1999, Bank of America Merrill Lynch data show. The past week’s gain has trimmed the drop to 3.7 percent, which would be the worst since 2008.
Yields on benchmark 10-year munis fell 0.29 percentage point over the past two weeks, the most since 2011.
The rally may support states and cities looking to bolster their budgets more than four years after the longest recession since the 1930s. Local governments have scaled back refinancing this year by the most since 2006 as elevated yields prevented them from saving on borrowing costs.
Refundings dropped to $81 billion through Sept. 11, out of $229 billion of total sales, Citigroup Inc. data show. That’s down 29 percent from last year’s pace, when localities refunded the most since at least 2003.
This week, issuers such as Denver and Western Michigan University are set to offer a combined $446 million in deals dedicated to refunding, representing about 15 percent of issuance, data compiled by Bloomberg show.
Such refinancing deals made up 10 percent of supply last week, the smallest share since July 26. That was the first full week after Detroit filed a record $18 billion municipal bankruptcy.
Denver is offering about $122 million of refunding debt. If the Fed had tapered its bond purchases, Colorado’s most-populous city would have probably delayed the sale, said Guadalupe Gutierrez, the city’s debt administrator.
“We try to plan around any sort of significant releases in market information in case there’s any sort of disruption as a result,” she said. “The news actually improved the conditions” to save on debt service.
Denver’s refinancing is estimated to save more than $5 million, “well above” the city’s target, Gutierrez said.
Interest rates are declining as supply is set to dwindle, said Dan Solender at Lord Abbett & Co. in Jersey City, New Jersey. Localities have scheduled $4.6 billion of bond sales during the next 30 days, the least since February.
“The market for two weeks now had steady performance with low supply,” said Solender, who oversees $16.5 billion of local debt as head of munis. “Retail demand seems pretty strong at these yields.”
Individuals have still pulled money from funds for 17 straight weeks, withdrawing about a net $27 billion, Lipper data show. It’s the fastest pace since 2011.
The 10 straight days of declining yields coupled with last week’s slower outflows reflect a “herd mentality” of demand returning to the market when a rally begins, said Adam Mackey at PNC Capital Advisors in Philadelphia.
For example, investors added $842 million to muni funds in the week through Dec. 5 when yields were setting generational lows. Similarly, they yanked $1.9 billion in the week through Sept. 11 as a fourth straight month of losses pushed interest rates to a two-year high, data from Bloomberg and Lipper show.
“The muni space is evolving and it’s turning into this momentum market where we’re oversold or overbought all the time -- there’s very little equilibrium,” said Mackey, who oversees $6.5 billion in local debt as head of municipal fixed income. “Either everyone is piling in or everyone is piling out. It creates opportunities, no question about it.”
Localities from West Virginia to Washington are issuing $3.7 billion of long-term munis this week, down from $4.2 billion last week, data compiled by Bloomberg show. They’re selling as AAA 10-year munis yield 2.86 percent, the lowest in more than a month. That compares with 2.73 percent on Treasuries.
The ratio of the yields suggests munis are relatively cheap, as local bonds historically yield less than their federal counterparts given their tax-exemption.
Following is a pending sale:
The Regents of the University of California are set to sell about $2.6 billion of revenue bonds this week, according to the state treasurer’s website.
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