The $3.7 trillion municipal market gained in March for the first time in six years, extending a 2014 advance as localities slowed bond offerings.
Munis earned 3.8 percent in the first quarter, the best start to a year since a gain of 4.4 percent in the first three months of 2009, Bank of America Merrill Lynch data show. The 0.2 percent gain last month broke a five-year losing streak for March, the longest for any month.
The local-bond market has outpaced Treasuries and corporate debt in part because the $59 billion of muni issuance last quarter was the slowest since the three months ended June 2011, data compiled by Bloomberg show.
“Munis eking out a positive return is as much about limited supply as anything else, which has been the story all year,” said David Manges, muni trading manager at BNY Mellon Capital Markets LLC in Pittsburgh.
The gains are defying predictions of a second year of negative total returns, following a 2.9 percent slide in 2013. In the 10 cases since 1989 that munis rallied in March, the bonds extended gains in April five times and posted losses in the other five years, Bank of America data show.
Most Wall Street analysts expect higher interest rates in coming months. The median forecast in a Bloomberg survey of 60 analysts is that 10-year Treasury yields will be about 0.9 percentage point higher by the second quarter of 2015.
“If you think the macro environment tends towards rising rates, then the good news for munis might be front-loaded this year,” Manges said.
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