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Cohen Bullish on Munis as Local Stress Persists: Tom Keene

Yields on benchmark municipal debt maturing in 10 years touched record lows this week, signaling that the bonds remain a strong asset, according to Natalie Cohen, head of municipal research at Wells Fargo & Co.

“We have 90,000 governments, and there are four or five examples of trouble,” said Cohen during a radio interview on “Bloomberg Surveillance” with Tom Keene and Sara Eisen. Cohen called 2012 “the year of local difficulty.”

On July 10, the City Council of San Bernardino, California, voted to file for bankruptcy protection, joining Stockton and Mammoth Lakes. Jefferson County in Alabama has also filed for bankruptcy and Harrisburg, Pennsylvania, is in state receivership. In April, Detroit barely escaped that fate in the face of a deficit and $12 billion of long-term debt.

Still, municipal issuers have taken advantage of yields close to the lowest since the 1960s by refinancing debt at lower rates. About 64 percent of this year’s municipal-bond sales has been so-called refundings, the most since 1993, according to Charlotte, North Carolina-based Bank of America Corp.

Top-grade munis due in 10 years yielded 1.73 percent at 11:13 am in New York, the least on record since a Bloomberg Valuation index began in January 2009. Benchmark 10-year Treasury yields touched 1.49 percent.

The ratio of muni yields to federal interest rates, a measure of relative value, has remained above 100 percent since May 16, according to data collected by Bloomberg.

Local governments saw a decrease in property-tax collections for the first three months of 2012 following two growth quarters, according to a report from the Nelson A. Rockefeller Institute of Government in Albany, New York.

The decline could signify a “serious fiscal crunch,” according to Lucy Dadayan, a senior policy analyst at the institute who co-wrote the report.

Cohen said that for local governments, “bankruptcy doesn’t always mean a default.” When municipalities are in trouble, she said, “you can’t take a city apart and sell off the assets like you can with a corporation.”

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