Muni Yields Drop to 1967 Low as Obama Tax Plan Stokes Demand

Muni Yields Drop to 1967 Low as Obama Tax Plan Stokes Demand
President Barack Obama holds up a pen as he speaks in the East Room of the White House in Washington on Nov. 9, 2012. Obama is urging quick action by Congress to keep taxes from rising on middle-income Americans at the start of the new year and begin negotiations to avert automatic spending cuts. Photographer: Andrew Harrer/Bloomberg

U.S. municipal-bond yields dropped to the lowest in more than four decades as President Barack Obama’s re-election fueled speculation that income-tax rates will increase, boosting the appeal of tax-free debt.

The interest rate on 20-year general-obligation bonds fell 0.12 percentage point to 3.55 percent in the week ended Nov. 8, according to a Bond Buyer index. That beats this year’s previous low of 3.6 percent and is the lowest since April 1967, when Lyndon B. Johnson was president.

Munis have joined in a post-election fixed-income rally led by Treasuries. Obama wants to increase the top federal income-tax rate to 39.6 percent from 35 percent as part of plans to trim the federal deficit, increasing the attractiveness of tax-free state and local borrowings.

“You’re seeing a renewed interest in tax-exemption from the election,” said Hardy Manges, head of muni trading at Mitsubishi UFJ Securities in New York. “You’re seeing a marketplace that thinks taxes are going higher.”

Bill Gross, who manages the world’s biggest bond fund at Pacific Investment Management Co., said this week that munis are attractive after the election because of Obama’s plan to increase levies.

Adding Again

Investors resumed pouring money into the $3.7 trillion tax-exempt market this week. Muni mutual funds added about $866 million in the seven days through Nov. 7, Lipper US Fund Flows data show. In the previous week, the funds had their first outflow since April.

The yield on 10-year benchmark munis declined as much as 0.1 percentage point this week to 1.58 percent, data compiled by Bloomberg show. It’s a record low for a Bloomberg Valuation index that began in January 2009.

Ten-year Treasury yields have fallen about 0.13 percentage point since the Nov. 6 election, fueled by concern that U.S. lawmakers will fail to agree on measures to avoid the so-called fiscal cliff of tax increases and spending cuts set to take effect at the beginning of next year.

The muni market has earned about 7.7 percent this year, compared with 2.6 percent for Treasuries, according to Bank of America Merrill Lynch data. It would be the second straight year that local-bond returns have exceeded those on federal debt.

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