Munis Prove Haven in Impasse Over U.S. Shutdown, Default
The $3.7 trillion municipal-bond market is proving a haven from political turmoil over a partial U.S. government shutdown and possible default.
While interest rates on 12-month Treasuries have almost doubled since the closure began on Oct. 1, yields on AAA munis securities maturing in a year have declined. The ratio of the yields, a measure of relative value, has fallen to about 208 percent, from 370 percent on Sept. 30, data compiled by Bloomberg show. The narrowest gap since April indicates that state and city bonds have become more expensive.
The shift shows investors are betting that improving state and local tax revenue will cushion munis from a fallout should U.S. lawmakers fail to raise the $16.7 trillion debt ceiling. The federal government will run out of room to borrow more on Oct. 17, according to Treasury Secretary Jacob J. Lew.
“You have a safe haven in municipal bonds because of the diversification of issuers and the strength of repayment capacity on the state and local level,” said Benjamin Thompson, chief executive officer in New York at Samson Capital Advisors, which oversees about $6 billion in local debt.
“There’s stability and predictability to this market that you’re not going to see in the Treasury market, which is going to come down to a few key political decisions made at the top echelon of government,” he said in a telephone interview.
U.S. cities are projecting their first increase in revenue since 2006, according to a survey released last week from the Washington-based National League of Cities. States have already benefited from 15 straight quarters of rising tax collections, Census Bureau data show.
Benchmark 1-year munis yielded 0.31 percent at 2 p.m. in New York, down from 0.33 percent on Sept. 30, Bloomberg data show. The interest rate on 12-month Treasuries rose to 0.15 percent at 1:53 p.m., up from 0.086 percent on Sept. 30.
Interest payments on most munis aren’t directly tied to the federal government. Moody’s Investors Service said in a report last month that local bonds backed by federal mass-transit aid, called Grant Anticipation Revenue Vehicles, are the most vulnerable. At least $10 billion of the bonds are outstanding, according to Bloomberg data.
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