Muni Yields Plunge to 44-Year Low as 2012 Supply Trails Demand

U.S. municipal-bond yields dropped to the lowest in more than four decades as issuers were slow to sell enough debt this month to meet demand after the asset class beat Treasuries and U.S. stocks last year.

The interest rate on 20-year general-obligation bonds with an average Moody’s Investors Service rating of Aa2, the third-highest, fell 0.21 percentage point to 3.62 percent in the week ended Jan. 12, according to a Bond Buyer index. That’s the lowest since April 1967, when Lyndon B. Johnson was president.

“We’re in the middle right now of just a powerful rally,” said Joe Deane, who manages $16 billion as head of municipal-bond investments at Pacific Investment Management Co. in New York. “You have to let the new-issue market begin to put supply back into the marketplace because, at the moment, the market is on the tight side.”

Municipal interest rates are also falling as tax revenue rebounds following the 18-month recession that ended in 2009, and as governments close $500 billion of budget deficits. State and local-government tax revenue rose 4.1 percent in the third quarter, the eighth straight gain, the Census Bureau said.

In the two weeks ending Jan. 6, states and municipalities issued $1.27 billion of bonds, the lowest two-week total since January 2008, according to data compiled by Bloomberg.

The amount of local-government debt scheduled for sale in the next 30 days dropped to about $4.2 billion, down 37 percent from a one-month high on Jan. 10, Bloomberg data show.

At the same time, investors are funneling money into the $3.7 trillion market at a faster clip. U.S. municipal-bond funds added about $1.1 billion in the week to Jan. 11, the most since March 2010, Lipper US Fund Flows data show.

The yield on top-rated 30-year municipal bonds fell the past five days, to 3.39 percent at 4 p.m. New York time yesterday, according to Bloomberg Valuation Index data.

The municipal market returned 11.2 percent in 2011, compared with 9.8 percent for Treasuries, according to Bank of America Merrill Lynch index data. The Standard & Poor’s 500 index was little changed for the year.



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